Insurance Rundown, Part 3

“Someone is not telling the truth…”

-Evan Greenberg

Did I get your attention?

Good evening, tonight we will glance over The Travelers Companies, Aspen Insurance, and Ace Limited, two are very interesting to say the least! But before I start…

Yesterday was an interesting day in insurance to say the least. By now everyone has heard about Warren Buffett’s supposed proposition and everyone is asking, well why would the mono-lines go through with this? Because right now it’s head’s I go bankrupt, tails I go to run-off. At least that’s is what I think. Some smart value investor will be able to extract some value out of each by taking one or another into run-off. The smart folks at PICO holdings have done this before, of course with other types of insurance lines. Mr. Whitman did hint at possible run-off situations, so sure it makes sense.

In fact, Mr. Buffett’s thesis makes a whole lot of sense, right now the mono-lines are too busy trying to distinguish and pay damages for toxic waste they hold in their portfolio. This puts the Municipal bonds (they insure) at the end of the payoff diagram. If Mr. Buffett takes control, he will be able to guarantee what the word insurance entails as opposed to a promise that will go unfulfilled if these mono-lines hold onto them.

The Travelers Companies (TRV)-

-Operating income of $4.5 billion full year, 1.1 billion 4Q2007

-$6.71 per diluted share full year

-Return on equity of 18%,

-NWP increased 3%

-CR of 88.4% in Q4, and 87.4 full year

-$1 billion share buy back in Q4, 4.1 billion since 2q2006

-Repurchased 19 million common shares in Q4, and 8.3% of outstanding shares as of beginning 2007.

-BV at 41.23, Debt-to-Captial ratio 19.4% compared to target of 20%

-Investment portfolio realized gain of 937 million FY

-Commentary

-“D&O, E&O and Fiduciary products are issued on claims made policies which dramatically reduce the latency tail on the business and the ability to stack limits.”

-“On a policy level basis we see it approximately two-thirds above a $5 million retention which reduces our net exposure per loss to $12 million up to an annual aggregate of approximately $375 million” (“Any potential issue would be frequency not severity”)

-“Given that we view this as fundamentally a frequency issue, we think a material variance from our assessment would require systemic changes to the insured litigation environment expanding our exposure to segments that currently appear to have low correlation to the sub-prime environment.”

-“In summary we have thought in a comprehensive fashion about the evolving implications of financial sector stress on our management liability and surety industry exposures. The net conclusion of our in depth exposure analysis at year end 2007 are that the issues are very manageable for us and we’re comfortable by both our diversity and profitability of business in the management liability and surety lines.”

-“90% of construction portfolio is public works spending”

-“Our experience shows us that recessions in and of themselves don’t necessarily cause surety losses. But they do tend to expose the underwriting that took place when times were good, when the economy goes into a recession and I think our position on that is that even in robust economic times our underwriting has not changed and so in a recession it’s not necessarily going to follow that our losses will increase.”

-(Interesting)- “When we refer to a systemic change, we’re really talking about a class of risk not currently identified in any way, not currently associated with in some way being dragged into it…Brian’s comment about frequency versus severity is driven by our limits profile. We have low limits, relatively small limits I think compared to other people who underwrite the business, and so on individual account won’t change much of anything. It would actually take a systemic change in the class of business that was associated with this and for there to be litigation which our policies would respond to…Ultimately, there has to be litigation to the insured for our policies to respond. So that’s what we think could trigger a worst case scenario, but so far there’s no evidence of that.”

-“It’s very important first to remember that in claims made policies defense costs are contained inside the limits unlike tradition occurrence policies where the obligation to defend run outside the limits and so the obligation to defend can simply run on, in effect forever, at least theoretically.”

-“To the extent that defense costs emerge, they emerge first at the primary level. Those who have the primary policy will provide defense. I think one of the things that we take some comfort in – and it’s in the analysis of the 30 claims and notice of claims that we’ve got – is that only five of them are primary, 25 of them are excess so at the moment you see the average attachment points there. It sure feels good in this case to be an excess provider rather than a primary provider.”

-On Acquisitions: “I think it would be irresponsible for a management team to say in the broadest sense that it would never consider an acquisition. I think we have a responsibility to be thoughtful, to see how we can create shareholder value and to use all of the tools that are available to us to do that.

Having said that, our instinct about it is really no different than it was which is that the risk of any transaction is very high. There’s culture risk and balance sheet risk, reserve risk, people risk, financial risk; it’s significant and we recognize it. We’re experienced at it and we recognize that those risks are real. Any transaction that we might evaluate will inevitably be compared to the very high hurdle of the risk assessment that we put into any transaction.

So then I go back to, can we create shareholder value? Can we complete our mission with the tools and skills and the assets that we have? The answer is we’re absolutely convinced we can. So you take a transaction, you evaluate it in the context to accelerate the growth of shareholder value, again evaluating against the risk.

So I think it’s all on the table, Larry. I don’t think that’s any different than it was three months ago or six months ago. Risks are high. They are difficult to do. We have a lot of experience doing them so we feel pretty good about it but the risks are nonetheless high.

