If an insurance company's management team has its heart set on fooling analysts, there is nothing we can do, cautioned Greg Peters, senior vice president, equity research, Raymond James & Associates Inc., Chicago.
Not quite 150 security analysts and insurance executives assembled at round tables with stiff, white table coverings in the Biddle Room, of the Harvard Club in New York City on January 27 - 28, 2003. They were attending the Insurance Industry Conference organized and hosted by the New York Society of Security Analysts Inc.
Mr. Peters in a finely articulated overview of the insurance industry observed that P-C companies have a history of chronic under reserving, and that it is almost impossible for outsiders to determine if an insurer is adequately reserved "until the deficiency becomes obvious to everyone, including even management."
He cited Frontier Insurance's handling of reserving before launching a secondary offering and afterwards. Before the launch, the company reported that reserves were adequate in all 10 previous years. In a little more than a year following the issue (SURPRISE!), reserves were suddenly deficient in all but the three earliest years. Share price had dipped from $33.875 at launch to $12.88 about 16 months later, and eventually the company went bankrupt.
Surveying the current state of the P-C industry, Mr. Peters said insurance stocks are very cheap, yet premium increases are in effect and suggested "these are good reasons to consider buying insurance stocks."
Good News All Around
Following Mr. Peters came a succession of executives, CEOs and CFOs, of mostly smaller capitalized life, accident & health and P-C insurance companies. For the next two days, these officers presented crisp, optimistic, number-laden productions to convince the security analysts in attendance that their insurance companies were prime opportunities for growth and worthy of being recommended as a buy.
Among those presenting were Argonaut Group Inc., Universal American Financial Corp., Scottish Annuity & Life Holding, PMA Capital Corp., RLI Corp., State Auto Financial Corp., PartnerRe Ltd., Kingsway Financial Services Inc., XL Capital Ltd., Renaissance Re Holdings Ltd., Alfa Insurance Group, Baldwin & Lyons Inc., Harleysville Group, HCC Insurance Holdings Inc., Platinum Underwriters Holdings Ltd., Western Financial Group, Hub International Ltd. and FBL Financial Group Inc.
Most of the companies in tightly scripted[1 - see numbered footnotes at end of analysis] shows used power point software which produced copious graphs, charts and tables, plus bullet points. Each began with a Forward Looking Statement which warned viewers to not regard the information as guarantees of future performance as "actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors…." These statements are routinely seen at the bottom of a stock company's press release, in annual reports or in the bowels of a 10K. It was rare prior to 2002 to see these at the beginning of an oral presentation. The profusion of class action law suits against companies for even hinting at better results that they later may have not been able to realize, has brought these statements in all their dense grey type, making them totally unreadable, to the fore front of company programs.
While the talks were similar in tone, content and focus, it was revealing to hear about the different methods used by various insurance companies to determine how to reward their top officers with stock options and bonuses. Some cited the combined ratio of operating units as the bench mark; another said each underwriting group was granted additional compensation measured on its contribution to profitability; one company said its bonuses were tied to the combined ratio for the entire company; one said its book value was most telling, and another stated it was share price. Not discussed was whether the benchmark was altered from time to time to insure that the most propitious rewards were granted.
One after another
Though most were interestingly delivered, informative and lively, some even humorous, frankly listening to this many optimistic reports one after another, dulled our discerning senses and one presentation began to sound very much like the previous one. We found ourselves imagining what a shock it would be if a CEO delivered a largely negative assessment of his/her company:
"Good morning, ladies and gentlemen. I'm Homer Gist, most folks call me 'Home Run'. We have good news and bad news to report to you today about Go Bust Insurance Co.[2] The bad news first.
"Last year, our premium volume fell by 39 percent, largely due to an agency force that for the most part refused to push our auto policies because they said, and I quote: 'You are so damn slow in paying off on claims, we are tired of having our clients, some of whom we count as friends, bitching to us about how they can't get cent one from your people when they have a legitimate claim.' Now, there's the key to the problem: We don't consider any claim legitimate! Of course, we do pay claims, usually when the case goes to court, which is the reason our combined is 130.9. The greedy trial lawyers have been quite successful in getting bad faith judgments against Go Bust. In some cases, juries have even awarded punitive damages.
"One example was a car owner, one of our insureds, who couldn't get a new windshield put in his Toyota because Go Bust wasn't sure the claim was legit. Apparently, the cheap bastard wouldn't install it himself, and let Go Bust reimburse him (fat chance!). Well, to show you how out-of-joint the justice system is in this country, the jury felt that the snow and sleet from this winter, hasn't this one been a hell of a bastard?, blowing in on the policyholder as he drove 32 miles round trip to work was excessive punishment and decided to slap us hard, a million dollars hard. Go Bust appealed, but we lost every damn one. Well, I say, 'You can't win 'em all.'
