Good evening, as promised, we will look over The Chubb Corporation, RenaissanceRe, and Harford Financial Services conference calls to see if the market is really softening. However, for comedic purpose I want to highlight a line from today’s Bloomberg article titled: “
In the article there is a truly wonderful nugget by Wall Streets Finest:
“Today’s announcement ‘will leave investors worrying about other skeletons in the closet,’ Nigel Dally, an analyst at Morgan Stanley, said in a note to clients. ‘Investors should brace for mark-to-market loss of roughly $5 billion in the upcoming quarterly results.’ He rates the New York-based company ‘Overweight.’”
Look to purchase AIG when Nigel goes “Underweight” on this insurance business. I did look at AIG, and will look at it in the future if the price is right, but something bothered me last week about the company. It was the headline: “AIG to Buy Stake in Chinese Motorcycle Maker.” This crossed my monitor about a week and a half ago, and if there was ever a time when hindsight is 20/20 it would be now. They (AIG) had to know that their derivatives weren’t priced right, yet they made a decision to make a purchase under their asset management sub. If anyone wants to make a case for this purchase, please do because my first reaction is: Don’t Lose Focus.
And so it goes…
RenaissanceRE Holdings Ltd. (RNR)-
-Growth in tangible book value per share of 19%
-45% CR for Reinsurance Segment, 89% for Individual Risk
-Gross premiums were roughly flat Reinsurance segment, down 19% in Individual Risk
-Net Investment income of $402 million
-Q4 results negatively impacted on investment in ChannelRe and losses in casualty book of business
-Net income for the quarter of $62 million or $.88 per share and operating income of $186 million or 2.64 per share.
-On a full year basis, net income of $570 million or 7.93 per share, and $735 million of operating income $10.24 per share.
-Top line declined by about 7% for the full year, driven primarily by our disciplined approach in the softening market.
-Purchased approximately $112 million of stock, bringing year-to-date to just over $200 million. Since January 1 we have purchased an additional 186 million of our stock. Since 1Q2007, 6.8 million shares for $386 million, 9.5% of our total outstanding shares.
-Managed cat premiums are expected to be down around 10%, specialty down around 25% and Individual Risk down around 5%.
Commentary-
-“We are never quite clear if the chatter predicts the fall or if it causes the fall, but either way we did see softening at year-end.”
-“Unfortunately at 1/1 this year this trend stopped and the reinsurance market did not grow for the first time since 2005. The lack of growth in the market and once again, increased appetite for cat risk and prices to reduce.”
“Exposure-based reductions approaching 20% and programs with flat or reducing exposures were seeing exposure adjusted reductions of between 7.5% and 12.5%..”
-“UK
-“Commercial property that is hurricane exposed continues to present opportunity for us in 2008. The market prices for California California
-“We have no CDO’s and no CLO’s in our portfolio, and also we have not indirectly invested in any securities that are wrapped or enhanced through financial guarantees.”
-“The in-force premium for our California earthquake book in 2007 declined by approximately 75%, and that doesn’t mean that we won’t do any California earthquake going forward, but certainly less of it is just based on picking the once that we want at right prices.”
-on Channel Re,
- Analyst Question- “Do you think that the business model is broken because people talked about the notional risk for year and years, and this time around it really the investor confidence has been shattered. So do you think that there is still a business there?”
-Neill A. Currie- CEO- “Well, apparently some people think so, And yes, I know the erosion of confidence, there is a problem, but there is an ebb and a flow in these sorts of things. And there is still a need for a product along these lines, and so we think there will be opportunities of one sort or another going forward.”