There’s nothing in our capital profile that’s driven towards accumulating capital in anticipation of a transaction. We are returning capital as aggressively as we think prudent in the marketplace that we’re in. To the extent that we feel comfortable doing more we will do more.

I think it would be nice to be AA straight with both agencies. We are on watch on upgrade from Moody’s from AA3 to AA2. I don’t know if that will occur or when. We’re currently rated AA minus with Standard & Poor’s I think it would be nice to be AA rated and the financial targets that Jay sets and the ways in which we measure our business are geared to doing that.

But we’re not sitting on $0.05 of capital without a good reason and a good reason is not sitting on it to create a war chest for an acquisition. That’s just really a silly way to run a business and we just don’t do it.” (I just love that response!)

-On EVERYTHING, and I mean EVERYTHING “I’ve been talking for a couple of years now actually at some risk to my perceived sanity, that there’s lots of factors that could cause one to believe that the traditional cycle that we’ve seen in the business may be somewhat different this time. We’ve talked about terrorism. We’ve talked about the management of various companies and how much that’s changed. We’ve talked about the tools and analytics that are available universally in the industry now and the fact that people are not running the business by the seat of their pants but in fact the analytics are really very much improved.

We’ve talked a little bit about the Sarbanes Oxley process that all companies, I believe certainly as we do go through; I mean there are so many people internally here that certify the financial statements that any concern about loss trend or reserve development gets evidenced very, very early and filters up to senior levels of management. I think you can make thoughtful decisions about risk-taking.

I think it’s interesting that virtually every company in the business of any size has been involved now in share buybacks or dividends. If you look back in the ‘90s, that was not the case. There were companies that had programs but there were precious few who were actually in the market returning capital.

The fact that we are this long into the cycle and our guidance would translate to a 13% to 14% return on equity range, even before the impact of any development I think is an indication of the fact that we are believers that it may not necessarily be as dramatically bad as it’s been before. I think there are lots of signals; and again, I’ve said this before. Look at the retentions. The retentions and ours are exceptionally strong but there are other companies that also have had strong retentions. That is a counter-indicative signal with respect to a highly competitive, as you say, stupidity environment.

We were looking at middle-market retentions in the ‘90s that were in the high 60s, and now we’re talking in the mid ‘80s. These are very dramatic differences. Although I’ve worked for people who said don’t ever assume it will be different this time so I think we look to next year and assume that it will continue to be somewhat more competitive than it was this year but I still think there are lots of indications out there that it may indeed be a little bit different. So we’re hopeful.”

-“There should be no confusion by anybody on this call about our aggressiveness with respect to returning capital to shareholders. It’s not transactional, it’s strategic. It is strategic. We do it consistently. It’s part of our philosophy, and it is not limited or driven by any particular dynamic. It’s just the right way we think to run a business.”

My Take: I think Mr. Fishman is a very smart person, very quotable, very informative and they seem to be doing all the right things for a company their size. Moreover, for a big company to stay out of much of the mortgage crisis regarding bonds is even more amazing. Kudos to the management team here and continue doing what you have been doing, because obviously it is working!

Next:

Aspen Insurance Holdings Ltd. (AHL)

-ROE for the quarter of 23.2%, for year 21.1%

-CR for the quarter 79.4%, for year 83% 2007, 82.4% 2006

-Full year net income was $489 million

-BV per share increased by 25% to $27.95

-Net investment income for the year was $299 million, up 46% on last year.

-Asset under management grew from $5.2 billion at start of the year to $5.9 billion at year end.

-Increased allocation to funds of hedge fund from 3% to just over 9%, (These alternative investment produce an 11.4% return for the year.)

-Less than $51,000 of fixed income investments wrapped by financial guarantors.

-GWP for 2007 $1.8 billion was down 6.5%, NWP down 4%

Commentary

-“Towards the end of 2007 our new lines including Excess Casualty and Professional Liability started to contribute to the top line, and we look forward to the contributions that all of our new teams will make in 2008. The property book in particular was reshaped lowering gross written premium by 20%.”

-“Energy Physical Damage insurance- Rate reductions here are averaging 16% and we have non-renewed a number of accounts as a result.”

-“Marine liability account, the experience was similar. Rates were down and in spite of this we achieved an average increase of 5% on our book reflecting loss experience on certain accounts and some exceptionally strong client relationships.”

-“In our new Excess Casualty insurance unit, rate declines of about 5% especially reinsurance division experienced reductions of approximately 3% in average was bigger declines in certain clusters”

-“Moving on to the property reinsurance segment, we are experiencing rate softening in both the U.S. and international markets. There are significant differences in rate movements in the U.S. cap market. On average, U.S. coastal exposed business saw arte declines of around 15%, which still allows for acceptable margins for us.”

-“On U.S. regional cat accounts, the rates fell by 20% or more rendering many programs uneconomic.”

-“On our facultative reinsurance book, we’ve seen U.S. primary carriers reduced rates by 10% to 25% with a less pronounced decrease in Europe over 10% to 15%.”

