Equity Mkts. Seen Rewarding Insurers That Are Highly Focused After Sept. 11

Mr. Porrino said that Mayfield Village, Ohio-based Progressive was one of the highly-valued and highly-specialized p-c insurers in the study, while The Hartford was included in the lower-valued, diversified company group.

After the session, which began with presentations recapping the near-term effects of the Sept. 11 terrorist attacks on various financial services companies, Mr. Porrino spoke with National Underwriter about whether the post-attack strategies of p-c insurers would line up with the results of E&Ys study.

Will they specialize? If so, in what types of business?

Mr. Porrino said he did not think that insurers would move en masse toward specializations in commercial lines.

"But one trend I definitely do see is that less companies will do both reinsurance and commercial lines," he said.

Noting that a "significant amount of reinsurance capacity is borne by primary companies," Mr. Porrino predicted that a number of primary insurers that have reinsurance operations would reevaluate their strategies.

He cited the high amount of capital thats needed to support reinsurance operations, the high cost of that capital and the security needs that a lot of buyers of reinsurance are going to have among the reasons that such strategic changes might be considered.

"I hope companies dont start switching wholesale from personal lines capabilities to commercial. And so far, I dont see that," he said. As for the few companies that do both, "you would expect them to say now is a good time to start writing more commercial. So youll see some marginal increases" and shifts in resources.

Agreeing that some commercial insurers had been in the process of shifting resources from standard commercial to specialty commercial lines prior to Sept. 11, Mr. Porrino predicted that that trend might slow up.

"The greed over the focus question is a very good question right now. And I think every management is going to handle it differently," he said.

"Personally, I have never thought Lloyds made sense," he added, giving what he referred to as his favorite example of lack of focus. "Lloyds made sense because you could get a global franchise and a global license like that," he said, snapping his fingers. "But does it make sense to write business in North America from London? No, it doesnt."

He predicted that "whats going to happen in the short term, is that people are going to put money in Lloyds because they think they can make a boatload [of profits]. The question is are they going to have the discipline to get out in two years time when things start going the other way."

During the press briefing, Mr. Porrino described some near-term issues facing insurers in the aftermath of the Sept. 11 attacks.

While theres a range of industrywide loss estimates "still out there," the ultimate number is likely to be north of $50 billion, he said. On a gross (of reinsurance) basis, insurers have disclosed losses up close to $40 billion, he noted.

The surprising thing is not the magnitude of the number, but the difference between the gross amount and the net amount, he said, noting that net loss disclosures total roughly $22 billion.

"Since the insurance industry tends to be somewhat inclusive, you would think the two numbers would converge," he said, noting that some of the difference is explained by the presence of finite reinsurance ("limited risk reinsurance very often using the time value of money concept") and takedowns of equalization reserves (special reserves held by European companies).

"But when you add that up, youre still missing at least $10 billion between net and gross," he said. "Theres no big capital markets hand-off to the insurance industry that is housing this loss. Its somewhere in the insurance industry. We just havent been able to find it yet."

Mr. Porrino also said that concerns about a possible availability crisis are being exacerbated by the inability of carriers to exclude terrorist coverages–"in no small part driven by the state regulatory bodies."

He noted that E&Y professionals had spoken to a few of the state regulatory bodies and found "they are very unwilling to allow terrorist exclusions in the policies." However, "at the same time, insurance companies are not willing to write it without some backup. So unless something happens very quickly, theres going to be a real divergence here," he said.

"One thing I would say for sure is the reinsurers are not going to cover terrorism," he added.

"The answer, of course, is a terrorism pool set up by the government," he said. "I personally think its an embarrassment that, in the United States, we have not been able to get it done," he added, noting that a terrorism pool was set up in the United Kingdom some years ago in a weeks time.

"We continue to argue over how to make it work. So well come up with a perfect model, but well also be too late. Theres going to be some real tension starting right after Thanksgiving," he said.

In the interim, will companies start moving business into their surplus lines subsidiaries?

"That is already happening," he said. "Companies that have both surplus lines and admitted paper are starting to put more resources into their surplus lines [operations] to avoid getting all the forms [approved].'

Mr. Porrino also spoke about the recent influx of more than $12 billion of capital into the industry.

"This is changing just about every day right now," he said, pointing to a table showing $12.6 billion in capital raised since Sept. 11 for the p-c industry.

The capital providers are being "very selective," favoring offshore startups, with $6 billion of the $12.6 billion total amount of capital raised, he said.

According to E&Y, the balance of the new capital breaks down as follows:

$2.9 billion to existing Bermuda companies.

$2.1 billion to existing U.S. companies.

$1.6 billion to existing companies outside North America.

"The $12.6 billion doesnt come close to the after-tax cost of the attacks," Mr. Porrino said, putting the industrywide, bottom-line net loss figure at $4.1 billion.

Noting that the difference is net new capital of $8.5 billion, he said, "this is an industry that was fundamentally significantly overcapitalized. We think that this will have an impact of the size of [and] length" of the hard market, he said.

Describing the influx of capital as "new money in search of management teams," he questioned the motives bringing capital to the industry.

"Im not sure this is the best path to success," he said, noting that traditionally, the process has had management teams looking for new money, instead of the current reverse situation.

"There is a very limited amount of talent to go around. Most people would say theres not enough to go around today, never mind enough to start another six or seven companies," according to Mr. Porrino.

"A lot of people are getting concerned about the amount of capital coming into this industry," he said, going on to paraphrase some remarks made by Berkshire-Hathaway Chairman Warren Buffett in a recent letter to shareholders of the Omaha, Neb.-based company.

"I think [Mr.] Buffett probably said it best, when he said that investment bankers may not know which businesses can succeed, but they do know which ones they can sell," he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 26, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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