Investing in Insurance Companies: Dynamic Compounding Opportunities with Nick Martin

Nick Martin

Company Website: https://www.polarcapital.co.uk/

LinkedIn: https://www.linkedin.com/in/nickmartininsurance/?originalSubdomain=uk

Transcript Begins here:
1
00:00:00,000 --> 00:00:04,160
Hi, and welcome to the investing the Templeton Way podcast.

2
00:00:04,160 --> 00:00:06,080
I'm your host Lauren Templeton.

3
00:00:06,080 --> 00:00:08,280
And I'm your co-host, Scott Phillips.

4
00:00:08,280 --> 00:00:10,080
We have a great guest for you today.

5
00:00:10,080 --> 00:00:13,920
His name is Nick Martin, and he's joining us from London.

6
00:00:13,920 --> 00:00:18,360
He is portfolio manager at Polar Capital Global Insurance

7
00:00:18,360 --> 00:00:19,760
Strategy.

8
00:00:19,760 --> 00:00:21,440
Welcome, Nick.

9
00:00:21,440 --> 00:00:22,520
Thanks for having me.

10
00:00:22,520 --> 00:00:24,040
delighted to be here.

11
00:00:24,040 --> 00:00:27,240
Yes, and Nick joins us from the UK.

12
00:00:27,240 --> 00:00:28,840
He's in London.

13
00:00:28,840 --> 00:00:32,600
And is evident by the name Polar Capital Global Insurance

14
00:00:32,600 --> 00:00:33,200
Strategy.

15
00:00:33,200 --> 00:00:37,480
Nick is a specialist in insurance businesses.

16
00:00:37,480 --> 00:00:40,720
So to kick things off today, Nick, please tell our listeners

17
00:00:40,720 --> 00:00:45,000
a bit more about your background and what attracted you

18
00:00:45,000 --> 00:00:48,320
to specialize in the insurance industry.

19
00:00:48,320 --> 00:00:50,200
Yeah, so thanks Lauren.

20
00:00:50,200 --> 00:00:54,160
So I think I've always been interested in investing

21
00:00:54,160 --> 00:00:56,080
from quite a young age.

22
00:00:56,080 --> 00:01:00,000
I think probably the first real experience I had of the markets

23
00:01:00,000 --> 00:01:04,280
and stock prices was probably in an economics class during school.

24
00:01:04,280 --> 00:01:08,200
And there was a competition, I think, where you had to try and pick a stock or two

25
00:01:08,200 --> 00:01:11,320
and then see how they did over the next few weeks.

26
00:01:11,320 --> 00:01:15,920
Of course, that's probably the worst thing you could do to introduce people to the markets

27
00:01:15,920 --> 00:01:23,800
in your current short-term, casino, get-rich-quick, all that stuff that obviously is not

28
00:01:23,800 --> 00:01:25,200
the thing to be thinking about.

29
00:01:25,200 --> 00:01:29,000
But certainly, whetting my appetite for the markets.

30
00:01:29,000 --> 00:01:34,320
And I sort of took it up a little bit in my university degree.

31
00:01:34,320 --> 00:01:38,400
So, I was reading a few things here and there, some investment magazines that probably skewed

32
00:01:38,400 --> 00:01:44,400
to retail investors, full of stock tips, and I actually ended up using, I probably shouldn't

33
00:01:44,400 --> 00:01:48,960
admit this but using a bit of my student loan to actually invest in the markets.

34
00:01:48,960 --> 00:01:52,760
And lucky for me, that was doing during the dot-com boom.

35
00:01:52,760 --> 00:01:56,080
So, it was more luck than anything else that I did okay.

36
00:01:56,080 --> 00:02:00,680
So, I still wasn't derailed on my stock career.

37
00:02:00,680 --> 00:02:08,520
So, after that university, I was trained in as a chartered accountant.

38
00:02:08,520 --> 00:02:11,040
It takes three years to get that qualification.

39
00:02:11,040 --> 00:02:15,840
And after two and a half of those years, I picked up a copy of the FT.

40
00:02:15,840 --> 00:02:20,120
And that's back in the day when you used to have physical copies of newspapers

41
00:02:20,120 --> 00:02:27,880
and saw in the recruitment section a job for a Lloyds of London-centric insurer called Hiscox.

42
00:02:27,880 --> 00:02:33,800
And the job that was advertised was to work with their group investment officer,

43
00:02:33,800 --> 00:02:36,440
Alec Foster, on his investment team.

44
00:02:36,440 --> 00:02:38,800
And that job had two real aspects.

45
00:02:38,800 --> 00:02:43,800
One was to look after Hiscox's money and for a property casualty company,

46
00:02:43,800 --> 00:02:48,560
that's largely assets that are outsourced to third party fund managers.

47
00:02:48,560 --> 00:02:51,840
Cash, short-dated bond, so not too exciting.

48
00:02:51,840 --> 00:02:58,080
And then the other part of the job was actually to help Alec work on the Hiscox insurance portfolio.

49
00:02:58,080 --> 00:03:02,320
So that's the insurance strategy that you mentioned at the start.

50
00:03:02,320 --> 00:03:05,920
So that was actually started in 1998.

51
00:03:05,920 --> 00:03:10,040
And I joined Alec in 2001.

52
00:03:10,040 --> 00:03:12,920
I was quite fortunate to do so.

53
00:03:12,920 --> 00:03:17,720
He wanted someone with over five years  experience in the investment markets.

54
00:03:17,720 --> 00:03:19,600
And in insurance.

55
00:03:19,600 --> 00:03:23,200
And I audited a few insurance companies up to that point.

56
00:03:23,200 --> 00:03:27,760
And as I just said, punted around in the stock markets for a couple of years.

57
00:03:27,760 --> 00:03:30,680
So certainly, I was nowhere near qualified.

58
00:03:30,680 --> 00:03:37,960
But luckily for me, Alec took a chance on a very enthusiastic 24-year-old at the time.

59
00:03:37,960 --> 00:03:44,200
Despite the fact during my interview, I repeatedly talked about this wonderful investor called Warren Buffett (mispronounced).

60
00:03:44,200 --> 00:03:49,160
And did that multiple times.

61
00:03:49,160 --> 00:03:53,680
Well, just at that kind of age, it's not the sort of thing you're discussing with your friends and family.

62
00:03:53,680 --> 00:03:57,760
So, about Berkshire Hathaway away and the like.

63
00:03:57,760 --> 00:04:00,240
So, Alec overlooked that being.

64
00:04:00,240 --> 00:04:05,200
And actually, I think a mutual friend of ours, Tom Gayner, the CEO of Markel,

65
00:04:05,200 --> 00:04:08,800
did something very, very similar in his early days as a security analyst.

66
00:04:08,800 --> 00:04:10,080
No.

67
00:04:10,080 --> 00:04:11,080
Yeah, I think he did.

68
00:04:11,080 --> 00:04:13,880
So, we both lived to tell the tale, which was nice.

69
00:04:13,880 --> 00:04:18,560
So that was 2001.

70
00:04:18,560 --> 00:04:21,480
I became co-manager from the strategy in 2008.

71
00:04:21,480 --> 00:04:25,440
And then we moved over to Polar Capital in 2010.

72
00:04:25,440 --> 00:04:30,600
Really, we struggled to grow assets within an insurance company itself.

73
00:04:30,600 --> 00:04:35,920
And when we joined Polar, we had about 70 million pounds or so.

74
00:04:35,920 --> 00:04:39,280
And today we're around 2 billion pounds worth of assets.

75
00:04:39,280 --> 00:04:40,920
So, a good win-win.

76
00:04:40,920 --> 00:04:47,040
And I took full responsibility for the funding in 2016.

77
00:04:47,040 --> 00:04:52,200
And we celebrate our 25th anniversary in October of this year.

78
00:04:52,200 --> 00:04:55,880
And I would have clocked up 22 of those 25 years at that point.

79
00:04:55,880 --> 00:05:00,880
So that was a very strange way to enter the insurance industry,

80
00:05:00,880 --> 00:05:03,440
but talking to many industry professionals,

81
00:05:03,440 --> 00:05:07,480
most people stumble into insurance rather than have it as a career choice.

82
00:05:07,480 --> 00:05:11,560
But hopefully over time that will correct itself.

83
00:05:11,560 --> 00:05:18,040
Because it's a fascinating industry that I've loved to be in for well over 20 years now.

84
00:05:18,040 --> 00:05:20,080
Well, that's a fascinating story.

85
00:05:20,080 --> 00:05:25,880
Congratulations on 25 years in business and in the increase in assets.

86
00:05:25,880 --> 00:05:27,440
That's very interesting.

87
00:05:27,440 --> 00:05:31,040
Now, to be clear, the strategy is long-only.

88
00:05:31,040 --> 00:05:34,160
I believe you have around 30 positions.

89
00:05:34,160 --> 00:05:38,480
And your focus would be on specialty insurers and reinsurance businesses.

90
00:05:38,480 --> 00:05:39,680
Is that correct?

91
00:05:39,680 --> 00:05:41,400
Yeah, absolutely.