My Take: I like the fact that they separate business they write into three categories: 1) Acceptable businesses, 2) Negative returning businesses, and 3) Low returning businesses. That view makes sense to me, I enjoy separation of risk that aren’t based on market weightings of S&P 500 (sorry I had to take a shot at XL). Further, Mr. Currie did say “Acceptable business is shrinking by 5% to 10%.” That also goes with the flow of the 5% to 7% rate reduction in premiums that we have heard over and over. Lastly, they did write down their Channel Re investment to Zero, now hate him or love him, Mr. Ackman has to get credit for this. He stated his displeasure with MBIA reinsuring policy’s through Channel Re who apparently Renaissance thinks is a zero. Overall, I don’t think I would invest in RNR only because one the best holding company’s who has a reinsurance sub, WTM is at near book.. I’d much rather prefer WTM whose investment process is conservative as opposed to RNR whose investments are through hedge funds and private equity. That’s not to say that RNR is a bad investment, just not one for my risk tolerance.
Next we go to….
The Chubb Corporation (CB)-
-Operating income per share of 1.60 up 10% for 4Q2006.
-CR of 83.3
-Investment portfolio market value of $18.6 billion.
-Fixed income portfolio remains heavily weight in tax exempt bonds, average duration of 4.6 years.
-Book value of 38.56 at end of 2007 compared to 33.71 at end of 2006. Increase of 12%
-Purchased 9.8 million shares at an aggregate cost of $525 million. In all of 2007, 41.7 million shares at cost of $2.2 billion
-ROE of 18.7%, 5-year average of 16%
Commentary
- “From Chubb’s standpoint the credit crisis currently has the potential to impact principally three types of policies we write in our specialty business; Errors & Omissions, Directors & Officers and Fiduciary. The types of insured’s we now expect to be impacted include home builders and developers, lenders, other financial institutions such as [REITs] mortgage brokers, mortgage insurers, bond insurers, rating agencies, investment managers and hedge funds. As we’ve done in the past on the investment banking, mutual fund and stock option back dating claims, we have been diligently monitoring case developments and claim filings relating to the credit crisis to ensure that we stay on top of the potential claims. For the reasons I’ll discuss I think we are well positioned to manage the exposures arising out of these events.”
-On the E&O side so far, things have been fairly quiet for us. In large part we contribute this to our underwriting strategy and prudent risk selection. In 2004 and 2005 we made a number of specific decisions that are now working to our benefit. We avoided writing insurance for the major sub-prime lending specialists. We got out of writing E&O insurance for almost all of the largest global investment banks and the top 30 global commercial banks and we exited a program of mortgage broker E&O insurance that we had been writing profitably for some time. As a consequence to date we largely have avoided the primary E&O exposures arising from these events particularly regulatory investigations involving allegedly deceptive marketing practices. Instead the few E&O claims that have been reported to us to date largely involve individual claims against investment managers that invested client funds in securities adversely impacted by the credit crisis.
-We have had relatively more activity on the D&O front but there also we benefited from strategic underwriting decisions, prudent risk selection and our limit and attachment profile. The majority of the claims we’re seeing under D&O policies are securities fraud class actions against directors and officers of companies that have either had to take a charge against earnings, revalue their investment portfolio or report disappointing financial results due to the affects of the credit crisis. Once again our conscious decision to avoid writing D&O insurance for large sub-prime lending specialists and to limit our exposure to investment banks and global commercial banks has helped us to avoid some of the highest profile cases. Of the Chubb policies under which D&O claims have been reported many are Side A only policies which can only come into play if the company is not able to indemnify its Directors & Officers. A significant majority of the policies are excess only and a great majority of the policies involve limits of $10 million or less.
-“Finally although it is far too early to predict how these cases ultimately will pan out it is noteworthy that plaintiffs are going to have the stricter requirements for pleading [inaudible] that the Supreme Court established last year in the {Tellabs] case in order for them to move forward with their claims. In fact the first reported decision in one of these cases granted the defendant’s motion to dismiss.”
-“We have received notice of only a couple of such suits under Chubb fiduciary policy. The policies potentially implicated have been either Side A or excess only. This also appears to reflect our decision to reduce our exposure under fiduciary liability policies for large risks. In sum, based on what we’re seeing now the underwriting actions I’ve just referred to lead us to believe that the volatility inherent in Professional Liability lines has been reduced but certainly not entirely eliminated in Chubb’s own book of business. That is borne out by our analysis of claims received by us to date. At the same time we recognize that the full contours of the credit crisis impact on insurers are not yet defined. It is an evolving process that has to be closely monitored and managed as we proceed.”