-“Casualty Reinsurance business, we saw rate reduction of just between 2.5% and 10%.”

-“In U.S. Casualty Reinsurance, rate reductions of between 10% and 15% are not in prominent marketplace. However, we were able to achieve an average reduction of only 4.5%, reflecting our focus on risk selection. We are seeking increasing competition in our U.S. Casualty Treaty business overall with particularly aggressive pricing and workers’ comp class covers or a number of contracts in the market were being renewed by some of our competitors with the rate reductions around 40%.”

-“I am also pleased to announce today that we have entered into the financial institution insurance market and have hired a highly respected underwriter to lead our efforts…We anticipate that we will write around $60 million to $70 million of GWP in this line by the third year. The emphasize will be on smaller and medium-sized financial institutions with limited exposure to major investment banks. We also tend to avoid the global 100 players. We think we’ve got the timing right on this one given the current market.”

-“We also think there will be some E&O exposures and we think there may be some crime, financial crime involved ultimately as well. Those are all lines of business that historically we have not been writing. So we miss the issue altogether. We’ve taken a pretty conservative approach here. So I would be surprised to see any adverse development. Last thing…I’d say that it is claims made cover and this problem isn’t over yet. Every few weeks we find another interesting headline. So there may well be more claims in the future. I don’t think Aspen is particularly exposed to those as to say, simply not the business we are in, but as a word of warning, the problem hasn’t ended for the industry as yet”

My take- Interesting warning by the CEO that the problems are just about to begin for the industry regarding D&O, E&O and even more interesting that they are about to enter the business soon. Overall, can’t say I know this company very well, however their info was great regarding rate changes. So, I will definitely keep an eye on their calls just to get to hear what exactly is going on in the marketplace. CEO seemed pretty candid.

Next up: Ace Limited (ACE)

-Operating income of 2.7 billion, net income of $2.6 billion.

-CR for year 87.9

-Per share book value grew 16% FY

-ROE up 18% for year

-Reinsurance net written premiums declined 31%

-Duration of 3.5 years

Commentary:

-“Inflation and recession can have an impact on property and casualty results, both revenue and claims. Finally the financial and economic conditions are deteriorating in the face of a soft and softening global property and casualty market. In a soft market underwriters tend to minimize or rationalize away risk.”

-“We are not getting paid to take either duration or credit quality exposure. We have kept our power dry for a time we believe we will have the opportunity to take increased risk at attractive returns. In that regard we are entering a period of greater opportunity.”

-“We estimate the size of the US exposed financial institutions market for D&) and E&O to be around $3 billion to $4 billion in premium terms. Ace writes $143 million of net premium. Our average net limit is about $7.7 million for D&O and $3.2 million for E&O. All of the businesses claims made and defense is with the limits.”

-“Prices continue to decline around the world and the rate of decline is accelerating in some classes and staying relatively flat in others. Overall the market continues to be more competitive. For instance, in US insurance property rates were off about 15% for the quarter while for the full year they were off about 7%. General casualty was off about 8% for the quarter and that varies by class and 7% for the year.”

-“For professional lines D&O is off in the quarter 10% to 15% and 10% to 12% for the year and E&O was off about 13% for the quarter and 9% for the year.”

-“We found the reinsurance market to be more competitive that some of the public commentary we’ve been hearing that would lead one to believe.”

-“For AGO our loss represents our 24% share of AGO’s recently reported $300 million negative mark to market loss on derivatives for the fourth quarter. Our relationship with AGO is limited to our equity investment recorded at $392 million…They have emerged as one of the strongest of the financial guarantors.”

-Analyst: “If you pull back big picture is there any other type of D&O or E&O event you can think that parallels this historically in terms of how we may think about it, whether its mutual fund market timing, S&L’s, IPO related stuff, investment banks, is there anything?”

-Evan Greenberg, “You said them all. They are all what you would look at but each one is so specific and so different that this one will have it’s own size and shape to it and it’s own emergence pattern and each one is distinct from the other because it is so fact specific.”

-regarding Financial Institutions “My sense of this is it’s going to play out over the next two to three years, in reserves in the loss fully developing and payments will occur over even a longer period of time. I think ’08, ’09 and depending on the contentious nature on whether it goes to court between even the insured’s and the grieved parties and then the insurers get into it. Those play out over a long time, think of laddering, and maybe give you a good sense. Look at Enron that continues to play out.”

-“In the E&S casualty areas we’ve reduced our exposure significantly because just the pricing and terms are crazy to us.”

-“Here’s what’s happened, we need more price, need more rate. If we are paying to take the risk, we are in the business of taking risk, we are not shying away from it and we are not changing that playbook and as long as we are paid to take it and the terms make sense then we will do that. In the FI world that means rate and that has to be recognized and so far it is ticking up a little bit but the market is very slow to react and us and another, I know a major player, have been attempting to push the market in that regard and others have come into sort of fill the breach because the market has been slow to take it up. We’ve been pulling back a little but we get paid for it we’ll take it.”