92
00:05:41,400 --> 00:05:42,200
That's correct.

93
00:05:42,200 --> 00:05:49,560
And we have a mandate within the strategy that we can invest broadly across the insurance industry.

94
00:05:49,560 --> 00:05:52,000
It's global in nature.

95
00:05:52,000 --> 00:05:56,680
But what we've done really is have over 90% of the assets in the property-casualty

96
00:05:56,680 --> 00:06:02,120
industry, or over here, often called the non-life insurance industry.

97
00:06:02,120 --> 00:06:06,000
So maybe I'll give the audience a bit of color about that.

98
00:06:06,000 --> 00:06:10,040
It's not well understood, I would say, for most people.

99
00:06:10,040 --> 00:06:14,960
And sadly, people's personal experiences of insurance companies tend to not be great.

100
00:06:14,960 --> 00:06:19,080
But I do think it's an industry which has some real importance.

101
00:06:19,080 --> 00:06:24,720
And if you look globally, the property-casualty premium is about $4 trillion.

102
00:06:24,720 --> 00:06:28,480
Or so, with the US being just over half of that.

103
00:06:28,480 --> 00:06:31,240
And then if you look at it by a class of business,

104
00:06:31,240 --> 00:06:34,360
roughly half is personal line, so auto and home.

105
00:06:34,360 --> 00:06:36,720
And then the other half is commercial lines.

106
00:06:36,720 --> 00:06:41,000
And I think an important characteristic of the industry from an investment perspective

107
00:06:41,000 --> 00:06:43,440
is its property-casualty insurance.

108
00:06:43,440 --> 00:06:45,240
It's not a discretionary purchase.

109
00:06:45,240 --> 00:06:48,360
It's something that's required by law.

110
00:06:48,360 --> 00:06:50,680
So just think about car insurance.

111
00:06:50,680 --> 00:06:51,640
You must have that.

112
00:06:51,640 --> 00:06:54,920
Your mortgage lender will tell you to have home insurance.

113
00:06:54,920 --> 00:06:57,480
And this is exactly the same for companies as well.

114
00:06:57,480 --> 00:07:03,360
And therefore, the buying of insurance tends to be less sensitive to the broader macroeconomic

115
00:07:03,360 --> 00:07:04,360
conditions.

116
00:07:04,360 --> 00:07:08,280
So when financial markets are a little bit more challenging and things are a little bit

117
00:07:08,280 --> 00:07:15,040
more difficult, the property-casualty sector can be an interesting place to hide from an

118
00:07:15,040 --> 00:07:17,360
investment point of view.

119
00:07:17,360 --> 00:07:22,560
And I think for many years, the industry has been considered a little bit of a GDP plus a

120
00:07:22,560 --> 00:07:24,800
little bit of a growth industry.

121
00:07:24,800 --> 00:07:28,040
But I think today I'd probably argue it's a little bit more than that because if you think

122
00:07:28,040 --> 00:07:32,920
about it, what the insurers actually do is take on the risk that you and I as individuals

123
00:07:32,920 --> 00:07:34,800
and companies do not want.

124
00:07:34,800 --> 00:07:39,600
So, for there to be long term demand for insurance, you probably only have to believe that risk

125
00:07:39,600 --> 00:07:41,280
goes up in the world.

126
00:07:41,280 --> 00:07:47,280
And sadly, with climate change and wars and pandemics and supply-chain disruption and

127
00:07:47,280 --> 00:07:51,000
deglobalization and the list can go on and on and on.

128
00:07:51,000 --> 00:07:56,480
I think it would be hard to argue that risk is only going one way.

129
00:07:56,480 --> 00:08:01,480
And I think the other thing that's changed a little bit since maybe over the last three,

130
00:08:01,480 --> 00:08:06,400
four, five years is that I think there's a bigger appreciation of risk in the boardrooms

131
00:08:06,400 --> 00:08:09,360
today than probably at any time in the past.

132
00:08:09,360 --> 00:08:12,680
And I think that's got a lot to do with ESG.

133
00:08:12,680 --> 00:08:17,400
It's got a lot to do with reporting standards like TCFD because all of that shines a bit

134
00:08:17,400 --> 00:08:20,720
brighter light on the risks that companies have.

135
00:08:20,720 --> 00:08:25,280
And those management teams and boards of directors have to demonstrate to stakeholders

136
00:08:25,280 --> 00:08:27,640
that they're managing those risks appropriately.

137
00:08:27,640 --> 00:08:33,720
And I think that gives a nice tailwind to demand for insurance as well.

138
00:08:33,720 --> 00:08:38,760
And at the end of the day, your Amazon package doesn't turn up tomorrow.

139
00:08:38,760 --> 00:08:43,480
Your ships don't sail, your planes don't fly without insurance.

140
00:08:43,480 --> 00:08:46,320
It's fundamental to the working of the global economy.

141
00:08:46,320 --> 00:08:51,000
And we like to say it's the oil that greases the wheels of world trade.

142
00:08:51,000 --> 00:08:52,000
Oh, absolutely.

143
00:08:52,000 --> 00:08:58,440
I think people underestimate how important insurance is to the global economy.

144
00:08:58,440 --> 00:09:05,240
I mean, if you just look at the impact on GDP post-disaster just due to the availability

145
00:09:05,240 --> 00:09:08,600
of insurance and the way insurance works.

146
00:09:08,600 --> 00:09:09,600
So, I agree.

147
00:09:09,600 --> 00:09:13,160
I think there are a lot of tailwinds for this industry.

148
00:09:13,160 --> 00:09:20,040
Speaking specifically about running a portfolio that is focused exclusively on the insurance

149
00:09:20,040 --> 00:09:29,960
sector, can you talk to me about portfolio construction, how you think about commercial

150
00:09:29,960 --> 00:09:39,800
versus personal lines, geographic exposure, and risk-management when it comes to a portfolio

151
00:09:39,800 --> 00:09:43,880
of stocks concentrated in the same industry?

152
00:09:43,880 --> 00:09:50,840
Yeah, I think the fundamental principle of insurance is you certainly need diversification.

153
00:09:50,840 --> 00:09:52,160
Bad things happen in the world.

154
00:09:52,160 --> 00:09:54,640
That's why the insurance companies exist.

155
00:09:54,640 --> 00:10:01,480
And I think from an investor's point of view, probably crudely, you've got a couple of options open.

156
00:10:01,480 --> 00:10:05,640
You can probably invest in one or two of the big insurance conglomerates.

157
00:10:05,640 --> 00:10:11,000
They operate in multiple countries across many lines of business and that kind of gets your

158
00:10:11,000 --> 00:10:12,000
diversification.

159
00:10:12,000 --> 00:10:17,040
I think over time we've generally found those kinds of companies to be a bit of jack of all

160
00:10:17,040 --> 00:10:20,320
trades, masters of none.

161
00:10:20,320 --> 00:10:25,080
And the insurance industry returns in the aggregate, kind-of bear that out to some degree.

162
00:10:25,080 --> 00:10:30,800
So roughly speaking for our 24 years of our strategy, the benchmark has been up sort

163
00:10:30,800 --> 00:10:37,720
of 5-6% on a compounded basis and our portfolio has done roughly double that over time.

164
00:10:37,720 --> 00:10:42,880
So, our approach is, as you mentioned, to have these sort of 30 to 35 companies who tend

165
00:10:42,880 --> 00:10:46,440
to be more sort of a specialist in their own field.

166
00:10:46,440 --> 00:10:53,680
So, think of them as big fishes swimming in small ponds and staying within their own underwriting

167
00:10:53,680 --> 00:10:55,080
sort of circle of competence.

168
00:10:55,080 --> 00:11:00,200
I think that's an important point to make.

169
00:11:00,200 --> 00:11:04,600
This is a strange industry and that you're selling this piece of paper that promises to give

170
00:11:04,600 --> 00:11:08,560
you some money if something bad happens in the world.

171
00:11:08,560 --> 00:11:14,000
So, trust is a very important thing within the industry and also you don't know your cost

172
00:11:14,000 --> 00:11:19,720
of goods sold when you sell that piece of paper.

173
00:11:19,720 --> 00:11:25,720
Therefore, it does leave you a little bit open if you're more optimist to have some problems

174
00:11:25,720 --> 00:11:30,120
down the line because you might underprice your policies, but you only find that out in

175
00:11:30,120 --> 00:11:32,560
a few years when the claims start coming in.

176
00:11:32,560 --> 00:11:37,800
So, it's an industry that kind of can attract them, get-rich-quick kind of people but actually

177
00:11:37,800 --> 00:11:44,040
success comes more from often playing defense and just reacting to how the underwriting markets

178
00:11:44,040 --> 00:11:48,640
are and there might be times when actually the best thing to do is send off your underwriters

179
00:11:48,640 --> 00:11:54,200
to go and improve their golf handicaps rather than underwrite business.

180
00:11:54,200 --> 00:12:01,520
The whole trick that I've found over two decades is actually you need to right-size your balance

181
00:12:01,520 --> 00:12:06,200
sheet relative to the underwriting opportunity that you have and in order to do that you

182
00:12:06,200 --> 00:12:11,240
need the right kind of cultures within the company and you certainly need management to

183
00:12:11,240 --> 00:12:12,240
have skin in the game.