-“The second item I’d like to discuss briefly and happily I might add is the latest of a series of favorable decisions from the US Supreme Court affecting Federal Securities Litigation. On January 15 the court issued its decision in another closely watched securities case, Stoneridge Partners. Once again the court came down on the side of defendants holding that private plaintiffs could not sue a company’s vendors for securities fraud. Even if those vendors have knowingly engaged in transactions that the company used to falsify its earnings. Because the plaintiffs could not establish that they had relied on any conduct or statements of those vendors. In so holding the court refused to extend the reach of private causes of action under the securities laws and reaffirmed that there is no private right of action against alleged aiders and abettors of securities fraud. Obviously the primary beneficiaries of the Stoneridge decision are the so called secondary actors, the vendors, suppliers, banker, lawyers, accountants, even customers who may be involved with companies that commit securities fraud. The decision provides them a measure of protection against liability for alleged securities fraud perpetrated by those they serve or with whom they do business.”
-“As such its primary favorable insurance impact is likely to be on E&O claims including those asserted against investment banks and accounting firms in cases like Enron Securities litigation. We think the decision is much less likely to significantly impact a D&O claims environment because the typical securities fraud claim under a D&O policy usually involves directors and officers public statements regarding their own company for which they can be held primarily liable. Nevertheless even on the D&O front the decision is a positive development in that it reflects the Supreme Court’s continued rejection of attempts to expand the scope of liability under the Federal Securities Laws.”
-“In an attempt to identify some positive development in this opinion the plaintiff’s bar has been pointing to a couple of dangling comments in the opinion that left open the possibility that the secondary actors in the investment sphere might still be open to liability. The Supreme Court curtailed that speculation last week when it denied outright the petition for [surserary] in the Enron case. Importantly it did not remand the decision to the Fifth Circuit for further proceedings consistent with the Stoneridge decision instead it left the decision below stand and affectively put an end to the securities fraud claims against the investment banks who were all major participants in structuring transactions that Enron used to misrepresent it’s financials. In that context it’s safe to say that the circumstances under which a secondary actor can be held liable in securities class actions are now quite narrow and that is very good news in the litigation arena for defendants and guarantors.”
-“There was competition for new business and it was particularly strong and some competitors actually moves outside of their typical appetite in search of that new business. There was also pressure to reduce deductibles and increase some sub limits. We also found that CAT prone property came under rate pressure. So we believe that the rate declines that we say in 2007 and that competition for new business will carry over into 2008. Rates are off mid to high single-digits depending on the line of business. The credit crisis might have a favorable impact on D&O pricing going forward; we’ll have to see about that.”
-“The favorable judicial climate has just been remarkable over the last three or four years. The United States Supreme Court has taken consistent positions which raise the level of pleading requirements and make it more difficult to establish class action securities certification and I venture to say if we were redoing the corporate abuse estimates today in the light of the developments in the law since the exposure both to the principals and to their insurers would have been substantially lower today than it was in the climate in which tey were experience.”
-“On our CAT program specifically we think the traditional market will be down 10%.”
My take: I thought this was one of the more informative CC’s thus far. Why? Well because they pretty much gave a lesson on D&O and E&O. Something I’ll touch on in the conclusion is really the landscape of how for 3 to 4 years the Supreme Court has been on the insurance side. Could the tide change? Well sure, you get some new politicians in office who want to get votes and points from the “working man” who has been “used and abused” by the “big bad insurance” company, and suddenly a line or two of business might not be as profitable as it was three or four years ago. Again, I’m just making a simple assumption, but an easy one that can change. I’ll comment more on Chubb in the conclusion.
