Brit Insurance Share Discussion Threads

[jonwig] 14/6/2010 12:07

This might be relevant comment on the bid. Is there a poison pill in the ERS?

[jonwig] 14/6/2010 11:32

L Beaker -

No one is going to buy a Lloyds of London insurer and run it like a hedge fund, due to the fact rating agencies would take it to the cleaners.

Well, absolutely - and Chaucer got itself into quite a pickle last year doing just that, or rather increasing its exposure to hedge funds. It chose the wrong hedge funds, in hindsight: silly of it!!

Not only the rating agencies (principally Best's) but the regulators would be huffing. The UK insurance industry was very proud of its performance through 2008-09 crisis, and seems to have been rewarded with a better attitude from regulators and CEIOPS than it feared. Hard win, easy lose.

JTC - sorry to bring up an earlier point, but I've missed 40 posts through being away. From what I can see your float metric is equivalent to the Loss Ratio, which - along with the Combined Ratio - is presented in the accounts. To ignore the NTAV would seem very foolish.

In fact, you can't just look at one aspect, hence the argument over the weekend. Just imagine an insurance outfit gearing up with debt: all the metrics could be improved in short order, but the investment case would be jeopardised.

EDIT: no, I've no new ideas on the bid either!

[crawford] 14/6/2010 09:14

LB,
quite a bizarre post.

[jtcod] 14/6/2010 08:05

Priceless! LB

I'll leave you with your heads in the sand then.

[little beaker] 14/6/2010 07:32

The only reason I come on here is to see if there is any new information available about Brit insurance. The only relevent commentary I could find was a link to a telegraph article, so thanks for that.

You guys might be in awe of a discussion which basically goes like the following:


Brit insurance is undervalued because they can boost their investment returns without affecting their credit rating
Brit insurance isn't undervalued because they can't boost their investment returns without affecting their credit rating


But I'm not in awe; no one is adding any new information, and to be honest it betrays a lack of basic understanding by Codders, whose central argument is "insurers can improve their investment returns by picking better investments". No one is going to buy a Lloyds of London insurer and run it like a hedge fund, due to the fact rating agencies would take it to the cleaners.

Would you insure your business with an insurer that was profligate with your premiums? No, of course not. Nothing to see here. Let's move on.

[palmleaf] 13/6/2010 23:42

Yep - good debate and well argued points JTC and EC - thanks.

Little Beaker - what well reasoned input, your mutt must be brilliant.

[raelbrook] 13/6/2010 21:15

Bluddy ell - took a peek in here for news n views on the 'bid' and stepped into a masterclass on insurance underwriting and investment - result - an absolute education and deeply in awe at the fluency of of the cuff input not to mention the quality of grammar, punctuation and spelling. Oh and lil beaker - great one liner but quite misdirected

[jtcod] 13/6/2010 17:36

njb
What you describe in my understanding of risk is from a personal investment management pov. However, the conversation with EC relates to Insurance Fund management which could never be the same, given the rules and commercial considerations. I just believe that within the confines of those rules, small tweaks can make a meaningful difference in the performance of the fund and pre-tax profit.

Hope this makes sense.

[effortless cool] 12/6/2010 16:20

edmundshaw,

I'm probably undermining my argument by inventing my own terminology. What I was meaning by beta was the market risk inherent in an asset class, i.e. the variance of returns.

[effortless cool] 12/6/2010 15:37

That's cleared that up then.

[edmundshaw] 12/6/2010 13:18

Which beta are you talking about? For me a high beta (as used in the CAPM)means assets generally follow the market as a whole.

Jargon aside, an interesting discussion. Good points on both sides...

[njb67] 12/6/2010 11:51

JTC and EC

Interesting debate.

I sense that where you differ in your perspectives is around how you define investment risk. Unless I am missing something, EC, you equate increased risk to increased equity exposure per se, whereas JTC, you define risk in terms of the margin of safety around individual investments (the difference between the purchase price and the intrinsic/underlying value of the investment).

Under the latter interpetation, increased equity exposure does increase investment risk, albeit at a potentially lower rate than assumed under EC's interpretation (so long as you invest in stocks with a high margin of safety).

If I have followed this correctly, where you appear to differ is that EC is using an "averaged" investment risk rate (based I suspect on looking at a how a large population of investments have performed), whereas JTC you are using a lower risk rate than can be obtained if you apply a focussed value based investment approach.

Please correct me if I am wrong!

regards
njb

[effortless cool] 12/6/2010 11:09

JTC,

You clearly had an industrious Friday evening; I went to the pub.

Looking at your analysis, there are three aspects that I would challenge.

1) As you show, insurers make money from their underwriting and from their investments. In order to do this, they incur expenses. You are offsetting all the expenses against the underwriting, and none against the investments. (Not even investment management fees)! This is in spite of the fact that the expenses are incurred to produce and service the float. Clearly, offsetting all the expenses against one source of profit is going to make the other source of profit look relatively better. A better approach for your analysis would be to compare profits from underwriting gross of expenses (except commission) against profits from investment gross of expenses (except investment management costs).

2) Underwriting profit is, effectively, net premiums less net claims. However, the premiums charged take account of the time value of money (sometimes explicitly, sometimes implicitly). Given this, I would suggest that the risk-free rate of return on the float should be netted off your investment figures and allocated to underwriting.

3) The investment returns you quote do not all relate to the float. A substantial proportion relate to the capital that supports the underwriting. Returns on these should be netted off to derive the investment value accruing from the float.