184
00:12:12,240 --> 00:12:14,600
So that's a key thing for us.

185
00:12:14,600 --> 00:12:18,880
That's management ownership underwriting with your own money and those businesses tend

186
00:12:18,880 --> 00:12:25,880
to be found in the US and there's good examples of companies that are almost a little bit

187
00:12:25,880 --> 00:12:31,920
like owner- operator type of businesses with big family ownership so the Markel s of this world, 

188
00:12:31,920 --> 00:12:35,880
Berkeley, Progressive, back in the day.

189
00:12:35,880 --> 00:12:40,560
These are companies where management has tens of millions and in other cases, billions

190
00:12:40,560 --> 00:12:44,960
of dollars  worth of exposure so they're very careful with what they do and they're not

191
00:12:44,960 --> 00:12:51,120
really too concerned with building empires, planting flags and where they are in the S&P

192
00:12:51,120 --> 00:12:52,480
500 league table.

193
00:12:52,480 --> 00:12:58,560
They really think on a per-share value creation basis and that really is what's needed to succeed

194
00:12:58,560 --> 00:13:00,760
in the industry over time.

195
00:13:00,760 --> 00:13:07,360
Right, long-term versus short-term and managing for quarterly earnings etc.

196
00:13:07,360 --> 00:13:14,760
Yeah, maybe we mentioned about the personal lines versus commercial and reinsurance

197
00:13:14,760 --> 00:13:16,760
in the mix as well.

198
00:13:16,760 --> 00:13:23,440
Generally speaking, we find personal lines insurance particularly auto to be a very competitive

199
00:13:23,440 --> 00:13:29,680
product, highly commoditized, lowest price, wind so in most places that's not a great recipe

200
00:13:29,680 --> 00:13:32,000
for investment success.

201
00:13:32,000 --> 00:13:37,760
We do find actually there's some markets around the world that have a more consolidated

202
00:13:37,760 --> 00:13:44,720
there, the three or four players that basically have the lion s share of the market so, Scandinavia

203
00:13:44,720 --> 00:13:49,000
over here in Europe who is a good example of that, Canada to some extent is the same.

204
00:13:49,000 --> 00:13:57,440
The US is actually a pretty responsible market, and the UK is horrific, very, very challenging

205
00:13:57,440 --> 00:14:00,760
over time.

206
00:14:00,760 --> 00:14:07,040
And so, for us versus that half of the industry premium we have about sort of 10, 15% of the

207
00:14:07,040 --> 00:14:12,440
portfolio in personal lines so we're very overweight commercial in insurance and within

208
00:14:12,440 --> 00:14:18,080
That, the more sort of specialty side of things so hard to place risk, hard to underwrite

209
00:14:18,080 --> 00:14:24,080
risks because I think that's really where you can differentiate yourself as a company using

210
00:14:24,080 --> 00:14:30,120
your, you know, that underwriting skill and that's where the margins are more available.

211
00:14:30,120 --> 00:14:35,760
There's also less possibility of having sort of almost rogue pricing going on in some

212
00:14:35,760 --> 00:14:42,000
of those risks because in a lot of cases, you know, if you're insuring a big commercial

213
00:14:42,000 --> 00:14:48,480
property or a ship or a plane is not on the appropriate price and therefore that sort of underpins

214
00:14:48,480 --> 00:14:53,600
discipline a little bit better than what you get in some of the very low premium personal

215
00:14:53,600 --> 00:14:56,320
lines business that I mentioned before.

216
00:14:56,320 --> 00:15:02,160
The other sort of thing to talk about maybe is sort of reinsurance side and that's a decent

217
00:15:02,160 --> 00:15:07,160
part of the industry gets disproportionate headlines particularly when it comes to catastrophe business.

218
00:15:07,160 --> 00:15:13,560
Catastrophe insurance is only about 40 billion dollars or whatever premium to probably about 1% of the

219
00:15:13,560 --> 00:15:18,440
industry total so actually relatively small but it's somewhere where people can understand

220
00:15:18,440 --> 00:15:22,280
because they see, you know, these horrible things that happen on their TVs and then they

221
00:15:22,280 --> 00:15:27,000
see some pricing reaction to that and I think a very important part of our process has

222
00:15:27,000 --> 00:15:32,560
been we've never wanted to be a bet on whether the wind blows, or the earth shakes and I think

223
00:15:32,560 --> 00:15:36,720
in recent years you could start talking about in the heat waves and droughts and particularly

224
00:15:36,720 --> 00:15:44,720
wildfires as well and you know I don't want to roll my investors  money and roll the dice

225
00:15:44,720 --> 00:15:50,960
with mother nature or my own. Come to think of it, I think it's important to have a

226
00:15:50,960 --> 00:15:56,280
limited amount of catastrophe exposure particularly in the moment when pricing is very strong but

227
00:15:56,280 --> 00:16:02,000
just to give you kind of sense so for our strategy there's sort of 6-7% of the look through

228
00:16:02,000 --> 00:16:08,720
premiums is exposed to catastrophe risk. We have a self-imposed limit of about 10% so we're a bit

229
00:16:08,720 --> 00:16:14,600
below that but I think it's hard to argue that you want to get too involved in that line of

230
00:16:14,600 --> 00:16:21,800
business particularly with everything we see almost daily on our TV screens, but I think

231
00:16:21,800 --> 00:16:26,760
the important point to remember is the insurance industry is a lot more than just sort of in a

232
00:16:26,760 --> 00:16:33,080
climate exposed risk and there's a lot of stuff there around liability, things like directors

233
00:16:33,080 --> 00:16:38,680
and officers  insurance, architects and engineers it's not just about physical things burning

234
00:16:38,680 --> 00:16:44,160
down or having an issue as a lot of insurance that's protection against negligence and ignorance

235
00:16:44,160 --> 00:16:48,880
and accidents generally and that stuff tends to be not particularly correlated with the

236
00:16:48,880 --> 00:16:54,680
broader economy and again plays into this idea of how property-casualty insurance can be

237
00:16:54,680 --> 00:16:58,560
a nice diversifier in people's portfolios.

238
00:16:58,560 --> 00:17:05,760
Yeah, no I agree with all those ideas, and you know it's critical to have an edge in underwriting

239
00:17:05,760 --> 00:17:12,520
when it comes to insurance. Can you speak towards some of the developments that you've seen

240
00:17:12,520 --> 00:17:18,440
in AI or machine learning and how that may impact underwriting in the future? Who has an

241
00:17:18,440 --> 00:17:24,200
edge are you seeing anything that's really creative and different these days?

242
00:17:24,200 --> 00:17:31,160
Yeah I think it's a subject that we've thought about for quite a number of years now and it

243
00:17:31,160 --> 00:17:36,600
probably even more so obviously given that there are more sort of exponential changes that

244
00:17:36,600 --> 00:17:43,720
that happen around machine learning and AI more generally and I think, we were talking about it a

245
00:17:43,720 --> 00:17:49,320
bit earlier about the sort of in any importance of underwriting and how that's the differentiating quality

246
00:17:49,320 --> 00:17:53,960
and that really goes back to can you as an underwriter slice and dice

247
00:17:53,960 --> 00:18:00,880
and understand your risk better than your competitors and price it appropriately and

248
00:18:00,880 --> 00:18:04,760
you know through that lens you could argue that you know the insurance industry were the

249
00:18:04,760 --> 00:18:09,760
original data companies because that sort of underwriting edge is often based on data

250
00:18:09,760 --> 00:18:15,240
and Progressive would be a great example of that how they slice and dice their risk and

251
00:18:15,240 --> 00:18:23,680
for the Berkshire fans obviously Geico has done similar things over a multi decades as

252
00:18:23,680 --> 00:18:29,960
Well, so you know I think that's an important thing so something like AI and machine learning

253
00:18:29,960 --> 00:18:36,960
probably even more so, you know what it does is really add a superb new tool into the underwriters

254
00:18:36,960 --> 00:18:43,080
toolbox and I think you know the difference in the underwriting quality in the industry

255
00:18:43,080 --> 00:18:50,200
which already is pretty wide I think is probably set to widen even further because you know

256
00:18:50,200 --> 00:18:57,600
you've got that ability to use that core resource which is your data and a lot of times that s

257
00:18:57,600 --> 00:19:03,160
claims data which is really valuable is not something you know a startup can just go and

258
00:19:03,160 --> 00:19:08,520
buy off the shelf you know this is sort of ingrained in companies and is not necessarily, I think

259
00:19:08,520 --> 00:19:13,400
the biggest companies who are the winners here is going back to that concept before of big

260
00:19:13,400 --> 00:19:18,680
fishes in small ponds if you if you really understand your niche and you can actually, you know

261
00:19:18,680 --> 00:19:24,520
I think widen your edge versus others by using these tools and I think you know there's

262
00:19:24,520 --> 00:19:29,640
a lot of talk about you know, will underwriters get replaced by the machines, that kind of thing

