Top 10 2003 Newsmakers
While less turbulent than 2001-2002, this year hasn’t exactly been a walk in the park. The industry continues to face intractable problems—a lack of capital strength, accompanied by accusations that it’s under reserved; burgeoning liability claims (asbestos, D&O, E&O, med-mal, et al.), inflamed by an uncontrolled tort system; some serious natural disasters, and the ever increasing costs of workers’ comp.
There’s cause for hope, however. Global equity markets halted their chaotic descent and have risen substantially since last March, increasing the value of investments. Interest rates, however, remain at their lowest levels in 40 years, decreasing borrowing costs, but also lowering returns. Most companies seem convinced that they need to make money on underwriting, rather than investments, which is easier said than done. Hard market conditions continue in many lines, but have begun softening in the property sector, leading to more warnings about “the cycle.”
So, which ones were the most “in the news” this year? Half of the companies were also selected last year. No real order of importance should be attached to the list, as each was chosen for what they did individually, as well as what their experience says about the industry. Here they are along with the reasons we selected them:
Zurich Financial Services (repeat)
What a difference a year makes. After posting a record $3.4 billion loss in 2002, ZFS reported a $1.402 billion net profit for the first nine months of 2003. The results are a strong endorsement of CEO James J. Schiro’s business plan, undertaken when he took over the company in May 2002. An American and former head of PricewaterhouseCoopers, Schiro lost no time in jettisoning non-core and non-performing units, reducing ZFS’ equity exposures and cutting costs. He’s close to attaining his goal of returning the company to profitability and retaining its place as Europe’s third largest general insurer.
He has been ruthless in selling off under performing units. ZFS sold its U.S. life operations to Bank One for $500 million; then it sold Threadneedle, its U.K. investment management subsidiary, for around $570 million. It sold its 51 percent stake in Sri Lanka’s Eagle Insurance in July and in September sold off its French operations to Generali, both for undisclosed amounts. Most recently it announced the sale of its U.K. life business to Swiss Re, and its Philippine life subsidiary to Manulife.
Commenting on the nine-month results, Schiro wrote: “These results demonstrate that Zurich has come a long way over the last year. Going forward, our challenge is to maintain the momentum and further develop our framework for sustainable and profitable growth. We are well positioned to do so, and I am confident that we will continue to make good progress.”
Royal & SunAlliance (repeat)
R&SA scored the other big comeback this year. While it’s not as fully along as ZFS, the company has made significant progress since the departure of long-time CEO Bob Mendelsohn in Sept. 2002. Under the direction of Andy Haste, the former CEO of AXA Sun Life, who succeeded interim CEO Bob Gunn in May, the company has continued to sell off units, particularly its U.S. business, and to exit unprofitable lines.
R&SA may eventually prove that smaller is better. The radical restructuring has included the disposal of most of its U.S. business, and a £960 million ($1.6 billion) infusion of new capital through a rights issue, which greatly improved its balance sheet.
The nine-month results, released last month, showed a £146 million ($248 million) pre-tax loss for the period, £10 million ($17 million) less than in 2002. Better yet, R&SA announced that it expected to spend less on claims provisions in the U.S. than it had originally anticipated. An ongoing review established that an additional £500 million ($850 million) was a more realistic amount instead of the £800 million ($1.36 billion) originally projected.
Commenting on the results, Haste said in a written statement: “The underlying performance of our ongoing operations, with a combined ratio of 96.2 percent, has been good. We have taken steps to address the legacy issues of the past, but we recognize that there is still a lot of work to do to ensure that we achieve our target of an average combined ratio of 100 percent across the insurance cycle.” Investors are counting on it.
Travelers/St. Paul (SP repeat)
Despite the comments about St. Paul snagging Travelers “on the rebound,” after the merger with Citigroup was dissolved, they actually make a pretty good fit. The new company will be the leading provider of commercial insurance lines in 22 states and a top three provider in 43 states. With around $100 billion in assets and $15.6 billion in combined premiums, it will rank second only to AIG. That has to be especially pleasing for the St. Paul after making our train wreck category last year.
