Insurance Sector: What I Learned in Bermuda

My articles aren't meant to be mostly about insurance, but I’ve been writing about it a lot lately. After this, I should have one more wrap-up post about first quarter earnings (see part I, part II, part III, part IV, part V, part VI, part VII, part VIII, part IX, part X and part XI), and that should be it.

My Bermuda trip went well. Here’s what I learned:

1. On net, pricing is actually improving at present. Property rates have been improving, with 6/1 and 7/1 renewals at the same level as last year. Casualty rates continue to deteriorate across almost all lines with aviation and D&O possibly having the most overcapacity. Florida rates have been improving, because insurers are buying coverage above the Florida Hurricane Catastrophe Fund, and second event coverage as well. Demand is high. (And Florida is not charging anywhere near enough for reinsurance in their fund… a disaster waiting to happen.)
2. Everyone wants to expand their specialty businesses, whether through tuck-in acquisitions, or lift-outs of underwriting teams. At the same time, more of the business is being written standard by admitted writers.
3. Because capacity with the highly rated carriers is adequate, the class of 2005 is having a hard time gaining enough business. This is exacerbated by the insureds generally taking higher deductibles, and insurers retaining more and ceding less. Also, sidecars are less needed in such an environment; many are maturing, and disappearing.
4. “Revenge of the Nerds” could have been the theme of the meetings. Only two of the ten companies are growing their business. Most are doing buybacks, and rest, minus Axis, are considering it. All of them are following roughly the same investment models (excluding Max Capital), and all of them are following roughly the same risk control strategy, though a few are limiting their writings at absolute limits, rather than probability based limits, which have been known to overexpose companies when rare bad events hit.
5. Conservatism is generally a good, but over-conservatism is a bad. Platinum Underwriters is too conservative, and is losing vitality by not writing business unless they are almost certain they will make a 10% ROE. They are shrinking now.
6. Finally, reserves are the biggest area of disagreement. Everyone says their own reserves are conservative, but few are willing to prove it, like PartnerRe (PRE) and ACE (ACE). XL Capital (XL) may be going that way as well, disclosing reserve triangles. In general it seems that if there are problems, it should be located in the portfolios of the heavier Casualty writers, like Arch Capital Group Ltd. (ACGL).

I came away relatively happy with our positions. I like Allied World (AWH), Endurance (ENH), and PartnerRe roughly equally well. I was impressed with Flagstone (FSR), and think that it could be a good buy during a wind crisis. Arch and Max Capital (MXGL) presented well; there are reserving questions with Arch though. XL did well, but I still wonder if they have control over their lines the way PartnerRe does. Platinum (PTP) is too conservative, and Axis (AXIS) smacked of braggadocio, somewhat touchy and defensive. Answers were among the least clear given.

Final note, on people: The Arch meeting was a hoot. They spoke their minds and dished on everyone, though not by name (clever analysts know, though). XL’s CEO expressed contempt for MR Greenberg (”glad he’s gone”), and AWH’s CEO talked about his friendship with Greenberg, and how it is bringing AWH business. Going with Harry Fong was a plus — his 30 years of experience is unmatched, and he has a quirky way of teasing the answers out.

Full disclosure: long AWH, ENH