Insurance Industry Questions/Discussions

[twacowfca]

You might want to consider why folks are hedging their UW income so aggressively - as it does have a cost. AIG's market presence has made it dirt cheap? & weather related hits are getting LARGER and more FREQUENT?

 

That's interesting.  Lancashire said on their conference call that they picked up a $40M ILW that would be triggered at a $20B industry loss event.  They bought it because it was cheap, they said.  Are you saying that AIG may be the source of such cheap tail insurance?  Shades of their selling mortgage  CDS dirt cheap a few years ago, something that vaporized most of their equity!

[orion]

Maybe a stupid question but I´m wondering why not all insurance companies show a loss table in their reportings?

 

I was starting to research Allied World Assurance Co Holdings (Ticker: AWH) and liked the BV development and their CB-ratio over time. But I couldn't find a loss table in their report?

 

[SharperDingaan]

Not sure AIG is the actual source, but pretty sure their presence is influencing pricing.

 

AIG is a fed controlled entity and Basel III insurance proposals are influencing the capital requirements of Insurance Companies. Selling coverage cheap, & taking on tail risk, is effectively the insurance version of ‘Operation Twist’. Now if you are doing this - what are the odds that you are ALSO doing a version of finite insurance?     

 

[Ghost]

Thanks twacowfca for the response to my question.  Is there any resource I can read to learn how the models are constructed?

 

Rumour has it WB insured Mike Tyson for a two year life insurance policy.  Any idea how they would have modeled this, think they simply used actuary mortality tables?

 

Source http://www.buffettfaq.com/

 

 

[twacowfca]

Thanks twacowfca for the response to my question.  Is there any resource I can read to learn how the models are constructed?

 

Rumour has it WB insured Mike Tyson for a two year life insurance policy.  Any idea how they would have modeled this, think they simply used actuary mortality tables?

 

Source http://www.buffettfaq.com/

 

At the risk of oversimplification, a decent model would require a lot of data over a long history -- really long, of the most important variables that can be obtained or inferred.  Then, a regression model might pare down the variables to a few with weighted values that seem to be predictive of outcomes in the historical data. 

 

Then, randomness might be introduced into the historical data through a probability distribution derived from the data and new outcomes generated to give a fuller range if outcomes than those in the historical data.  These "Monte Carlo" simulations would be run many times and might extend the range of outcomes well into longer tails than occurred in the historical data. 

 

I recently reviewed the outcomes from 10,000 Monte Carlo simulations of a new model simulating elemental and non elemental risk.  There was a much higher percentage of extreme events in the MonteCarlo simulations than in the historical data.  This still is inadequate to model true "unknown unknown" or "black swan" risk. But Monte Carlo simulations are a big improvement over previous methods of assessing risk. 

 

Finally, after a big loss event, the new data is very helpful in assessing how models performed and how they can be improved.

[jay21]

twacowfca, how do you think about debt in P&C insurance companies?

 

At first thought I assumed this would be bad because you might be losing your funding advantage.  But the debt could be cheaper than equity.  Also I guess it depends on the uses of the proceeds.  Do you have any thoughts on capitalization or could you provide some thoughts on how you analyze an insurers capital structure?

[giofranchi]

twacowfca, how do you think about debt in P&C insurance companies?

 

At first thought I assumed this would be bad because you might be losing your funding advantage.  But the debt could be cheaper than equity.  Also I guess it depends on the uses of the proceeds.  Do you have any thoughts on capitalization or could you provide some thoughts on how you analyze an insurers capital structure?

 

I generally don’t like to see much debt on the balance sheet of a P&C insurance company. Like you said, I think that good insurance companies can borrow money (gather float) trough their operations at very cheap rates. Great insurance companies can even borrow money for free! That’s one important advantage (among many) they enjoy on other money management vehicles. Why then pile up debt, on which they must pay substantial interests? A little debt might be justifiable, but I would like to see it remain a relatively small percentage of equity.

 

giofranchi

[twacowfca]

twacowfca, how do you think about debt in P&C insurance companies?

 

At first thought I assumed this would be bad because you might be losing your funding advantage.  But the debt could be cheaper than equity.  Also I guess it depends on the uses of the proceeds.  Do you have any thoughts on capitalization or could you provide some thoughts on how you analyze an insurers capital structure?

 

A little bit of debt can help goose returns if an insurance company is a very good underwriter.  Otherwise, debt can bite in many ways.  Long duration and lack of covenants are very important.  Prem is good at this game.  He keeps rolling FFH's debt so that they won't be faced with much debt coming due in the near future.

 

LRE recently increased the debt in their capital structure from about 8% to about 16%, still rather low.  I'm OK with that because the debt is 10 years fixed at a low interest rate, and they are good underwriters.  MRH recently rolled their debt and increased the amount with a longer duration.  It's still a small percentage of their capital structure, and they are decent underwriters.  I think they are sniffing out increasingly firming rates in catastrophe exposed lines that they can jump on. 

 

Companies that are mainly property underwriters like these two are better situated to use debt now in a low interest environment for investment returns than mainly casualty insurers which are more dependent on investment returns.

[anders]

When looking at insurance, I always have the following in mind:

 

"At bottom, a sound insurance operation needs to adhere to four disciplines. It must (1) understand all

exposures that might cause a policy to incur losses; (2) conservatively evaluate the likelihood of any exposure

actually causing a loss and the probable cost if it does; (3) set a premium that will deliver a profit, on average,

after both prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the

appropriate premium can’t be obtained.