Strong leadership again helps explain the turnaround. St. Paul Chairman and CEO Jay Fishman, who formerly headed Travelers’ as a division of Citigroup, has led the last two years of restructuring. He’s overseen the exit from unprofitable lines, spun-off most of the company’s reinsurance operations into Platinum Underwriters, a Bermuda company in which Renaissance Re has a substantial stake, and settled some major asbestos claims.
The merger plans call for Travelers shareholders to receive 0.4334 shares of St. Paul common stock for each Travelers share. St. Paul will also pay a special dividend of $1.16 a share to its shareholders prior to the merger to offset the anticipated lower dividend payments by the combined company. Fishman will become CEO, while his Travelers counterpart, Robert Lipp, will be board chairman until Jan. 1, 2006, when Fishman is to take over that position. The companies expect to save around $350 million pretax in expenses in the first three years following the merger. It could be a marriage made in heaven.
The Insurance Information Institute
The organization has assumed the monumental task of trying to make the world of insurance comprehensible to non-industry people. In its own words: “For more than 40 years, the I.I.I. has provided definitive insurance information. Today, the I.I.I. is recognized by the media, governments, regulatory organizations, universities and the public as a primary source of information, analysis and referral concerning insurance.” It describes its mission as improving “public understanding of insurance—what it does and how it works.” It’s not a lobbying group.
While Dr. Robert Hartwig, its highest profile personality, is widely recognized for his understanding of the industry, and his cogent explanations, he’s not the only one who makes the I.I.I. work. There are many others like Loretta Worters, vice president of communications. She and her colleagues organized the International Insurance Society Conference in New York last July.
In short, if the I.I.I. didn’t already exist someone would surely invent it. It definitely deserves to be in our top 10, and the IJ salutes the men and women of the I.I.I. for a job well done.
The rating agencies
Up until medieval times messengers who gave the king bad news were often put to death—a practice many companies might wish to reinstate as far as the rating agencies are concerned. Even if the Bush Administration appears to share this reasoning, it’s not a good idea. Every game has to have a scorekeeper, and insurance is very much a game, notably in taking risks and placing wagers on the outcome.
Ratings have taken on a new and vital importance in the last three years. A.M. Best, which has been rating the insurance industry exclusively for more than 100 years, had around 44 percent of the worldwide revenues for insurance ratings in 2002.
Standard & Poor’s, which also rates other industries, has around 30 percent of the insurance market. Moody’s Investors Service, which is known for industry and country ratings, Fitch and Weiss round out the pack.
Their combined influence cannot be overestimated. A downgrade means that a company not only pays higher rates on the money it borrows, but also lowers its worth in the eyes of potential customers, their agents and brokers. At the recent PLUS Convention Attorney Peter Biging specifically warned agents to fully document the circumstances surrounding any coverage placed with a less than ‘A’ rated company in order to protect themselves from E&O liability claims.
If the industry faults rating agencies for being too zealous in their assessments, they’ve also been blamed for ignoring potential problems. Reliance is the most notorious example; up until a few months before it filed for rehabilitation it still had an ‘A’ rating. The agencies are right to be cautious, however, as a downgrade may signal the start of a “death spiral” from which the company can never recover. Part of Kemper’s demise can be read in the constant lowering of its ratings. Despite the controversy rating agencies are now as much a part of the industry as underwriters.
Axis Specialty
When Marsh’s MMC Trident II investment trust got together with Credit Suisse First Boston, the Blackstone Group, JP Morgan Partners and Thomas H. Lee Partners to form a new Bermuda-based company in the wake of Sept. 11, only the most optimistic among them would have predicted the success of AXIS Specialty Ltd.
That was just two years ago. Since then AXIS has grown from start-up to standout. AXIS Capital Holdings, formed in Feb. 2003, held an initial public offering of 21.5 million shares on the New York Stock Exchange in July at $22 per share. They are currently trading at between $28 and $29, giving it a market cap of more than $4.4 billion, a 275 percent gain in two years. Its operating subsidiaries are rated ‘A’ (Excellent) by A.M. Best and ‘A’ (Strong) by S&P.