-“Our new business writing in the quarter were down about 43% from the prior year and our new business for the year was down 20% from the prior year”

-“Keep in mind the answer is really more the financial institutions and the large ones can buy side ‘A’, they can’t buy ‘B’ and ‘C’, not available to them. They buy it because that’s what they can buy and that’s what’s protects their individual directors and therefore they’ll serve on the board of those FI’s. I think that’s more of the answer from everything we know. Someone is not telling the truth…”

-“The higher the risk the greater the volatility and the more uncertainty the more we want to get paid for that business.”

My Take: I’m starting to like Mr. Greenberg a lot, I think he comes from the perfect genes to run a sound and successful insurance company. He is very candid, he makes sense, he understands the concept of getting paid for risk. New business in the quarter was down 43% from prior year, well that makes perfect sense if you are not getting paid enough for the risk! ACE will be a force if the elder Greenberg has had any influence on the younger. I wouldn’t be surprised.

In conclusion, I decided against talking about Markel even though I have the CC transcript sitting right in front of me. I think I’ll devote a whole post (they deserve it) to them sometime in the next two weeks or so, once I get a glance of the three amigos (FFH, ORH, NB.TO) when they report next Friday (that should be interesting!). Further, I will also write the conclusion to the 2007 Insurance Rundown sometime during the week. Having a full time job really humbles you in relation to finding free time. On Friday, I head to Houston, Texas to get a taste of Texas Tea (oil) while visiting a very dear friend. Until next time…

Take care,

S.K.

Insurance Rundown, Part 2

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: “AIG Falls on Concern Losses May Have Been Understated.”

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 and Continental Europe, and those were down about 5% and 7.5% respectively.”

-“Commercial property that is hurricane exposed continues to present opportunity for us in 2008. The market prices for California commercial property earthquake coverage had decreased dramatically in 2007. In 2007, our written premium from California earthquake coverage declined more than we had anticipated at the beginning of the year. We do not see a growth opportunity in the segment under current market conditions of 2008.”

-“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, Aspen, and Ace Limited.

Until next time, take care,

S.K.

Insurance Rundown, Part 1

Ah, yes, divorce, from the Latin word meaning to rip out a man's genitals through his wallet.

Robin Williams

Over the past week or so, I’ve pretty much looked over every conference call transcript of as many insurance company’s I could get my hands on. What can I say? I was curious. A couple were left out, one in particular was MBIA for the obvious reason of probably not understanding what they are/were and will be doing. Considering the fact that Warburg invested X amount and the subsequent 50% cut in business value leads me to one conclusion: put it in the “too hard to understand” section, which by the way seems to becoming a larger section considering my circle of competence is rather small.

I was interested in a couple of things, for example:

-What will XL do with their SCA position? What were they thinking?

-What does an honest management (WTM) think about rates?

-Is RLI adding another banner year to the rafters?

-How does RNR think about Channel Re since they own a large position and since Channel reinsured MBIA policy?

-What does Tom Gayner and the outstanding folks at Markel think? Know?

-What does young Greenberg think about the market?

I found some answers knowing that I would be left with more questions. Next two weeks should be interesting because of more info from the three amigos (Fairfax, Odyssey, and Northbridge). Enjoy…

The companies that I am about to shed light on include, Selective Insurance Group (SIGI), XL Capital (XL), White Mountains (WTM), RLI (RLI), Harford Financial (HIG), RenaissanceRE (RNR), The Chubb Corporation (CB), OneBeacon (OB), Travelers (TRV), Markel (MKL), Aspen (AHL), ACE Limited (ACE).

I punished myself through some excruciating reading (well worth it!) to prove a hypothesis: We are currently in a soft market that may be accelerating rather than stabilizing.

So let’s begin:

Selective Insurance Group (SIGI)-

-Combined Ratio (“CR”) of 98.9% (2007), 97% (2006).

-Overall ROE of 13.6%.

-Total investment portfolio increased 4% to $3.7 billion during the year.

-Book Value was up 5% to 19.81.

-Repurchased $5.7 million shares or 10% total outstanding shares at average price of 25.13.

-80 jobs are being eliminated.

-“The improvement in our Workers Compensation book of business is a big success story for 2007”

-“Auto net premiums written grew 15% in the quarter to $12 million for all personal lines states excluding New Jersey.”

-“We saw 16.5% rate reduction for our property catastrophe reinsurance treaty and limits were lowered by $25 million to $310 million with retention unchanged at $40 million.

-“2005 was a year of challenges in our industry and in the financial markets.”

-“Pricing on new business was down about 6% in 2007.”

-“In some cases less sophisticated companies that do not have the underwriting tools that are trying to bid a renewal business down. You see that coming across from everywhere and then I just think you see the companies out there just trying to struggle to make premium targets and in particular, in some of the areas going after some larger accounts and that is where we saw that really hit us in the first quarter of 2007 where we talked to a whole group of agents and you find that they lost fifty or seventy or hundred thousand dollar account and in some cases, they lost it at 20% to 30% below expiring and they had no idea where this even came out of the blue and so, part of those efforts with our agents is the fact that that was a wake up call in January of ’07. They are very proactively marketing their renewal inventory.”