It's also worth noting for context that Brit has a very poor underwriting record compared to peer group (probably second worst to Novae) but has a relatively good investment record.

Notwithstanding its logical flaws, your analysis is certainly interesting in that it demonstrates the potential to generate value by adding alpha to the investment return - one aspect of your original point, I guess.

I still think you're naive in your understanding of how easy this is to do in practice, in terms of the need to increase investment risk to do so and its implicatons for capital ratios and the threat it poses to underwriting capital.

[luthier] 12/6/2010 10:07

Apollo considering fresh offer for Brit Insurance

One leading investor in the insurer said it would now seek discussions with Brit's management over the offer but agreed that Apollo's bid was too low.

"We don't think that the company should just simply roll over and accept an offer in this region," the investor added. "Brit is a very good quality business and is performing well in a sector that private equity investors are circling. We don't expect this offer to be the last it accepts."

[crawford] 12/6/2010 08:42

JTCod - 11 Jun'10 - 23:07 - 259 of 261

Excellent post JT, very clear and shows how consistent profits have been from the free float. A well run outfit - I'd be quite happy to park my money here for 10 years without a takeover happening.

[jtcod] 12/6/2010 06:38

I agree with the sentiment H. I am sure though that you have found him to be almost gleeful in exposing his own mistakes and humble in his successes. I try to be as humble but find it very hard on occasions. ;-)

[hieronymous1] 12/6/2010 00:34

Thank you JTCod for the clarity of your arguments and the hard work entailed in extracting the figures to back them up.

I read Mr Buffett's newsletters regularly but try to do so critically as a learning exercise. As I shall with your contributions to this board.

My comments about Mr Buffett were actually an attempt to say that criticism is healthy. We have seen lately in the Roman Catholic Church what happens when any organisation or its leaders claim infallibility and insist that "you cannot be one of us unless you accept our authority unreservedly".

[jtcod] 11/6/2010 23:07

To recap I said earlier that the real earnings of a GI company over time come from Investing the float and therefore that is where the value comes from if the float/company can be bought cheaply enough. This was refuted.

Here are the figures for BRE:


Combined Ratio
2009 94.0%
2008 99.4%
2007 92.7%
2006 86.9%
2005 105.2%
2004 92.9%
2003 88.5%
2002 88.6%
2001 162.0%
2000 80%

Net Earned Premiums
2009 £1495.5m
2008 £1145.6m
2007 £1103.3m
2006 £1048.7m
2005 £942.5m
2004 £857.4m
2003 £671.4m
2002 £325.3m
2001 £219.1m
2000 £18.9m


Underwriting profit based upon Combined Ratio (Total for duration £301.7m)
2009 £89.7m
2008 £6.9m
2007 £80.1m
2006 £137.2m
2005 (£37.5m)
2004 £63.9m
2003 £56.3m
2002 £37.1m
2001 (£135.8m)
2000 £3.8m


Investment Profit (Total for duration £665.8m)
2009 £137.4m
2008 £7.4m
2007 £137.4m
2006 £112.6m
2005 £121.8m
2004 £76.1m
2003 £42.7m
2002 £7.6m
2001 £17.2m
2000 £5.6m


So that establishes over 10yrs that more than 2/3rds of BRE profit came from investment returns (based upon a comparison with the combined ratio earnings.) However, that still doesn't tell the full story.

Though the combined ratio reflects earnings after expenses and claims, it doesn't allow for every overhead and loss.

When you take all overheads, adjustments, currency losses etc from the underwriting earnings, you end up with pre tax earnings as follows:


Reported Profit before tax (Total for the duration £740.1m)
2009 £116.4m
2008 £89.2m
2007 £191.2m
2006 £186.3m
2005 £62.4m
2004 £116.1m
2003 £75.4m
2002 £11.4m
2001 (£114.5m)
2000 £6.2m


Now the ratio is Investment £665.8m (89%) vs. Insurance Business £74.3m. (11%)

EDIT: I would also point out that when 9/11 happened BRE were a very small company and a significant growth in the early years will always flatter underwriting performance figures against the Investment performance figures. In other words if this had been a company of similar size throughout the term, I would have expected a greater percentage of the company earnings in the Investment camp.

[jtcod] 11/6/2010 19:26

He is less fallible than anyone else I have come across in Investment and business management Hieronymous1 so I think it is worth considering what he has to say regarding a business sector that represents by far the biggest part of the Berkshire group and with regard to more than 50yrs experience of investment and ownership in the industry.

After all, whilst most the other players in the Insurance industry have been treating investors to BS for 50yrs Buffett has continued to erode their market share with his no nonsense approach.

[hieronymous1] 11/6/2010 18:19

Buffett is not infallible and only religious lunatics claim to be. In a long life Buffett has probably contradicted himself or been unclear from time to time. "Consistency is the vice of small minds",(Voltaire).

Your debate was most edifying.

[effortless cool] 11/6/2010 17:42

Got to go - enjoyed the debate.
EC

[jtcod] 11/6/2010 17:40

I agree that there are now greater constraints in the insurance industry than there were say 10 or 20years ago and they will probably get tighter still when the new guidelines come out, though fwiw I believe that the new rules will be tempered by political considerations.

You ask "Do you really believe that better stock-picking (or bond-picking in their case) could do it?" as in achieve 1.5% superior return: Frankly yes I do and particularly in a climate like todays.

Btw, not wishing to drag it out any longer than is necessary but both quotes originated from Buffett not me.