263
00:19:29,640 --> 00:19:36,040
is it's not something we overly expect to be the case I think you know I think AI and machine

264
00:19:36,040 --> 00:19:40,600
learning is it you know it's a that the phrase a lot of people use is it is a nice copilot

265
00:19:40,600 --> 00:19:46,400
and just augments what it is and all that's going to do is amplify the difference between

266
00:19:46,400 --> 00:19:55,120
the good and bad probably even further. I see. Well when it comes to pricing risk can you speak

267
00:19:55,120 --> 00:20:01,040
towards sort of the complexity of risk facing insurers and have you seen any significant changes

268
00:20:01,040 --> 00:20:06,480
and I'm thinking specifically about secondary perils. I mean right now we have the terrible news

269
00:20:06,480 --> 00:20:13,120
out of Maui and Tennessee even this summer we've seen some really severe thunderstorms so can

270
00:20:13,120 --> 00:20:19,680
you talk about these secondary perils and any type of changes you've seen when it comes to the

271
00:20:19,680 --> 00:20:26,720
complexity of risk in the recent years? Yeah I think it certainly, risk is coming becoming ever more

272
00:20:26,720 --> 00:20:32,240
complex and that's just as a broad sweeping statement but we see evidence of that everywhere

273
00:20:32,240 --> 00:20:38,240
and I think you've seen probably in the news in recent months a lot of sort of you know

274
00:20:38,240 --> 00:20:45,120
mainstream insurers so are starting to pull out of places like you know writing home owners business in

275
00:20:45,120 --> 00:20:51,280
California or Florida or wherever because the risk is just becoming that you know, too complex

276
00:20:51,280 --> 00:20:56,800
for them they want you know the law of large numbers, cookie-cutter kind of underwriting but you know

277
00:20:56,800 --> 00:21:02,400
once risks starts getting a little bit of hair on it, it tends to end up moving from the sort of

278
00:21:02,400 --> 00:21:08,720
admitted regulated insurance market into what's called the excess and surplus lines market which is

279
00:21:08,720 --> 00:21:14,480
really think of it as specialty type of insurance as underwritten by these specialty companies in

280
00:21:14,480 --> 00:21:23,440
markets like Lloyds of London and elsewhere and I think over recent years roughly 10% of the

281
00:21:23,440 --> 00:21:28,640
US commercial business was I think going back sort of five or six years written within these

282
00:21:28,640 --> 00:21:35,040
excess and surplus lines market is now closer to 20% so that gives you an idea about how more

283
00:21:35,040 --> 00:21:41,360
complicated risk is becoming and with and a lot of that is to do with these secondary perils and

284
00:21:41,360 --> 00:21:47,360
I think when I started 20 odd years ago you know the concern in the insurance company boardrooms

285
00:21:47,360 --> 00:21:52,080
was hurricanes and earthquakes but now you have all these other things that are pretty closely

286
00:21:52,080 --> 00:21:56,640
linked to climate change and I think if you look at the reinsurance industry results and

287
00:21:56,640 --> 00:22:01,760
particularly catastrophe reinsurance in the last five or six years they've been really really

288
00:22:01,760 --> 00:22:08,800
difficult and I think that that's led to some very sharp pricing correction and also probably

289
00:22:08,800 --> 00:22:15,040
more significantly and this has really happened only in the last sort of six-12 months

290
00:22:15,040 --> 00:22:21,520
that the reinsurance industry as a whole has really moved try to move itself away from the underlying

291
00:22:21,520 --> 00:22:26,320
risk because what's really happened is as these wildfires and droughts and everything as it has

292
00:22:26,320 --> 00:22:32,480
impacted that the reinsurers have really started to, really picked up most of that feel and I think

293
00:22:32,480 --> 00:22:38,240
the reinsurers ultimately wants to be there when you know sort of real catastrophes happen

294
00:22:38,240 --> 00:22:42,800
and these secondary perils have become so commonplace it's almost like the reinsurers

295
00:22:42,800 --> 00:22:49,760
are paying the bill every year and that got to an unsustainable place and that's why we've seen such

296
00:22:49,760 --> 00:22:56,320
as severe correction in pricing in recent times and importantly from the reinsurance perspective

297
00:22:56,320 --> 00:23:02,000
they've moved a little bit away from that risk and you as the primary insurer have then got

298
00:23:02,000 --> 00:23:07,280
a decision to make you know you need to put up your premiums sufficiently with, for it to have an

299
00:23:07,280 --> 00:23:12,400
expectation of underwriting profit or you might decide that risk has become too complex for me

300
00:23:12,400 --> 00:23:17,920
I can't buy the reinsurance I want so you start to walk away, and I think that's a situation

301
00:23:17,920 --> 00:23:24,640
where we're starting to see happen in certain places around the world and ultimately this could

302
00:23:24,640 --> 00:23:30,000
you know cause an issue because you know some risk might become in an unaffordable from an insurance

303
00:23:30,000 --> 00:23:37,520
buying perspective. And Nick, that what happens in those cases so if a market is  abandoned so to say is

304
00:23:37,520 --> 00:23:43,280
that is the solution some type of partnership between private insurance and government I mean

305
00:23:43,280 --> 00:23:50,160
what does that look like and how, what do you think we're going to see there? Yeah I think that's

306
00:23:50,160 --> 00:23:55,840
probably the most sensible sort of route it is actually sort of those kind of public-private

307
00:23:55,840 --> 00:24:02,880
sort of partnerships you do see a few examples of them around in different markets where, you know

308
00:24:02,880 --> 00:24:07,600
if someone can't get a policy they go into almost a pooling system and they get sort of put on

309
00:24:07,600 --> 00:24:12,800
you know some of the insurers to have that to some extent but at the end of the day you know

310
00:24:12,800 --> 00:24:18,640
Insurers, as you know they're not obliged to underwrite a risk where they're expecting to lose money

311
00:24:18,640 --> 00:24:25,600
so, I do think you know this is going to be a growing political problem over time particularly

312
00:24:25,600 --> 00:24:33,360
in those more natural catastrophe-exposed states so we're we have to see how all that sort of

313
00:24:33,360 --> 00:24:39,280
transpires but I think we're seeing early signs of some of that for sure.

314
00:24:39,280 --> 00:24:46,800
Well we've certainly seen an increase in pricing in reinsurance and it's been a hard market,

315
00:24:46,800 --> 00:24:53,680
how long do these markets usually continue when you look back historically at past examples of

316
00:24:53,680 --> 00:25:01,360
this what should investors expect for the duration of a hard market? Yeah, I think when it comes to

317
00:25:01,360 --> 00:25:06,560
cycles I do think it's important to remember, you know particularly in more recent times that

318
00:25:06,560 --> 00:25:12,080
when the insurance industry is made up of lots of different cycles. It's not just one big sweeping

319
00:25:12,080 --> 00:25:17,040
everything goes up or everything goes down and I think you know data analytics and

320
00:25:18,640 --> 00:25:26,400
and all of that has been incredibly helpful in sort of reducing the amplitude of cycles so

321
00:25:26,400 --> 00:25:32,960
you can take corrective action on pricing a lot quicker than probably 20- 30 years ago where

322
00:25:32,960 --> 00:25:37,840
you know you don't realize quite the mistakes you've made until you know that the claims come

323
00:25:37,840 --> 00:25:43,360
pouring in I think there's a bit more of a sort of nudging pricing behavior and a bit more

324
00:25:43,360 --> 00:25:51,120
reacting in the industry today which I think is supportive of you know more sustainable less volatile

325
00:25:51,120 --> 00:25:59,120
you know returns for the industry over time but, that said you know the cycle you know is

326
00:25:59,120 --> 00:26:04,240
always going to be there to some extent I think I always think about you know the sort of

327
00:26:04,240 --> 00:26:10,480
cost is the business where you know lots of capital coming in could change the dynamics

328
00:26:11,120 --> 00:26:16,480
and that's quite hard to do in actually in many parts of the insurance market because you need a

329
00:26:16,480 --> 00:26:21,760
claims infrastructure you know you need the sort of licensing you need to know sort of you know

330
00:26:21,760 --> 00:26:27,040
that back office to really be successful but in the catastrophe reinsurance business you know you

331
00:26:27,040 --> 00:26:34,160
arguably only need in a few people sitting around a table and a big pot of money and off you go

332
00:26:34,160 --> 00:26:40,560
and start rolling the dice with mother nature so that's an area where you know you can see

333
00:26:40,560 --> 00:26:46,720
a bit more cyclicality and right now I think because we've had such you know poor results from

334
00:26:46,720 --> 00:26:52,080
you know for most people in that market you know there's a sort of fear factor that's going in

335
00:26:52,080 --> 00:26:57,360
and that's you know leading to this at a very significant price rising and how long that last is

336
00:26:57,360 --> 00:27:03,040
going to be dependent to some extent on catastrophe activity but I do think you know things like

337
00:27:03,040 --> 00:27:09,760
you know capital providers like pension schemes and the like you know they've got fatigue you know

338
00:27:09,760 --> 00:27:16,000
that's probably a polite way of putting it after some tougher years and you know roughly 15-20