-“I think that this cycle will be the difference between the haves and the have nots. I think the have nots are going to wake up in another nine to 18 months from now and realize what they have got and it is going to be devastating.”

My take: Rates are down, poor performance of investment portfolio (could be worse), CR too high for my blood. I don’t really know this company too well, however I wanted to get a feel if the 5-7% rate decrease that I’ve read about from everyone else holds true, and it does based on Selective’s 6% rate reduction YoY. Also, I don’t like the job cuts, insurance companies rarely cut jobs, and I wouldn’t regard this as a smoke signal however. (1 out of 12 so far)

Next:

XL Capital (XL)

-Book value of 51.16,

-$471 million net realized losses during the quarter. (side note: this was on the fixed income side, this isn’t supposed happen)

-$57 million charge related to lower rated structured credit.

-Gross premiums written declined 7.4% in the quarter.

-“Reducing certain pressure particularly in aviation and some casualty clauses”

-“Premium growth in European construction and European professional lines”

-2007 full-year retention in high 80% to 90% range for professional, and PnC.

Commentary

-“Unprecedented conditions in the credit markets including the impacts on SCA and our investment portfolio.”

-“I also point out that XL’s guarantee to SCA was put in place at the time SCA achieved its first AAA ratings in 2000. As we have described, this guarantee would only pay if SCA failed to meet its payment obligation on a defaulting exposure, those written prior to SCA's IPO in August of 2006. Given that the large majority of topical exposures are post IPO and that SCA’s claims resources were nearly $3.5 billion as of September 30 of 2007, we continued to consider the probability of having to make any payments under the guarantee remote.” (side note: this right here is what you call tail exposure, could be small could be large)

-“We also continue to review our evaluation procedures. There has been a great deal of market focus on the ABX indices of the sub prime valuation metrics. We've reviewed the pricing of our sub prime portfolio relative to these indices. A lower grade sub prime valuations are in line with the ABX, which is the only source of price transparency, given the illiquidity of low-grade cash markets.”

-“Market conditions in the fourth quarter continue to follow recent trends with insurance premium rates on renewals down approximately 7% for the full year.”

-“In reinsurance, GPM written for the quarter fell by $152 million QoQ…The underlying run-rates, reduction in earned premiums was 11% driven by a 12.8% reduction in the rolling 12-month NPW.”

-Average policy limit for public D&O is $12 million, higher limits written in Bermuda and Europe , and lower average limits in the US. “The side A only component of our public D&O is significant representing approximately 1/3 of our GPW in 2007.

-“The magnitude of the sub-prime issue has the potential to be larger than previous events…the attritional loss experience has been quite low in professional lines for the past several years including 2007. Current loss trends continue to be favorable. Industry class action suits filled over the last few years remain below historical averages and the US Supreme Court decisions over the past two years have raised the bar for plaintiffs. With respect to actual claims activity related to sub prime events, we received 26 claims or notices of potential claims through year-end 2007. Since then we have received an additional three claims notifications. The majority of these notices are on D&O policies, with 9 on primary of policies and 17 on excess. Total net limits associated with these 26 notices are approximately $300 million with side A only accounting for $87 million of this amount…historically only a small percentage of reported claims became full indemnity losses for professional lien.”

-“History for similar events has shown that there will be a certain percentage of insurers that will be proven or have caused no wrongdoing and was simply financially impacted by the wave of events surrounding the economic environment.”

-“Percentage of policies issued for our broad definition of financial institutions is 21%, which is very much in line with the financial institutions consent of the S&P

-“The amount of time that it takes to pay out on claims in this whole financial guaranty area make this even if it were to occur on some worst-case scenario, way, way down the road, and we don’t expect that to happen.”

-“Rate reductions (for US catastrophe) moving more towards double-digit but it was overall pretty much in line with what we’re anticipating rate wise.”

Nomination for best question: (unidentified analyst): You’ve got above average-average exposure to credit in your investment portfolio. You’ve got the residual guarantee to SCA, you’ve got some D&O and E&O exposure to FI and short sellers are all over your stock. Can you specially give me the pitch to your long-term investor to stay the course, to tell us where the hope is to paraphrases is repeating, tell me that Larry Bird is actually coming through that door?”

My take: This doesn’t smell good, at all. It is currently at ¾ book, has pretty much lost over 45% of market cap. Why is that important? Well, morale of employees, agents who represent the company, capital adequacy. They don’t disclose IBNR and that is important for reserve estimate for analysts. I don’t understand why they would compare the % of D&O they have to the Financial weighing in the S&P. It doesn’t make much sense if you ask me; it should be based on price adequacy not weightings of an index. Suppose oil and gas were to become 50% of the S&P, are you going to write 50% of your D&O based on the S&P weighting? I’m confused. Why do you need actuaries if you can just base your entire price, allocation to the simplest form of numbers when your whole business depends on price adequacy and raking in enough premium for the risk you take. What you are doing is not insurance here, its portfolio risk through indexing. It makes sense for Vanguard, it probably doesn’t make sense for insurance. I might be wrong, I don’t doubt that. They might need Larry Bird, Kevin Mchale, Robert Parish, Danny Ainge, Bill Walton and the current Celtics squad (Garnett, Pierce, Allen) to come out of the tunnel. Don’t forget coach Auerbach. (2 out of 12 so far)

Next:

White Mountain- they didn’t have a conference call and I actually like that.