"Our investment income's down nearly 80 percent from a year ago, 'Lefty' Draw, Go Bust's investment guy, went a little heavy into Enron and WorldCom stock coupla years ago, so we've got quite a big, hell tell it like it is, a gigantic net loss.
"Now, to the good news. This management team for Go Bust has been in place, lets see, I've been CEO for 19 weeks, more or less, with Go Bust about six months. You'll remember, Harold Stubbins, 'Stub' we call him, CEO before me, was hauled off to jail after he ran a red light, smashed into a school bus, put the pedal to the metal to get out of there, and shot at the police when they came to his house to collar him. Well, the good news is that 'Stub,' no fool he, has his car insurance with Allstate!"
How accurate, confident?
Of course, our interest in or purpose for listening to these discussions was not as focused or as intense as it was for the security analysts. They desired as much operational and financial data as could legally be disclosed by the companies. But if Raymond James' Mr. Peters' questioning of the validity of insurers' reserving is accurate, how confident are the analysts of the results being offered in these dog and pony shows?
Further, since the conference was held at the end of January, most of the insurance companies had not published their 2002 reports and the insurance executives cautioned the attendees not to ask them to disclose any information about the fourth quarter or full-year 2002. Perhaps, in the future, having the conference in late February or early March would permit companies to post full year results, which would provide a more uniform basis for year-to-year comparisons. It is like comparing a football team's record using only the scores at the end of third quarter, rather than scores at the end of the game.
Scheduled to conclude the conference was Dr. Robert P. Hartwig, senior vice president and chief economist from the Insurance Information Institute. A speaker at many such gatherings, Dr. Hartwig uses a power-point program with 81 slides to describe in a fast-paced, dynamic style the profound influence 9/11 had on the re/insurance industry and will continue to have for the future. Dr. Hartwig has a ready and full command of his subject and a plethora of facts and figures to support his theses. Some of the slides, however, need to be updated as the conclusions drawn from them may not be supported by more timely data.
Facilities and Victuals
Certainly, the conference was held in one of the more elegant rooms in the city. The Biddle Room at the Harvard Club has wood paneling, high-ceilings, with wall sconces holding two, small, white-shaded lamps. The base of the sconces have the Harvard crest etched lightly on them.
On one wall in an ornate, wood frame, illuminated by an over head lamp, the portrait of Nicholas Biddle[3] looks down on those assembled in the room that bears his name. We thought he may have been the Nicholas Biddle,[4] head of the Second Bank of the United States, the one whose policies Pres. Andrew Jackson found so repulsive. Next to Mr. Biddle is a portrait of a very severe Charles Stebben Fairchild, graduated 1863, Pres. of Harvard Club 1901-1905. Painted by Cecilia Beaux, it was a gift of members of the club. In an adjoining room is a portrait of John Osborne Sargent,[5] 1811-1891, graduated 1830. Pres. of Club 1878-1881. Two other unidentified men hang at one end of the room, along with an etching of the layout of Harvard University in the late 19th century on another wall.
Apparently at one time or the other, Harvard men/women and guests kick up their heels in frolic as part of the floor is left bare wood, the balance is heavily carpeted in a colorful, rich pattern.
We also seem to recollect a head of a wart hog[6] tusks intact hanging on a wall somewhere in the club.
Breakfasts were ample, if not overly supplied or original. Orange juice only was offered. Available were the usual assorted muffins, some labeled non-fat, small bagels with crème cheese and jams, coffee and tea. The saucers for the cups were remarkable in their shape. They had high sides[7], allowing us if we so preferred, to pour our steaming hot coffee or tea into the saucer and blow to cool it. The sides would prevent the liquid from slopping out if we desired to slurp it up (noisily?).
The buffet lunch, again adequate with a selection of sandwiches, lettuce and pasta salads, did have a soup that brought many back for seconds. One young analyst at our table, eagerly consuming his second bowl, announced he did not know what was in the soup, but pronounced it "excellent." There was no dinner provided for those attending the meeting. But as is usual with these types of gathering, dinner invitations are often offered and accepted among the analysts and company officials. And attendees have thousands of eateries scattered throughout the city to select from.
Evaluation and Ranking
The conference organizers, the NYSSA, had the courage to ask attendees to complete an evaluation of the seminar. The results of the survey will surely help the association plan future ones, and make them even more constructive, responsive and supportive.
More conference organizers need to step up and ask for evaluations of their meetings. While the results may be disappointing, even critical and negative, how else to determine what is right and wrong with their conferences? Yes, there is one rather certain and final sign that the meetings are not significant — a fast fall off in attendance.