339
00:27:16,000 --> 00:27:21,520
percent of the catastrophe market is underwritten by a non-traditional capital like pension schemes so

340
00:27:21,520 --> 00:27:27,520
not your traditional reinsurers and I think that's probably going to sort of you know remain around

341
00:27:27,520 --> 00:27:34,560
that level rather than sort of go up too much more and if you think you know if we're a, you know

342
00:27:34,560 --> 00:27:40,320
on a pension scheme board and what a trustee and someone says you know what a

343
00:27:40,320 --> 00:27:45,360
no reinsurance pricing has gone through the roof this is a great time to do it and then someone

344
00:27:45,360 --> 00:27:51,360
says well what about the you know all the tragic events in in place x y z you know because it you

345
00:27:51,360 --> 00:27:56,640
know it's there everywhere on people's tv screens and probably someone will say you were mad to be

346
00:27:56,640 --> 00:28:04,720
going into that particularly in an investment environment where you know with bond yields going

347
00:28:04,720 --> 00:28:11,680
up you know so meaningfully in the last sort of year or so if you can get sort of high single

348
00:28:11,680 --> 00:28:16,800
digits or not a decent you know a bit of corporate paper why do you want to run the risk with

349
00:28:16,800 --> 00:28:21,920
mother nature with climate change and all of that, you probably don't and that keeps capital out of

350
00:28:21,920 --> 00:28:28,400
the industry and makes it more sustainable so there's always things sort of going on I think but

351
00:28:28,400 --> 00:28:34,720
even if we have in a year or even a couple of years maybe very strong reinsurance results it

352
00:28:34,720 --> 00:28:41,040
probably is going to take you know at least that time before pricing starts to be impacted and

353
00:28:41,040 --> 00:28:45,760
know one of the early lessons I learned you know when I first started at Hiscox is that price

354
00:28:45,760 --> 00:28:51,200
you know tends to go up in the lift and down the stairs, so you tend to have this sort of violent

355
00:28:51,200 --> 00:28:57,280
reaction on the upside and then over time it prices start to drift down so you know I'm certainly

356
00:28:57,280 --> 00:29:04,560
expecting a good few years of strong underwriting margins not just in reinsurance but in primary

357
00:29:04,560 --> 00:29:11,280
insurance as well and on that we've had probably four or five years of rate increases sort of

358
00:29:11,280 --> 00:29:17,680
coming through so underwriting margins are actually in a very good place right now across many parts

359
00:29:17,680 --> 00:29:24,000
of the industry and I think what's interesting from an investment point of view is that suddenly

360
00:29:24,000 --> 00:29:31,200
almost from nowhere you know probably a bit over a year ago suddenly those investment returns

361
00:29:31,200 --> 00:29:36,480
that you were earning on your you know your cash pile and your sort of two-to-three-year bonds which

362
00:29:36,480 --> 00:29:41,360
is typically what a property casualty company has an investment portfolio your one-two percent yield

363
00:29:41,360 --> 00:29:47,840
is now four or five. I know! And that is, and that's sort of transformational for earnings power if you

364
00:29:47,840 --> 00:29:54,080
put it on you know it earns free very quickly and what that is kind of done and we can possibly

365
00:29:54,080 --> 00:30:01,440
going to a bit more detail if you want but it's taken a sort of typical R.O.E. from a sort of low

366
00:30:01,440 --> 00:30:07,920
double digit to somewhere in the mid to high teens and I would argue that the valuations of

367
00:30:07,920 --> 00:30:13,920
the sector have not risen ​commensurately with that in a big increase in earnings power and I think

368
00:30:13,920 --> 00:30:18,800
you know Berkshire Hathaway is probably the exemplar an understanding the value of float

369
00:30:18,800 --> 00:30:26,880
and we could maybe touch on that, and that value of float in today's world compared to

370
00:30:26,880 --> 00:30:34,320
a year or two ago is night and day and I think that's a very big difference in the sector that I don't

371
00:30:34,320 --> 00:30:39,280
think has yet been fully understood.  Yeah I was just talking to somebody about that this weekend just

372
00:30:39,280 --> 00:30:50,000
that float has always been powerful but now it has just exploded. I don't think the market has yet

373
00:30:50,000 --> 00:30:57,760
to comprehend that. 

375
00:31:04,720 --> 00:31:10,560
Scott's microphone is not working so I'll be asking his

376
00:31:10,560 --> 00:31:17,040
questions for him and as his wife I can do that, so his question was in regards to price-to-book multiples

377
00:31:17,040 --> 00:31:24,480
and whether they're reflecting that the increase in interest rates and the opportunities or the

378
00:31:25,040 --> 00:31:32,240
the power behind the float in these businesses. Yeah so, maybe just before

379
00:31:32,240 --> 00:31:37,360
you get in there just to give a bit of context as to as to how float works so, essentially

380
00:31:37,360 --> 00:31:43,600
in an insurance company, they receive the premiums upfront and then they pay the claim when

381
00:31:43,600 --> 00:31:48,640
something bad happens and in the interim then the insurance company can earn an investment return

382
00:31:48,640 --> 00:31:54,960
on that and because the insurance company is not wanting to double up its underwriting risk it keeps

383
00:31:54,960 --> 00:32:01,920
those investments you know very safe and solid so sort of two to three year so the US Treasury kind

384
00:32:01,920 --> 00:32:08,240
of return it is where you're kind of thinking and you know and insurance company has two pots of

385
00:32:08,240 --> 00:32:14,160
money essentially within its investment portfolio, it has the capital it needs to underwrite with, so

386
00:32:14,160 --> 00:32:19,520
roughly speaking for every dollar of capital you have you can underwrite about a dollar of premium

387
00:32:19,520 --> 00:32:24,480
now that number changes a little bit depending on the type of business you have but that's a decent

388
00:32:24,480 --> 00:32:31,760
proxy right now and then you have you know the Warren Buffett's float as well and what that means

389
00:32:31,760 --> 00:32:37,600
So, for our for our companies, that every one percent change in investment yield is worth about

390
00:32:37,600 --> 00:32:45,040
2% a year on ROE or book value growth said another way which is the way to really measure value

391
00:32:45,040 --> 00:32:53,680
curation in the property casualty industry so if we've gone from the world of US two-year treasury

392
00:32:53,680 --> 00:33:01,360
probably up 4% or so maybe since the end of 2021, that tells you about how much it increase

393
00:33:01,360 --> 00:33:06,080
the earnings power the companies have and you know going from this sort of low double digit level

394
00:33:06,080 --> 00:33:12,720
to mid to high teens and you know and you know the price-to-book multiples of the industry move

395
00:33:12,720 --> 00:33:19,760
around a little bit but I think at the moment you know we can keep the numbers relatively simple

396
00:33:19,760 --> 00:33:27,840
so I think for our strategy you know it's about 170% or so price-to-book and we would expect over

397
00:33:27,840 --> 00:33:33,760
the next 12 months you know as an annual kind of book value growth in that sort of it's called

398
00:33:33,760 --> 00:33:39,760
17% range just to keep that nice and simple and therefore if you divide those numbers into each other

399
00:33:39,760 --> 00:33:48,720
you have this sort of cash-on-cash return of about 10%. Now over the 24 years plus of the strategy

400
00:33:48,720 --> 00:33:54,720
our company's typically have grown their book value sort of 10-11% a year and it's typically cost

401
00:33:54,720 --> 00:34:01,600
you as an investor sort of 130-140 price-to-book and if you do that same cash-on-cash calculation

402
00:34:01,600 --> 00:34:08,800
you get at about 8% cash-on-cash return so said another way today, you'll get in a lot more for your

403
00:34:08,800 --> 00:34:14,560
money than you certainly have done in the last sort of quarter of a century or so which is why

404
00:34:14,560 --> 00:34:20,640
I would argue that the market hasn't fully understood just how different the world is

405
00:34:20,640 --> 00:34:25,440
you know in this sort of higher bond yield environment than what we've had really since the

406
00:34:25,440 --> 00:34:30,480
financial crisis so that sort of memory that's sort of been ingrained for 15 years it's going to take

407
00:34:30,480 --> 00:34:36,080
a little while to come out but I think you know the good thing about the property-casualty sector

408
00:34:36,080 --> 00:34:42,480
is that investment income earns through very quickly and we're already starting to see the impact of

409
00:34:42,480 --> 00:34:50,240
that and it's just going to continue I think so I think you know there's a good prospect right now

410
00:34:50,240 --> 00:34:58,480
that the price-to-book multiple of the sector you know could well rise in the coming period but

411
00:34:58,480 --> 00:35:04,720
I think from an investment case point of view now if you've got your book values growing

412
00:35:04,720 --> 00:35:10,640
mid to high teens you can probably argue that you don't really need price-to-book multiples to

413
00:35:10,640 --> 00:35:16,080
actually go up you know you'll probably be very happy as an investor if your stock return just

414
00:35:16,080 --> 00:35:21,600
track the book value growth of your company and I would be willing to bet that a mid to high