It has offices in Bermuda, the U.S. and Europe with more than 200 employees. For the nine months ended Sept. 30, AXIS posted gross revenues of $1.12 billion, up from $389.4 million in the same period of 2002, while net income rose to $371.9 million, up from $153.8 million.
Led by CEO John Charman, the company continues to expand. It acquired the renewal rights to Kemper’s D&O business in June. The start-up is in good company.
Lloyd’s of London (repeat)
Lloyd’s offers proof positive that you actually can teach an old dog new tricks. It also proves that critically examining how your business operates pays off. When an insurance company, in this case an insurance market, goes from losing almost $5 billion to making $1.32 billion, it’s quite a comeback, and indicates Lloyd’s should be around for another 300 years.
The 2002 profits, the first after six lean years, resulted from a combination of the hard market, greater underwriting discipline and an increase in the capital available to Lloyd’s syndicates. The change from red to black wasn’t a trickle; it was a flood. As Julian James, director of Worldwide Markets pointed out in an open conference call, not only was the £834 million ($1.32 billion) Lloyd’s earned the “highest ever” on an annual basis [it was only the second time Lloyd’s has reported annual earnings]; it was also “the highest ever profit on a particular year at Lloyd’s,” measured by the traditional three-year accounting system.
Under Chairman Lord Peter Levene and CEO Nick Prettejohn, Lloyd’s is taking steps to assure that 2002 wasn’t a one time only phenomenon. In addition to scrapping the traditional three-year accounting system, Lloyd’s members also voted to revamp its organizational structure and adopt a franchise system, overseen by a board that will set standards and enforce them. Brokers from outside the U.K. can now become Lloyd’s members, and the market is in the process of updating and modernizing its operations with Xchanging and Kinnect.
The rating agencies are once again bullish on Lloyd’s, and have affirmed their ‘A’ category ratings. Traditionally conservative Moody’s even predicted that, if conditions remain “normal,” it sees “a 12 percent return on capacity for the market.” That’s quite a turnaround from the days after Sept. 11 when the NAIC launched an investigation of its financial condition.
If Levene has anything to do with it, Lloyd’s will not only will be standing in future years; it’ll be standing tall.
Munich Re
If you’re the world’s biggest reinsurer, and the third largest primary insurer in Germany, you write a lot of policies, and that can be a problem, because the more you write the more claims you’re exposed to. Munich Re exemplifies this dilemma. It’s been earning less money than it needs to cover the losses.
By the end of 2002 it had strengthened reserves at its U.S. subsidiary American Re by $3.4 billion. It had faced WTC-related losses in excess of 2.1 billion euros ($2.5 billion) and another 2 billion euros ($2.4 billion) from the floods in Germany and Eastern Europe in the summer of 2002. While it committed to a program of unwinding its cross holdings in German companies, including Allianz, it saw the value of its investment portfolio plummet as the world’s stock markets went into a nosedive.
2003 was to be the year of recovery, and the company has done rather well, but it isn’t home yet.
In downgrading the company’s ratings last August from ‘AA-‘ to ‘A+’ S&P explained its action as stemming from “the slower-than-expected recovery in Munich Re’s earnings and the impact this could have on the group’s ability to replenish capital during the current hard phase of the cycle.”
After earning 1.1 billion euros ($1.31 billion) in net profit in 2002, (helped by some big capital gains) the company posted five straight quarterly net losses, which finally ended with Q3 2003 when it earned 152 million euros ($180 million). It warned, however, that it expects to post an overall net loss for the year. The principle villain is the taxman, as the company has had to set up provisions to pay an estimated 1.54 billion euros ($1.84 billion).
Partly as a result the company announced a record capital increase, raising nearly 4 billion euros ($4.73 billion) in a rights offering to shareholders. Despite all its problems, Munich Re has already earned 30.7 billion euros ($36.7 billion) in premiums in the first nine months of 2003.
Kemper/Lumbermens Mutual
Hindsight being 20/20, it’s now easy to recognize that Kemper had probably entered what David Schiff, editor of Schiff’s Insurance Observer, describes as the “death spiral” as early as 2002. The pattern is all too familiar. The 90-year-old company’s problems started with increased claims payments, which led to the need to strengthen reserves, but, in the wake of Sept. 11, and with equity values falling, this proved difficult. Agents, brokers, and clients began to worry about Kemper’s financial strength. So did the rating agencies. A parade of downgrades ensued, making it increasingly difficult for Kemper to keep business. Even a cut through agreement with Berkshire Hathaway signed at the end of 2002 didn’t help.
