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Pricing "Spectacularly Stupid" Chartis' Walsh Says


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Pricing “spectacularly stupid”: Walsh

 

09 June 2010

 

Countering accusations over the past two and half years that his firm was undercutting rates to keep business, Nicholas Walsh, vice-chairman of Chartis, has hit back saying that...

 

Read more: [Chartis] [Nicholas Walsh] [AIG] [iIS]

 

Countering accusations over the past two and half years that his firm was undercutting rates to keep business, Nicholas Walsh, vice-chairman of Chartis, has hit back saying that it is start-ups looking to build market share and older rivals looking to grow geographically that are slashing rates, not his firm.

 

Chartis is the general insurance operations of American International Group (AIG), which was bailed out by the US government in 2008.

 

“There is some spectacularly stupid pricing going round,” Walsh told the IIS Reporter. “People are trying to establish a piece of business or a portfolio. It will come unstuck. Always has, always will.”

 

Walsh says the pricing environment will lead to, at best, lacklustre results for this year.

 

“As long as they continue to underprice their product to the level they are doing without the benefit of reserves emerging from prior years, the P&L in insurance companies will be very dull at the end of this year, even without some kind of event or events in the US which everybody is talking about as being more likely than not.

 

“It is just absurd underpricing. People are using the excuse of new capital coming into the market and saying they have to be more protective of what they have. Or there are companies with geographical ambitions, partly fed off an expectation that we would be giving up our leadership position and partly a feeling of ‘let’s find something new to do’, and I think a lot of that is going to become severely unstuck. If you underprice your product for long enough you go out of business.”

 

Walsh says the catastrophe activity already this year should have served as a wake-up call to insurers, but so far has not.

 

“I just don’t recall a period of so many mid-sized natural catastrophe market events and then you add on a couple of manmade ones like in the Gulf of Mexico and we haven’t entered the cat season, it has been dramatic. And why nobody is taking this into account when they price is completely beyond me,” he says.

 

Walsh says Chartis is no longer being affected by the uncertainty at its parent company. In early 2009, the unit was renamed Chartis and was being readied for an IPO. But since Robert Benmosche took over as CEO of AIG last August, this plan was abandoned. Chartis is seen as a core unit of AIG now.

 

“In the current trading environment, Chartis does not have any overhanging trading issues with what happened to AIG. It is no longer an acceptable excuse for not meeting our targets because it is not having any effect. We don’t have issues with insurers not accepting our paper on coinsurance, particularly on the multinational side. That’s history. We are just trading in a poor environment in the same way that we would have done in our history.

 

“In the US domestic side of the business, we are still losing top line but it is deliberate because we are continuing a process we started a long time before 2008, which was to reduce our workers’ comp writing until we can get a decent price for it. That was a very large business, now it is modest size one. And we are reducing property cat because we are now looking at Chartis rather than AIG when we are deploying capital. It is a very large business but it is not AIG with all its diversity. And we are also letting quite a lot of excess casualty business go. I don’t think that [this] business is moving onto another insurer at an increased price.”

 

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Its very interesting to me, that everyone seems to be saying the same thing.

 

What CEO is growing top line by reducing rates and writing bad business. I think we are going to have to wait till the tide comes in.

 

Everyone seems to be having panel decisions and investor presentations. Here are some others that I plan on listening to.

 

http://irsolutions.snl.com/corporateprofile.aspx?iid=4078260

 

Webcast

M&A Panel:

M&A in 2010: Is It Too Early or Too Late?

Tuesday, June 8, 2010 10:40 AM ET

 

Webcast

Professional Liability Panel:

How Has the Pricing Dynamic Changed Post-Credit Crisis?

Tuesday, June 8, 2010 2:40 PM ET

 

http://phx.corporate-ir.net/phoenix.zhtml?c=148827&p=irol-IRHome

 

Aspen Had an Investors day today as well.

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Pricing “spectacularly stupid”: Walsh

 

09 June 2010

 

Countering accusations over the past two and half years that his firm was undercutting rates to keep business, Nicholas Walsh, vice-chairman of Chartis, has hit back saying that...

 

“I just don’t recall a period of so many mid-sized natural catastrophe market events and then you add on a couple of manmade ones like in the Gulf of Mexico and we haven’t entered the cat season, it has been dramatic. And why nobody is taking this into account when they price is completely beyond me,” he says.

 

 

    Thanks for posting.

 

    What puzzles me about statements like this is why they don't seem to understand the obvious.  William Berkley has a simple and plausible explanation for the current irrational pricing.  Much like super-sharp poker player who wastes some of his winnings at the roulette wheel because he can "afford" to lose some bets, the insurance industry acts the same.  Basically, aggressive pricing will continue as long as companies have (or believe they have) redundant reserves from prior years that can be released to make the current accident year look better than it really is.  When these redundant reserves are exhausted (or perceived to be) fear will overtake greed, irrational pricing will stop, and the market will harden. Only in a fear based market will underwriting losses and poor investment results affect pricing (not a greed based market like we have seen for the last 5 years).    Anyone who wants an answer as to why 2008 investment returns, or 2005 cat losses, or 2009 low interest rates didn't harden pricing should listen to his most recent presentation.  I can't think of a better use of 30 minutes for anyone involved in this industry. (Bonus: you will also get a good sense when we will next see a P&C hard market)

 

http://ir.wrberkley.com/events.cfm

 

    What does this mean for an investor in insurance companies?  Everything.  Reserves are easily manipulated and companies naturally save for a rainy day when times are good and withdraw reserves when times are tough.  There is no other business that depends as much on trustworthy management.  Reading a stack of K's/Q's for metrics is not enough.  Without understanding what motivates management and how that squares with their actions over previous cycles, an investor can easily get lulled into commitment of capital that in hindsight looked too good to be true.

 

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  I can't think of a better use of 30 minutes for anyone involved in this industry. (Bonus: you will also get a good sense when we will next see a P&C hard market)

 

http://ir.wrberkley.com/events.cfm

 

     What does this mean for an investor in insurance companies?  Everything.  Reserves are easily manipulated and companies naturally save for a rainy day when times are good and withdraw reserves when times are tough.   There is no other business that depends as much on trustworthy management.  Reading a stack of K's/Q's for metrics is not enough.  Without understanding what motivates management and how that squares with their actions over previous cycles, an investor can easily get lulled into commitment of capital that in hindsight looked too good to be true.

 

Thank you for the link! Never heard Mr Berkley speak before. Enjoyed presentation. Informative.

 

On an aside, I have not noticed an appreciable decrease in the P&C insurance rates on our commercial property since 9/11. I can vouch to the stickiness of customers as described by WRB. We have not been aggressive seeking out better quotes.

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I noticed 43% of W R Berkley portfolio are municipals.Hopefully Buffett is not right on the municipal bond market.

 

It's very possible that WEB and Berkley are both right.  Sticking to the best municipals, obligations of state governments and bonds for essential services such as existing water systems that can cover payments by simply raising rates to customers, will produce a default rate that is a tiny fraction of 1% if the years impacted by The Great Depressoin are excluded.  Such munis are very secure investments, but not necessarily a good insurance risk because the premium may also be less than 1%.  Plus there is always latent tail risk.  It's not impossible that conditions like the 1930's could happen again.

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