415
00:35:21,600 --> 00:35:26,960
teen returns is probably going to do just fine against broader markets over any reasonable

416
00:35:26,960 --> 00:35:33,120
time horizon and I think if you look at our strategy and the sort of 10-11% type of returns we've

417
00:35:33,120 --> 00:35:41,760
done about 3% better than the broader markets over the 24 years and that outperformance tends to come

418
00:35:41,760 --> 00:35:49,840
in more difficult times because of the defensive characteristics of the sector, so long winded

419
00:35:49,840 --> 00:35:57,600
wave saying, I think there's a you know some bright future ahead for the industry you know given

420
00:35:57,600 --> 00:36:03,680
where we are on margins and particularly on the power of these increased investment returns

421
00:36:03,680 --> 00:36:08,720
that we're seeing. Yeah, you certainly have laid out a compelling case for the opportunities

422
00:36:08,720 --> 00:36:15,440
of investing in the insurance industry. There's so many aspects that you have commented on

423
00:36:15,440 --> 00:36:23,040
that we could go into I think it's important to maybe speak towards inflation and how that

424
00:36:23,040 --> 00:36:29,920
impacts growth in premium replacement cost etc. and maybe also some comments on social inflation

425
00:36:29,920 --> 00:36:35,200
and what that is how that impacts insurers, I think that's important for investors to understand
.
426
00:36:35,200 --> 00:36:44,960
Yeah, I think that inflation is clearly a big topic for for any investor in in in recent

427
00:36:44,960 --> 00:36:51,520
times and I think one thing I would say at the start is inflation in insurance you know it's

428
00:36:51,520 --> 00:36:57,360
probably always been there so a large component of lost cost that are medical and as I think we all

429
00:36:57,360 --> 00:37:03,840
know medical costs have only gone one way for a very very long time so for any insurance industry

430
00:37:03,840 --> 00:37:09,600
it's very used to dealing with inflation and I think the nice thing about property casualty

431
00:37:09,600 --> 00:37:16,400
insurers is that most policies are on a 12-month renewal so therefore you can adjust your pricing

432
00:37:16,400 --> 00:37:24,240
to really reflect though those changing conditions then that comment you know it is more

433
00:37:24,240 --> 00:37:31,200
skewed to probably more property insurers that then on the sort of casualty and liability side

434
00:37:31,200 --> 00:37:38,240
and that's really when you can come a little bit unstuck, so I think within our strategy we tend to

435
00:37:38,240 --> 00:37:45,520
focus on casualty risk that in the industry are called short tail, so or medium tail so you pay your claim

436
00:37:45,520 --> 00:37:51,760
within probably two three four years that's why you've got that bond duration of two to three years

437
00:37:51,760 --> 00:37:57,440
but many of the bigger companies that are undertaking or underwriting much more longer-term risk they

438
00:37:57,440 --> 00:38:03,680
have longer bond portfolios probably four to five years because some of those risk within those

439
00:38:03,680 --> 00:38:09,840
portfolios actually are expected to pay out probably 10, 20, 30 years  time so think about

440
00:38:09,840 --> 00:38:15,040
pharmaceutical liability where, you know if people taking the drug today maybe it takes 20 years

441
00:38:15,040 --> 00:38:21,120
before you know whether that drug has an issue or not and if you're, if you've got your inflation

442
00:38:21,120 --> 00:38:26,800
assumptions wrong when you price that risk when you're paying that in 20 years  time that is a very

443
00:38:26,800 --> 00:38:32,720
big, compounded error so that's a real sort of danger and one reason why we tend to avoid some

444
00:38:32,720 --> 00:38:38,320
of those bigger companies because if you're sitting on that theoretical board of directors for that

445
00:38:38,320 --> 00:38:44,320
pharmaceutical company you probably want one of the big players that have been around for many

446
00:38:44,320 --> 00:38:48,800
decades if not in a hundreds of years because that gives you the comfort you don't really go for

447
00:38:48,800 --> 00:38:57,280
the sort of the small specialty guys that we typically invest in so that is a sort of starting

448
00:38:57,280 --> 00:39:04,240
point on inflation I think the other thing to appreciate is as you alluded to in the question you know

449
00:39:04,240 --> 00:39:09,920
a lot of insurance it gets priced off of things like revenues, company pay rolls, that kind of thing

450
00:39:09,920 --> 00:39:17,280
so, as inflation moves through the system premium volumes naturally rise and I think so not only do

451
00:39:17,280 --> 00:39:23,280
you get with if there's inflation of course you know you get the bond yields come up with, you

452
00:39:23,280 --> 00:39:28,400
know we've touched a little bit on the investment income and how big that that difference is but also

453
00:39:28,400 --> 00:39:34,640
on the premium volume aside, you get that coming through as well because effectively your exposure

454
00:39:34,640 --> 00:39:41,360
is going up so if it suddenly costs you 25% more to rebuild your building because of inflation

455
00:39:41,360 --> 00:39:45,120
you know you're going to have to pay more premium to reflect that. There's a natural

456
00:39:45,120 --> 00:39:52,800
thing in in the system that the safeguards against a lot of insurance. You mentioned sort of

457
00:39:52,800 --> 00:40:00,880
social inflation that's as a term has generally been used in industry to describe sort of,  a heightened

458
00:40:00,880 --> 00:40:07,520
court award and jury awards over time, there's something that's been with the industry now

459
00:40:07,520 --> 00:40:14,720
for a few years, lots of reasons why that's occurred, but I know often  Is that predominantly

460
00:40:14,720 --> 00:40:22,400
in the US market or is that just a global phenomenon? I think it's predominantly a US

461
00:40:23,360 --> 00:40:29,120
thing but I think what often what starts in the US sort of creeps elsewhere over time

462
00:40:29,120 --> 00:40:34,960
anyways so I think it's something that I certainly would keep an eye out for

463
00:40:34,960 --> 00:40:42,080
you know probably anywhere but certainly I think the US is where it's most evident for sure

464
00:40:42,080 --> 00:40:48,240
and I think some of those sorts of trends on inflation have been, you know a little bit more

465
00:40:48,240 --> 00:40:52,560
difficult to understand than usual because of COVID, you've had courtrooms being shut you know

466
00:40:52,560 --> 00:40:59,760
and the like so that's kind of like muddied the waters a little bit but certainly you know underwriters,

467
00:40:59,760 --> 00:41:05,760
I think being prudent when it comes to loss cost inflation and assumptions and that's really

468
00:41:05,760 --> 00:41:10,800
what's been driving this sort of four- or five-year improvement in insurance pricing, it s not that

469
00:41:10,800 --> 00:41:15,280
you know they just got a load more money for the risk that they have, to some extent

470
00:41:15,280 --> 00:41:19,200
that if you're underwriting margins, they've gone up but not to the extent that premium rate rises

471
00:41:19,200 --> 00:41:24,160
they've gone up and that's because you know what matters to underwriting margins is the delta between

472
00:41:24,160 --> 00:41:30,000
premium rate rises and loss cost inflation. You know sometimes you look at sort of reports and it all

473
00:41:30,000 --> 00:41:36,640
focuses on rate changes but it's very important to think about you know what's what, how exposure is

474
00:41:36,640 --> 00:41:42,480
changing because you know losses come from your exposure they don't come necessarily

475
00:41:42,480 --> 00:41:49,600
from your premium there's clearly a connection between the two but if people, you know now are if

476
00:41:49,600 --> 00:41:54,960
you have an accident they're awarding you know three million dollars instead of one million five

477
00:41:54,960 --> 00:42:00,320
years ago, because everywhere on the internet you see that you know a billionaire doesn't really mean

478
00:42:00,320 --> 00:42:05,600
as much today as it might have done 20 years ago and therefore juries award a lot more because they've

479
00:42:05,600 --> 00:42:12,400
been trying to stick up for the smaller person. You know I think that's that creates a

480
00:42:12,400 --> 00:42:18,960
potential issue and some of that stuff is what's been driving inflation, but you know in itself

481
00:42:18,960 --> 00:42:24,400
and insurer doesn't necessarily need to be concerned about inflation as long as you can as long as

482
00:42:24,400 --> 00:42:30,000
you expect it and as long as you price for it it's unanticipated and unexpected inflation

483
00:42:30,000 --> 00:42:35,120
that can really get you and if you're if the time horizon between taking in the premium the

484
00:42:35,120 --> 00:42:41,840
paying out the claim is it a long period there's more chances of you getting that wrong, so you know this

485
00:42:41,840 --> 00:42:46,800
is a this is a difficult industry because of going back to that you know you don't know your cost

486
00:42:46,800 --> 00:42:51,280
of goods sold so there's a lot of assumptions that goes into pricing and that makes it a challenge

487
00:42:51,280 --> 00:42:57,680
in industry and where a lot of players are not necessarily you know great but if you can find

488
00:42:57,680 --> 00:43:03,200
those companies that can actually do well if your competition is not that good, that actually

489
00:43:03,200 --> 00:43:10,400
presents you with a very interesting opportunity over time you probably want to be competing with

490
00:43:10,400 --> 00:43:14,960
a lot of companies that aren't great rather than in a lots of really, really good ones.