-Book value per share of $444, increase of 2.5% for the quarter and 11.4% for the years (including dividends)

-Tangible BV was reduced by $2 for share repurchases.

-YoY comparables seem pretty consistent if you subtract the after-tax gain of $171 million for OneBeacon 27.6% sale.

-January 31, 2008, OneBeacon declared a $200 million special dividend, of which White Mountains will receive approximately $146 million. (Approximately 72 million shares held)

-GWP down 18% and 20% for the quarter and year.

-NWP down 19% and 15% for the quarter and year.

-Had a 7.6% investment return.

-Back of the napkin calculation, they bought 295 shares YoY

Commentary

-“We had a good year. We avoided the sub-prime mess and continued to generate solid returns in our investment portfolio. OneBeacon and White Mountains Re had good underwriting results. Esurance had strong premium growth but higher than expected claim cost. We remain confident that it is a superior business. Our balance sheet and capital position are strong. We are leaving no stone unturned in our search to add value in these volatile markets.”

-“The market is softening everywhere. We expect reductions in volume across most line throughout 2008, especially in North America. Our U.S. clients are also experiencing volume declines in their primary business. Our European book is holding up better as the phase of market deterioration in Europe is less pronounces.”

-The decreases in GWP and NWP “Occurred in almost every line of business, especially property catastrophe exposed business, casualty, and accident and health where pricing, terms and conditions did not meet “White Mountains Re’s underwriting guidelines. Higher ceding company retentions also reduces premium volume.”

-on Esurance, “The fourth quarter results were impacted by seasonal increases in claims frequency as well as increased loss severity…2007 was a challenging year. While our top line growth remains strong, intense competition in the personal auto market increased acquisition costs. We expect that market conditions will continue to put pressure on our growth going forward. Esurance also experienced increases in loss frequency and severity throughout the year. As a result of these higher loss trends, we have taken decisive pricing action in several states."

-on Esurance, “Gross written premiums were $198 million for the quarter and $803 million for the year, an increase of 23% and 34% from the comparable periods of 2006. As of December 31, 2007, Esurance had 485,000 policies-in-force, an increase of 30% over 2006.”

-on Investment Activities, “Equities continued a string of superior performance. We continue to focus on careful security selection and conservative positioning to protect capital in this volatile market."

My take: This is the antithesis of the smell from XL, I like what they did. I will comment on the OneBeacon dividend when I look over their CC next, but getting $146 million to invest in other lines makes sense from WTM perspective. I am not concerned about the near 20% reduction in GWP or NWP AT ALL, I actually like it. If the business is not priced adequately for the risk you are taking, don’t write it. The ceding retentions is what happens during a soft market for reinsurance. Basically, primary writers keep more of the net limits and cede less to reinsurance and that in effect puts pricing pressure on reinsurance rates, not quite simple like that because it’s obviously more complicated than that. The increase in loss frequency and severity is actually a reoccurring theme recently, especially after Sir Buffett confirming this very same view during his visit to Canada. I love the way they invest conservatively and they preach it! I think the fact that the market is pricing their business at 1.05 P/B is one of the best deals in the market today. I don’t currently hold a position, but this right here would be a great entry. Overall, I used the word “like” and “love” many times here, what can I say? There is a lot to like with this story. (3 out of 12)

Next:

OneBeacon Insurance Group (OB)-

-Adjusted book value per share was $19.14, 2.6% increase in 4Q, 16.2% YoY.

-CR was 92.8% for 4Q and Year (full)

-Total return on investments was 1.6% for the fourth quarter and 7.5% through 12 months. (Similar to WTM).

-Special dividend of $200 million or $2.03.

-Year-end debt to capital ratio at 28.4%, 150 bp’s lower then year-end 2006.

-Repurchased 1.6 million shares at 21.26- $34.6 million spent.

-Increased reserves in WC and Construction defect.

Commentary-

-on Year-end debt to capital ratio, “Special dividend we announced this morning will push that number higher”

-on Soft market, “We continue to operate in the marketplace which obviously is more competitive today than it was at the tip of IPO.”

-“Turning to investments as Mike mentioned, the total return in the portfolio for the quarter was 1.6% and for the full year was an outstanding 7.5%. On the fixed income side as illustrated on slide 13, our portfolio under performed the Lehman index, primarily as a result of being under weighted in treasuries and being shorter in duration. But the real story here is that our fixed income investment managers avoided any exposure to subprime mortgage securities and also to CDOs. That puts them in a fairly select group and as a testament to the quality of their credit analysis and risk selection.”