While not in the same league as the investor-analyst extravagances mounted by the prodigious, but now sullied[8] investment banks and securities houses, such as Salomon Smith Barney or Merrill Lynch, that draw the biggest names in the re/insurance industry, paying the maximum of $425 for non-members (NYSSA members paid $375) for both days of this conference seemed a real bargain, even for those staying over night.
Out of a possible 5 POLIES, we give the NYSSA 2003 Insurance Industry Conference 3 POLIES.
[1] Some companies have switched from a scripted presentation to a more "fire side" chat type. While these informal gatherings may give the impression the company's executives are cozily leveling with security analysts and financial writers, there are high risks involved. The executive, in his/her desire to be candid, and perhaps brag just a little, may divulge an event in the future that has not yet been announced publicly. Such revelation could, if reported, put the company in violation of Regulation Fair Disclosure (Reg. FD).
[2] Exhaustive research did not disclose any insurance company that was or is called Go Bust.
[3] An email to the Harvard Club brought this reply: I do not believe our Nicholas Biddle is the same as the one you are referring to, though they are possibly related. This Nicholas Biddle did indeed attend Harvard and was a member of the class of 1900. The club history reports that he managed the Astor estate for his livelihood and that, as a member, he managed the construction of the 1905 addition to the Clubhouse, which included the building of Harvard Hall. Later, he became the Chair of the club's House Committee. In that capacity, he accepted (not without controversy) the donation to the club of a mounted elephant head in 1910. The head (taken by William G. Sewell, Harvard class of 1897, and called by the club's history "the nemesis of African wild life") is still on display in Harvard Hall. Nicholas Biddle died in 1923. Shortly after his death, Vincent Astor (Harvard class of 1915) offered to have the large room on the third floor paneled and decorated in memory of Nicholas Biddle. (The history does not say, but perhaps Vincent Astor was related to the Astor estate that Biddle managed.) Charles A. Platt was hired as the architect. The room was decorated with French walnut paneling and silver lighting sconces and chandeliers. The use of French walnut is somewhat inconsistent with the rest of the clubhouse which is paneled in quarter-sawn light English oak. Biddle's portrait, which hangs in the room, was painted by Ellen Emmet Rand and was donated by members of the class of 1900.
[4] Nicholas Biddle (1786-1844), born in Philadelphia, entered the University of Pennsylvania at the age of ten, but was not granted a degree because he was only thirteen. He went on to study at the College of New Jersey at Princeton, where he graduated in 1801 as valedictorian. After holding important posts in the American legations in France and England, he returned to the United States in 1807. In 1819, President Monroe appointed him one of the government directors of the Second Bank of the United States. In 1823, he became its president. In the late 1820s, President Jackson and his supporters claimed the Bank was a threat to the country because its mandate to control the movement of money ran counter to the banking interests of states mostly in the West. Mr. Biddle held firm to his belief of the need for a strong central bank to control inflation and stabilize the economy. But ultimately Jackson triumphed when he vetoed Congress's 1832 recharter of the bank. Jackson considered his 1832-election triumph over pro-bank candidate Henry Clay a mandate of his anti-bank policy. After the bank failed of recharter, Mr. Biddle operated it as a state-chartered bank until it collapsed in 1841, the result of the Panic of 1837 and his speculations in cotton. He was charged with fraud but was subsequently acquitted.
[5] At Harvard University, a John Osborne Sargent Prize of cash is awarded for the best metrical translation of a lyric poem by Horace.
[6] An email to the Harvard Club elicited this reply: You did indeed see a wart hog, but it was on the first floor hanging above the elevators, not on the third floor by the Biddle Room. It is a male wart hog, and was taken in British East Africa by J. W. Norton (Harvard class of 1899). Both the wart hog and the elephant are part of the club's extensive taxidermy collection.
[7] Geo. Washington used these pronounced concave saucers to illustrate the need for having two Houses of Congress. The House of Representatives, he suggested, was the cup, where bills could be debated while they were new and hot, and dwelt with quickly. The Senate, however, represented by the bowl-shaped saucer, was where discussion of bills could be conducted calmly, and voted on after passion had cooled.
[8] In December 2002, the New York Attorney General's office concluded an investigation of 12 investment banks including Salomon, Credit Suisse First Boston and Goldman Sachs for charges of conflicts of interest and favoritism. The firms could pay as much as $350 million each, depending on the evidence against them. Merrill Lynch agreed to pay $100 million to settle charges that its research analysts privately denigrated stocks that publicly they praised. A possible consequence of the settlement with the 12 investment banks could be a release of evidence which may enable disgruntled investors to file civil lawsuits against the firms.
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