491
00:43:14,960 --> 00:43:22,400
Yeah I like the way you said it earlier and you said that a compound error over a long length of

492
00:43:22,400 --> 00:43:27,200
time can turn into a really big issue for these businesses so if your inflation projections aren't

493
00:43:27,200 --> 00:43:34,400
correct a small a small error compounded over a long length of time can create a huge problem.

494
00:43:34,400 --> 00:43:40,160
Catastrophy risk for a for a casualty business it's kind of implicit in learning a lot

495
00:43:40,160 --> 00:43:44,960
of companies  balance sheets and that's you have to be very careful in trying to understand

496
00:43:44,960 --> 00:43:50,960
those risks and you know I think the US companies generally you can get a

497
00:43:51,360 --> 00:43:59,520
into the weeds a lot more when it comes to things like reserves and the like than you can in

498
00:43:59,520 --> 00:44:05,520
many other parts of the world and about 70% of our strategy is actually in the US listed companies

499
00:44:05,520 --> 00:44:11,200
which is you know it's about half of the global markets US, so we re overweight US and that's really

500
00:44:11,200 --> 00:44:16,800
you know because of that sort of understanding of the risk that within the companies and also

501
00:44:16,800 --> 00:44:23,360
there's a much more in terms of capital management, how people buy back shares when the underwriting

502
00:44:23,360 --> 00:44:28,560
opportunity is not there that that that that owner mentality is a lot better in the US than we

503
00:44:28,560 --> 00:44:34,560
typically find in other markets around the world. Well, speaking of other markets around the world

504
00:44:34,560 --> 00:44:40,400
and emerging markets are there any opportunities there or is that an area that you just stay away from?

505
00:44:40,400 --> 00:44:44,560
Yeah you would, you would think there should be because you know

506
00:44:44,560 --> 00:44:50,560
as emerging economies and obviously they're fast to growth and then you have this

507
00:44:50,560 --> 00:44:55,840
kind of a little bit this sort of S curve of demands as people get richer you know you want to get

508
00:44:55,840 --> 00:45:01,360
this sort of like a wealth effect coming through and as people start to accumulate different assets

509
00:45:01,360 --> 00:45:05,760
they want to protect them through, and insurance is a great way of doing that so you have lots of

510
00:45:05,760 --> 00:45:13,280
you know demand certainly, but I think you know from an investment point of view I think you know

511
00:45:13,280 --> 00:45:22,480
when you have the sort of relatively small investment returns overall you have to be pretty sure

512
00:45:22,480 --> 00:45:27,360
about the underwriting profitability side of things and I think as we sort of move into those

513
00:45:27,360 --> 00:45:32,400
more emerging markets that becomes a bit more uncertain because I think a lot of the players

514
00:45:32,400 --> 00:45:38,240
tend to be a bit more market-share focused and therefore there are more of a leveraged you know

515
00:45:38,240 --> 00:45:44,400
return on that investment side because there's actually not really much underwriting profit to speak

516
00:45:44,400 --> 00:45:49,840
of and as an investor you want to know you know be investing in companies where you have conviction,

517
00:45:49,840 --> 00:45:54,800
that book values can grow in attractive rate over time and really you need that sustainable

518
00:45:54,800 --> 00:45:59,200
underwriting profits to be able to sort of make that call and we just don't really see that

519
00:45:59,200 --> 00:46:06,080
in most of the emerging markets but that's before you even get to things like you know can you trust

520
00:46:06,080 --> 00:46:12,080
the contract law and the courts and all that kind of a stuff which for a lot of insurance it is

521
00:46:12,080 --> 00:46:18,240
very important so we do have a bit of exposure in the portfolio, but it does tend to come from the sort

522
00:46:18,240 --> 00:46:24,800
of the US listed companies have been more global operations so you know a Chubb or a Fairfax

523
00:46:24,800 --> 00:46:32,400
would be an example of companies where they have a bit more of a geographic sort of spread

524
00:46:32,400 --> 00:46:36,560
and then of course you get the you, know the insurance brokers themselves you know they're not taking

525
00:46:36,560 --> 00:46:42,320
on underwriting risk on their own balance sheets, they get paid a commission or fee to place insurance

526
00:46:42,320 --> 00:46:46,640
risk though you know for those some of those bigger global brokers you know the Marsh & McLennan s, 

527
00:46:46,640 --> 00:46:51,440
the Aon s of this world you know they you know it gets some good growth in some of those emerging

528
00:46:51,440 --> 00:46:57,120
markets as insurance penetration rises but they don't take on that potential balance sheet risk

529
00:46:57,120 --> 00:47:02,240
they, just you know generate some nice cash from that sort of you know secular growth from the

530
00:47:02,240 --> 00:47:08,000
the those in those economies. Yeah, you just touched on one of Scott's questions because I have

531
00:47:08,000 --> 00:47:12,320
them here in front of me and he's evidently on mute. I wish I could do this at our house right?

532
00:47:12,320 --> 00:47:18,880
Mute him. Sometimes I think he'd like to mute me most of the times, but just on the impact of

533
00:47:18,880 --> 00:47:24,160
deglobalization and the increased risk associated with ensuring smaller markets exposed to conflict

534
00:47:24,160 --> 00:47:30,960
or fluctuating rule of law, I mean what are what are your thoughts there-the impact of deglobalization?

535
00:47:30,960 --> 00:47:39,200
Yeah I think a lot of insurance is, it is done locally so I think if you see that's probably

536
00:47:39,200 --> 00:47:48,080
a key point so and I've had a lot of the global brokers sort of help another big sort of

537
00:47:48,080 --> 00:47:54,160
them you know the bigger companies in the S&P 500 or whatever and managing their

538
00:47:54,160 --> 00:48:01,760
exposures over time, clearly if there's more unrest in the world you know you might see some of that

539
00:48:01,760 --> 00:48:08,000
you know those production facilities whatever else you know get a moving back home to some extent

540
00:48:08,000 --> 00:48:13,680
and that obviously creates more in insurance opportunities locally, I think they you can you know

541
00:48:13,680 --> 00:48:21,600
certainly, buy a political risk type of insurance and the like and terrorism, something slightly

542
00:48:21,600 --> 00:48:27,360
different but a sort of political risk and over things are you know unstable governments and where

543
00:48:27,360 --> 00:48:32,640
banks might not have the certainty that they need to lend you can actually buy some insurance to

544
00:48:32,640 --> 00:48:37,120
sort of cover some of that, particularly sort of development type projects and that's quite a

545
00:48:37,120 --> 00:48:42,320
small part of the industry but you know you tend to sort of see these kind of opportunities

546
00:48:42,320 --> 00:48:49,360
and I think you know there is certainly sort of geopolitical risk in various parts of the insurance

547
00:48:49,360 --> 00:48:56,000
market and that introduces obviously more uncertainty, so I think a lot of the time you know we

548
00:48:56,000 --> 00:49:01,440
try and stick to that in the more developed markets where the rule of law is very clear, contract

549
00:49:01,440 --> 00:49:07,440
law is very clear, there's great opportunities anyway in those markets as risk goes up in the world

550
00:49:07,440 --> 00:49:13,280
and you probably don't really need to get too involved in some of those other areas in the market

551
00:49:13,280 --> 00:49:18,960
there's probably missed opportunity there there's probably some great growth around that we

552
00:49:18,960 --> 00:49:26,000
don't find, but that growth in the insurance can be a risky thing so is it you know it's something to

553
00:49:26,000 --> 00:49:33,200
be very mindful of, you know almost growth too quickly. So, my next question for you is just in regards

554
00:49:33,200 --> 00:49:39,760
to and we were talking about it a bit earlier: the secondary perils but really climate risk,

555
00:49:39,760 --> 00:49:46,000
and I've heard you speak, and I've read some of your comments just on how the insurance industry can

556
00:49:46,000 --> 00:49:54,800
be a great partner or a great, an important player in the ESG movement the move towards sustainability

557
00:49:56,160 --> 00:50:06,080
and this idea of I believe you call it or maybe it's just an industry term nature,

558
00:50:06,080 --> 00:50:12,000
nature-based solutions that was the phrase I was looking at sorry nature-based solutions and

559
00:50:12,000 --> 00:50:16,720
are you seeing anything creative there I think listeners would really like to understand that

560
00:50:16,720 --> 00:50:23,040
that aspect of this market. For sure, I'm a bit of a generally as a bigger sort of point on

561
00:50:23,040 --> 00:50:28,560
sort of ESG and just sort of doing good for the world just generally I think the

562
00:50:28,560 --> 00:50:34,400
insurance industry is a huge role to play and if you think of it almost sort of crudely,

563
00:50:34,400 --> 00:50:40,400
you know we can all debate fossil fuel companies but if those companies can't get insurance

564
00:50:40,400 --> 00:50:45,760
they're going to find it very hard to finance themselves properly and that leads to some issues

565
00:50:45,760 --> 00:50:51,360
for those companies so the insurance industry has certainly got a role to play in and can be