-“On the equity side, our portfolio managers and prospective partners outperformed the S&P by over 400 basis points for 2007, including notably a positive return of 1.2% in the fourth quarter when the S&P was down over 3%. I could use a number of superlatives to describe those results. But I think, they actually speak best for themselves.”

-“There has been no material change in the asset allocation of our portfolio, which continues to reflect our focus on maximizing risk adjusted total return as opposed to just maximizing that investment income. For your reference, we are now breaking out convertible bonds separately, which we think off and managed as part of our equity portfolio. The fixed income portfolio continues to be high-end in credit quality and short in duration.”

My take: Okay, I’m sort of confused and this is why I think WTM has a lower P/B multiple, they own approximately 71 to 72 million shares of OB, they obviously want to divest some of their position here. So OB makes a special 2 dollar dividend, their debt to capital ratio is a little higher than others, and with the dividend it will increase. Do you really want to do that in a soft market which will increase CR? OB is at 1.13 P/B, and WTM is at 1.05 P/B, if you buy WTM you own a majority position in OB at a lower P/B. OB can’t successfully repurchase shares because that will increase WTM % of ownership. So the market tags a lower P/B multiple on WTM because of a controlling position that is limited in capital allocation decision making. OB P/B over WTM P/B is 7.6% higher, but with WTM you get the dividend where capital allocation is not limited, Esurance, ReInsurance, Portfolio investments, ie. Further, their (OB) return on portfolio is mirror of WTM return, Plus, I think Esurance may be a Gem. This should play out in the next year or so, I think. (4 out of 12)

Next:

RLI Corp (RLI)

-Operating earnings of $157 million or $6.52 per share, $28.3 million in 4Q

-The combined ratio for 2007 was 71.4, for Q4 was 81.7

-Investment income grew 10.6% to 78.9 million

-Fixed income portfolio duration 4.2 years and AAA rating

-Repurchased approximately 1.2 million shares of RLI at average $58.27 during 4Q

-Repurchased approximately 2.3 million shares at average of 58 for 133.3 million for year.

-ROE of over 22%

-Have 85.7 million remaining from the $200 million repurchase program

-Surety is very economy dependent and “license, statutory bonds”, Primary liability as well.

-Surety- “Someone has to get a license and they have to bond themselves to get that license. That doesn’t mean that loss will necessarily flow from that, but certainly as that implodes there would be people that say they didn’t get to close their house, or they didn’t get their escrow money, or there cold be any number of problems that could arise that could affect the bond”

Commentary:

-“Our direct exposure to subprime and mortgage products is less than $10 million. Of this $10 million all are rated AAA, and have been paying as agreed. All of these are fixed rate instruments with no interest rate reset and were issued prior to 2005 and are not currently on watch from any rating agency.”

-“We have a fair amount allocated to municipal bond securities, 25% of our portfolio or $473 million. Roughly 70% of these bonds are insured by traditional monoline insurers. We would prefer buying municipal bonds without this wrapped insurance, but in the marketplace dominated by insured issuance this will be difficult to do.”

-“From an insurance standpoint, we have two product segments with subprime exposure: Surety and Executive products or D&O. It should be noted that our exposure to subprime in these products is minimal.”

-“Another good underwriting quarter and another good underwriting year combined ratio of 82 and 72, respectively. Good news, the market is soft, but as I've said in the recent past, we're coming off very robust pricing, and also we have a very diverse product mix, number of products less susceptible to the softening, for example, our Personal Umbrella product, our Surety products.”

-“Really it's the E&S marketplace, excess and surplus lines marketplace where the real price declines lie, with standard companies invading our space, this is like most cycles, we are there. Also, as you know, our model rewards profit, not volume. With prices under this pressure, selection becomes more important, and the quality of the underwriters is paramount.”

-“In the Surety side, it is a really good story. Gross written premium is up 9% in the quarter, 6% for the year. Less price sensitive, as I mentioned earlier. Although some terms, conditions are under pressure, for example; credit being branded a little more liberally by some. Less collateral required, some personal indemnity not being required. But overall, the Surety segment is in good shape. Jon did mention the surety areas where you could have some exposure to subprime. We have very little exposure, we wrote small, a few small bonds on some very small mortgage brokers. So far, we don't expect any loss out of that.”

-“In the Property segment, we were up 4% in the quarter, down 8% for the year. While the gross written premium for the quarter is driven in large part by our Marine growth. As we build out that Marine product, we would expect the comparisons quarter-over-quarter to be fairly good as we build out that footprint.

-“In the E&S Property side, that was where rates were under pressure. The fire business was off around 5% in the quarter. But that's been coming of less robust pricing.”

-“On the Quake side, probably peaked around January of '07 about 25% or so. Difficult market, a lot of capacity, but we are the premier brand monoline quake in California. We will continue to manage our exposure, continue to service our customers and be careful as the market starts to -- as it continues to soften. But what's important there is managing our exposures and making sure that we are prepared when the market does harden as it always does.”