The company was forced to sell off more and more of its business, and as the pace accelerated the company dwindled. Layoffs and office closures accompanied the decline. Kemper stopped writing new business. It posted a $312 million net loss for 2002, and its ratings hit bottom. In April it retained the services of Princeton Partnership LLC to “assist in the development and implementation of strategies related to the runoff of certain lines of business.”
That signaled the end of the line. Last month it announced that Kenning Financial Advisors LLC, formed by Michael Coutu and Tom Norsworthy, had taken over as owner and manager of its P/C operations to guide Kemper through a successful runoff of its businesses.
Could it have been saved? Maybe, but the odds were increasingly against it. The parts remain, D&O with Axis; commercial lines with the St. Paul; environmental casualty with Zurich; personal lines with Unitrin; etc. But the company’s Illinois headquarters has been leased, and there won’t be a Kemper open this year, or for many years to come.
American International Group (repeat)
AIG always makes news, whether it’s announcing innovative new programs, like its classic car coverage, buying a 9.9 percent stake in PICC, China’s biggest P/C insurer, leasing 10 Airbus 320’s to Aer Lingus through subsidiary International Lease Finance Corp., or settling fraud charges filed by the SEC for $10 million. Even though its market capitalization has fallen by 25 percent since 2000, it’s still a whopping $152 billion, even bigger than Berkshire Hathaway’s $129 billion.
In 2003, AIG picked up GE Edison, General Electric’s Japanese life business for $1.8 billion, as well as its U.S. auto and homeowners for $250 million. Chairman and CEO Maurice “Hank” Greenberg estimated the acquisitions would add around $250 million a year to AIG’s profits.
Those are on the rise as well. After posting an embarrassing $104 million net loss in the last quarter of 2002 (it took a $1.8 billion after tax charge for reserve strengthening), the company earned $1.954 billion in Q1 2003, $2.276 billion in Q2 and in Q3 it announced that profits increased by 26.9 percent to $2.34 billion, “compared to $1.84 billion in the third quarter of 2002.” Net income for the first nine months of 2003 totaled $6.57 billion, an increase of 16.8 percent compared to $5.62 billion in the same period of 2002.
Greenberg’s eventual retirement continues to make news, but the man who has run AIG for more than 30 years is still firmly in charge. He has indicated that a succession plan is in place, but hasn’t revealed what it is. Greenberg recently took on the U.S. legal system as well, instituting a policy of rating states by how their courts treat business, and urging companies to avoid investing in those that consistently allow marginal cases and high cost verdicts. He’s also leading the fight for tort reform. Go get’em, Hank.
Gen Re (Berkshire Hathaway)
Gen Re is the largest of Berkshire Hathaway’s far-flung insurance operations. Ranked by both S&P and A.M. Best as the largest U.S. reinsurer and the third largest globally, its position as one of Warren Buffet’s primary investments gives it a lot of clout.
The rebranding will bring together General Re and Cologne Re under the umbrella Gen Re name. The action follows the decision last March to acquire the remaining interest in Cologne Re held by France’s AXA group.
Ironically, Gen Re could almost qualify in the “turnaround” category. As Buffet recognized in 2001, Gen Re had fallen victim to the soft market, pricing risks too low. He took the steps necessary to correct the problem—changing management and enforcing underwriting discipline. In his annual letter to Berkshire’s shareholders in February he wrote that the company “is now positioned to deliver huge amounts of no-cost float to Berkshire and its sink-the-ship catastrophe risk has been eliminated.”
As usual Buffet was proven right, as Gen Re has contributed several billion dollars in profits to Berkshire this year. Berkshire had $24.43 billion in cash at the end of June, up from $16.1 billion at the end of March. In the third quarter revenues from its insurance activities, which includes GEICO, rose 7.8 percent to $5.96 billion, although Gen Re’s premium revenue fell by 3.2 percent to $2.05 billion.