Next up:
Harford Financial Services (HIG)-
-Net income for 2007 came in at $2.9 billion
-Core earnings rose to another full year record $3.5 billion
-Core earnings per share were up 21% over 2006 to $10.99
-Since the end of 2006, book value per share excluding AOCI is up 11%
-Return on equity topped 15%.
-Written premiums were $2.5 billion in fourth quarter, 4% below last year.
-4Q CR 91.1%
Commentary
-“We benefited from favorable weather, our underwriting profitability was healthy and investment income was strong. PNC competition has been and continues to be intense with new difficult to come by.”
-“We think competition will remain tough in the coming year, but we do not expect pricing to become broadly irrational. That is why we believe we can achieve modest growth in 2008.”
-“Even though our top line has declined, we grew policies in force in personal lines, small commercial and middle market over the past year.”
-“We have seen more competition in personal lines of small commercial, but these lines remain largely rational. Loss cost will trend in slightly higher are still quite manageable.”
-“In middle market, we are seeing the effects of several year of moderate pricing declines on a written premium in combined ratio. State mandate reductions in workers’ compensation rates are also dampening premium growth.”
-“We are competing aggressively for new business in select classes and regions.”
-“In general, we would say that for investments where underline credit is single-layer or better the wrap is not getting much value in today’s market. The bonds are already trading close to the underlying credit. This process had already started in the fourth quarter and is partially reflected in our year end marks.”
-“Historically, life insurers have always been major holders of commercial mortgages and we are no exception. We hold a balance portfolio of $22.4 billion. Versus our peers The Hartford does hold the larger portion of its investment in the CMBS format and we provide extensive disclosure about these holdings in our appendix. The CMBS format has pluses and minuses. While in most market condition, they are more liquid than other loans, this liquidity means they are accounted for at market value, while whole loans are carried at amortized cost. CMBS also benefits from diversification and if you buy the senior trunches subordination, though in today’s market, structural protection often does not get the highest value from investors.”
-“On the fundamental, the commercial mortgage business is still in very good shape. Delinquencies remain near historical lows. Property values, while down in the last 12 months, never experienced the hyperinflation of residential property over the last 5 years. At this point in the credit cycle, I much rather be overweight commercial mortgages than high-yield corporate. You may have noted that roughly $1.9 billion of our commercial mortgages are held in commercial real estate CDOs. I would like to stress of that roughly $1 billion are not CDO in the sense you might remember them from residential mortgages.”
Ok, nomination for one of the best exchanges:
-Eric Berg “I understand that this is all about hedge ineffectiveness and about certain hedges that do not qualify for hedge accounting but how should we think about these losses, are they economic? Should we ignore them in your opinion, David? How do you think about this because they are running through your P&L so clearly the SEC feels they are meaningful. They are hitting your book value, what is your view on these $165 million and similar charges and previous periods?”
-David Johnson, “Eric, the vast majority of what you saw in the fourth quarter was loss as associated with credit derivative position that is what is recorded in that line and I look at that in two different ways depending on the credit derivative strategy. Portion of that loss is the credit derivative strategies where we did effectively replication trade and took credit risk, very similar to the risk we would take by owning a corporate bond, by assuming credit risk through buying or selling credit derivative and then also getting other fixed income investment associated with it.”
My take: I’m not that savvy with life insurance, not that I’m savvy with PnC, but I understand it better, at least that’s what I think. There wasn’t too much great info from this CC, just very basic info, just as we have been hearing, the PnC market is soft and may be getting softer. I think life insurers are in more trouble because of their investment portfolios and limitations they have.
So overall, the consensus is that the market is soft and that seems to be a reoccurring theme. However, I think there is an ace up the PnC sleeve that may change markets and I haven’t heard anyone talk about it yet. I’ll share that with you in the conclusion. The next post will cover Travelers, Markel,
Until next time, take care,
S.K.
1 comment:
Have you heard? This Errors & Omissions Insurance Program can reduce your E&O Insurance premiums anywhere from 20% to 50%. E&O Insurance for Life and Health Agents
Post a Comment