-“The Casualty side, off 14% in the quarter, 8% in the year, general liability, our largest product, off 8% in the quarter. Fourth quarter is always tough, rates off about 12%. Again, we would expect to see that start to stabilize in '08 as we were off like I said 11% in '07. Again, that's an E&S product so it is under pressure.

-“Transportation off 15% for the year, 12% for the quarter, rates down about 9%. I will say in the transportation area that tends to be the first to soften and the first to harden. We did see our submission activity pick up in the fourth quarter, so we are seeing more opportunities. Again, I would expect to see rates start to stabilize sometime in '08 in this area.”

-“Our personal umbrella product was up 5% for the year, it's our standalone personal umbrella. Again, less rate competition here, less overall competition in this space actually. It has been a very good product for us.”

-“The executive products D&O, gross written premium is off 21% for the year, 30% for the quarter. Rates are off 20% from their peak. We expect this to start to stabilize as well as some of the companies start to experience difficulty in their financial institutions cover. And again, as Jon mentioned, the exposure on the subprime would be in this product most readily. We have very little exposure there as we look at it, it's probably less than $5 million.”

-“So, overall a good quarter, tough E&S marketplace, there is too much capacity in the marketplace it's time that good underwriters thrive. We'll continue to manage our exposures and out select our competition."

-“The rates are not going to firm at any point in time. But I think the decline will start to lessen as the year progresses.”

-“I think rates have declined fairly rapidly over the past 12 months. So, I don't expect that level of declination to continue, or yes, you're right. We will start seeing significant underwriting losses at some point. But remember on the casualty business, it can be a while. Again I think information is better than it's been in the past. I think management has that information on pricing. They are seeing the price level declines, the trends, and I would expect that unless they've got a different way of looking at things, that they all see that these price declines can't continue.”

-On acquisition:

-“I think you all know that it appears that the pricing for, say an insurance company acquisition, that pricing has come down as there has been some erosion in the sector over the last 12 months in terms of price and so that’s true…And it’s based upon obviously what are you are paying for it and what kind of returns you are going to get.” (Sounds like “Price is what you pay, value is what you get”)

-On industry:

-“The profitability of the industry over the last – since the early 2001, we have had several profitable underwriting years in a row or most companies have. One would expect, again all things being equal, that in periods of rising prices that companies tend to make their balance sheets or heal their balance sheets. I know from a generally accepted accounting principles booking basis that's not supposed to occur, but it's a natural occurrence because I think companies tend to underestimate the effects of pricing changes from year-to-year either going up or going down.”

-“And so, for that period where we had multiple years going up, I think probably on a relative basis balance sheet is healed. Now we are entering a period or we have been in a period for perhaps 18 months, where prices are going down, and my belief is that the opposite occurs during that period of time, and that companies tend to underestimate again the effects of the reduced pricing. And so perhaps if you look at this last accident year, you would maybe expect that a company might underestimate their loss ratio.”

-“Now, having said all that, we don't believe that we do that ourselves. When you look at acquisitions, is there more risk or less risk, and you are discounting or believing a current balance sheet say in 2008, versus what that balance sheet would have been in say 2001. Yeah, but you still have to perform an exhaustive study of what they've done in the past, I mean, what kind of business have they written. And there are relative risks in the various lines of business that they've written. I mean, if they have exposures, asbestos environmental exposures and that sort of thing, that probably did not go away, or hasn't gone away just because, we've had good underwriting years here for a few years. But at the same time, you have to look at other things that we know are out there, like construction defect and that sort of thing so.”

-“RLI has been a company that has persevered and thrived in hard markets and in soft markets and we will continue to maintain our disciplined underwriting approach, which could mean some reduced top line growth. We will however pursue other opportunities by either startup. Lift out some teams of people, which we have been successful at in the past. We talked about Marine for example and our transportation division was started as a lift out or even possibly an acquisition, small acquisition.”

My take: You would have thought this was probably the longest CC, it wasn’t. However, it was THE most informative and I think these guys are really up to something special. I like the fact that their retention will be down, I like that they are looking at acquisitions when most insurance is at lower P/B and from their highs. This company is at a higher P/B, but who says it isn’t warranted? Their combined ratio is outstanding, probably best I’ve seen for 2007. ROE? Amazing. Dry powder? Yes they do! Honest management? Sure seems like it. One analyst even said during the CC, “You guys are truly great at what you do.” That’s unheard of in this day and age where you are guilty until proven innocent. RLI is on my watch list and will sell my collectible basketball cards if the price warrants it. That should mean something because I don’t even let my brother look at those basketball cards. (5 out of 12).

This concludes the first portion of three segments dedicated to the named insurance company’s named at the beginning. Next up: The Chubb Corporation, RenaissanceRe, and Harford Financial Services.

I would also like to the producer of all the CC transcripts, Seekingalpha.com.

Helpful Lingo:

-CR: Combined Ratio, GWP-Gross Written Premium. YoY- year-over-year, NPW- Net premium written, FI- Financial institution.

- Side A policies are designed to respond to claims made against individual directors and officers that are not indemnified by the covered company.