 

Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business

that their competitors are eagerly writing. That old line, “The other guy is doing it so we must as well,” spells

trouble in any business, but in none more so than insurance. Indeed, a good underwriter needs an independent

mindset akin to that of the senior citizen who received a call from his wife while driving home. “Albert, be careful,”

she warned, “I just heard on the radio that there’s a car going the wrong way down the Interstate.” “Mabel, they

don’t know the half of it,” replied Albert, “It’s not just one car, there are hundreds of them.” - Warren Buffett

 

My two cents,

 

 

 

 

[onyx1]

Good news for the industry as Travelers continues to benefit from price increases that are outpacing loss cost trends on all their markets.

 

 

“We are very encouraged by pricing trends across all three business segments. Renewal rate change in Business Insurance was approximately 8%, up from nearly 6% in the fourth quarter of last year and consistent with recent quarters. Renewal rate change in Financial, Professional and International Insurance improved to 4%, and we once again achieved double-digit pricing improvements in Personal Insurance. Given the continued low interest rate environment and uncertain weather patterns, we will continue to seek improved pricing. "

[kiwing100]

 

here is how ratings agencies look at P&C insurers

 

http://www.ambest.com/ratings/methodology/BCAR_UNDERSTANDING_PC_Insurers.pdf

 

[giofranchi]

I don't know if these writings by David Merkel have already been posted...

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Insurance_Investing_Part1.pdf

Insurance_Investing_Part2.pdf

Insurance_Investing_Part3.pdf

Insurance_Investing_Part4.pdf

[giofranchi]

I don't know if these writings by David Merkel have already been posted...

 

 

Part 5 in attachment.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

 

On_Insurance_Investing_Part5.pdf

[Liberty]

http://www.iii.org/assets/docs/pdf/NYSSA-031813.pdf

 

Overview of P&C industry.

[pancakes]

Hi, I am a new member of the board. I wondered if anyone knew of good resources on statutory accounting or the analysis of stat filings?

 

Any help is much appreciated!

[giofranchi]

I don't know if these writings by David Merkel have already been posted...

 

 

Part 5 in attachment.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

Part 6 in attachment.

 

giofranchi

On-Insurance-Investing-Part6.pdf

[giofranchi]

I don't know if these writings by David Merkel have already been posted...

 

 

Part 5 in attachment.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

Part 6 in attachment.

 

giofranchi

 

Part 7 in attachment.

 

giofranchi

on-insurance-investing-part-7-final.pdf

[giofranchi]

The Four Pillars Of Insurance Investing

 

giofranchi

The_Four_Pillars_of_Insurance_Investing.pdf

[kiwing100]

 

Causes of insurance company failures

 

http://aaiard.com/11_2010/Kovacs.pdf

[jay21]

Some CEO shake-ups in the industry:

 

http://finance.yahoo.com/news/endurance-ceo-steps-down-replacement-151227229.html

 

Former Axis CEO became CEO of ENH and bought $30m of stock.  I believe he repurchased a good chunk of  shares at AXS so at a PB of <.8 ENH may be worth looking at.

 

 

[WhoIsWarren]

Is there any good reference piece on common attributes of insurance companies that ultimately failed?

 

This piece of research by S&P tries to address this point.  It takes a global perspective (kiwing100's earlier post focused mostly on Canada).  It's not the complete article -- it only goes back over the last 30 years -- but a decent job.

 

http://www.standardandpoors.com/spf/upload/Ratings_EMEA/2013-06-13_WhatMayCauseInsuranceCompaniesToFail.pdf

[nwoodman]

I thought the recent commentary from Market Scout was interesting.  Overall rates for P&C were up around 5 % but the report notes the following:

 

"Richard Kerr, CEO of MarketScout profiled the September market conditions by noting, “There are several medium sized publicly traded insurance companies who are encountering challenges in their ongoing business operations. These companies may be sold, restructured, or placed into run off unless they structure some creative solutions to get them past their current financial crisis. Very capable, smart insurance executives lead each of these firms. It just goes to show how quickly things can go wrong if an insurer experiences adverse loss development. Rates will increase if a few more companies experience similar deterioration.”

 

http://new2.marketscout.com/zBarometerCommercial.php

 

Does anyone know the insurers he is referring to?

 

 

I would imagine Tower is one of them

 

http://www.reuters.com/article/2013/10/07/fitch-downgrades-tower-group-on-reserve-idUSFit67244920131007

 

Cheers

 

nwoodman

[jay21]

Cat bond yields have dropped to about 4.7 percentage points more than benchmark interest rates, the lowest second-quarter level since 2005 and down from 6.57 percentage points a year ago, according to John Seo, managing principal at Fermat Capital Management LLC. The Westport, Connecticut-based firm oversees $4.5 billion, more than 90 percent of which is invested in cat bonds.

 

"The hurricane does not know the rate that was charged for the hurricane policy, so it's not going to respond to how much you charge," Buffett said at the Edison Electric Institute's annual convention in Las Vegas on June 9. "And if you charge an inadequate premium, you will get creamed over time."

 

http://finance.yahoo.com/news/buffett-warning-unheeded-catastrophe-bond-000919885.html

 

I believe there is some sense in having these instruments, but anecdotally it appears like someone is going to get creamed (and I have a feeling it won't be Buffet).

[Packer16]

Is there any way to buy a CDS on these cat bonds?

 

Packer