566
00:50:51,360 --> 00:50:57,200
very influential in how industries evolve in terms of sort of capital flows to some extent and I

567
00:50:57,200 --> 00:51:03,360
think we're starting to see a little bit of that. I don't think the industry probably wants to be

568
00:51:03,360 --> 00:51:08,800
too sort of political in it, in its views and I think if companies are showing the right sort of

569
00:51:08,800 --> 00:51:15,280
transition plans that they are largely going to be supported but I think you know the way I kind

570
00:51:15,280 --> 00:51:19,680
of put it is the insurance industry it has the opportunity to nudge, you know the right behaviors

571
00:51:19,680 --> 00:51:23,280
so, you don't want to sort of push people into it you just want to encourage the right things and

572
00:51:23,280 --> 00:51:29,680
actually, if you as an insurance buyer are not doing what you really should be doing from sort of ESG

573
00:51:29,680 --> 00:51:34,960
and sort of you know, global citizen perspective you're going to pay more for it in terms of your

574
00:51:34,960 --> 00:51:40,400
insurance premiums and you're going to be at a disadvantage to others so I do think you know, the

575
00:51:40,400 --> 00:51:45,520
insurance industry is a force for good and if you look at the sort of UN sustainable development

576
00:51:45,520 --> 00:51:51,200
goals you know there's 17 of them you could probably argue you know insurance touches you know all of

577
00:51:51,200 --> 00:51:59,120
them and I think you know that it has a very beneficial impact on society overall and you

578
00:51:59,120 --> 00:52:04,320
mentioned nature-based solutions so this is something you know that not only from a professional

579
00:52:04,320 --> 00:52:09,440
point of view I've got a lot, sort of personal interest in in some of this stuff as well

580
00:52:09,440 --> 00:52:15,200
and maybe the way to think of it is really the insurance industry having sort of nature as your

581
00:52:15,680 --> 00:52:21,360
risk prevention partner and maybe you can illustrate that by examples, so just think about you know

582
00:52:21,360 --> 00:52:27,840
if you've got a coastal area that's exposed to potential flooding and tsunamis because of

583
00:52:27,840 --> 00:52:33,680
hurricane activity or the like you know what are your options to protect those buildings? Well you

584
00:52:33,680 --> 00:52:42,240
can build an ever-higher cement concrete sea wall. No one really wants to do that or maybe you

585
00:52:42,240 --> 00:52:47,200
you have a nature-based solution sort of like you know mangroves or coral reefs or the like and

586
00:52:47,200 --> 00:52:54,800
they act as a natural break where when those sort of excessive wave activity comes in so you're

587
00:52:54,800 --> 00:53:00,320
starting to see some projects you know like that, so there's some good examples out there. Chubb have

588
00:53:00,320 --> 00:53:09,680
done something in Miami around mangroves, there's some stuff on a YouTube about that and I think we're

589
00:53:09,680 --> 00:53:15,760
We are in the early days of some of that stuff happening, but I do see you know companies taking

590
00:53:15,760 --> 00:53:23,040
a big more interest in this kind of thing yeah so one of a big industry concern in

591
00:53:23,040 --> 00:53:30,080
you know, even more so in recent years, has been flooding and flood management so you,

592
00:53:30,080 --> 00:53:36,640
and also, you know the impact of wildfires as well so you're seeing in some parts of the world

593
00:53:36,640 --> 00:53:42,160
and certainly, in California you know seeing a little bit of it in the UK and elsewhere now you can,

594
00:53:42,160 --> 00:53:49,120
who can help you fight this kind of stuff, actually beavers of all things can and

595
00:53:49,120 --> 00:53:54,880
there's some remarkable pictures on sort of wildfire areas in the California where you've

596
00:53:54,880 --> 00:53:59,680
had the presence of beavers and they're actually you know the sort of surrounding forests as

597
00:53:59,680 --> 00:54:04,160
good as they've ever been and then either side of it is just like you know the forests have been

598
00:54:04,160 --> 00:54:10,640
completely burned away and I think you know this is maybe a nature-based solution example taken to

599
00:54:10,640 --> 00:54:15,440
you know rather an extreme but it kind of illustrates the point actually there are things out there

600
00:54:15,440 --> 00:54:20,000
you know in nature that can really, really help the insurance industry and risk prevention

601
00:54:20,000 --> 00:54:25,760
just generally and I think you know you'll start to see some companies doing more of that

602
00:54:25,760 --> 00:54:31,760
we would see a little bit in sort of company charitable to give in and everything there's a little bit

603
00:54:31,760 --> 00:54:38,560
of that and but I think nature-based solutions are becoming a less of a charity sort of thing and

604
00:54:38,560 --> 00:54:44,800
a little bit more of the business case and you certainly see some of that in some parts of the

605
00:54:44,800 --> 00:54:50,960
world as well and institutions like the insurance development forum have been really

606
00:54:50,960 --> 00:54:57,520
be quite forceful in trying to introduce some of that into you know into the insurance industry

607
00:54:57,520 --> 00:55:03,040
itself it's not easy to do but it's something where it makes a real difference I think.

608
00:55:03,040 --> 00:55:09,920
Gosh, it makes so much sense and it's also such a positive story about the industry, but it can

609
00:55:09,920 --> 00:55:15,760
increase profitability to insurers and also accomplish some really great things for the environment so

610
00:55:15,760 --> 00:55:22,000
I love that aspect of the industry and I hope we see more of that. Yeah, it's very exciting.

611
00:55:23,040 --> 00:55:31,360
Earlier in the podcast we talked about higher interest rates and just access to I guess, capital

612
00:55:31,360 --> 00:55:37,440
alternative sources of capital I'm thinking about some of the movement we've seen in

613
00:55:37,440 --> 00:55:44,560
in insurtech over the past few years, do you have any views on that or what we may

614
00:55:44,560 --> 00:55:52,160
see going forward? Yeah, I think you know when you're running a sort of sector-specific for the strategy

615
00:55:53,040 --> 00:55:58,080
it's very easy as a manager I think to probably, to get caught in your own in your own little

616
00:55:58,080 --> 00:56:04,480
World, in your own little goldfish bowl and I've always been sort of you know hopefully alive to that

617
00:56:04,480 --> 00:56:09,760
potential risk, and you don't see things coming from outside of the industry affecting

618
00:56:09,760 --> 00:56:16,000
what you do, and quite a few years ago now we started getting involved in it wasn't even

619
00:56:16,000 --> 00:56:20,160
called in insurtech at that point, it was an argument is it, instech is it insurtech

620
00:56:20,160 --> 00:56:27,120
and whatever but it's essentially the insurance version of FinTech and we got involved in a

621
00:56:27,120 --> 00:56:33,280
number of accelerator programs and it's a so-called startup bootcamp here in the UK we did some

622
00:56:33,280 --> 00:56:38,640
stuff with Accenture we did some stuff with Lloyds of London as a market just to really be able to

623
00:56:38,640 --> 00:56:45,760
sort of look around corners, would be the sort of phrase that I would use and what we sort of saw

624
00:56:45,760 --> 00:56:51,120
like five or six years ago we were sort of, called a new startup saying we're going to come in

625
00:56:51,120 --> 00:56:57,840
and each do your lunch the tired old dinosaur insurance companies and that conversation

626
00:56:57,840 --> 00:57:04,880
was something that wasn't quite sure that their companies really understood quite how difficult

627
00:57:04,880 --> 00:57:09,600
this industry is and then people are talking about conquering America and not realizing actually

628
00:57:09,600 --> 00:57:15,520
America is 50 insurance markets because it is regulated at a state level you know,

629
00:57:15,520 --> 00:57:20,960
there's things like that but that was you know those lessons were soon kind of learned but

630
00:57:20,960 --> 00:57:26,240
I think the conversation changed from that you know startup versus incumbent to one of more

631
00:57:26,240 --> 00:57:32,000
of a partnership over time because in the day you need a regulated balance sheet to sell

632
00:57:32,000 --> 00:57:37,280
an insurance policy and you might have the greatest tech on the front end, but you still need something

633
00:57:37,280 --> 00:57:44,000
on the back end and I think what happened and we had a few sort of insurtech companies,

634
00:57:44,000 --> 00:57:49,840
you know, sort of certainly start up, some went to market, some of them some of those companies

635
00:57:49,840 --> 00:57:56,800
maybe insur-wreck nowadays, what happens to the share prices but it's not for me to judge

636
00:57:56,800 --> 00:58:05,040
is not something that we necessarily got involved in doing that, but I think you know what

637
00:58:05,040 --> 00:58:11,440
happened was that some of the more distribution-focused companies realize actually underwriting

638
00:58:11,440 --> 00:58:17,200
for a profit can be challenging and actually maybe when you're trying to underwrite and

639
00:58:17,200 --> 00:58:23,680
you can't tie in with an industry incumbent for whatever reason you end up having to have a balance sheet

640
00:58:23,680 --> 00:58:29,680
yourself and that changes the rules of the game for a VC or other sort of capital provider who want

641
00:58:29,680 --> 00:58:35,280
the sort of the you know the tech growth story they don't want regulated balance sheet businesses

642
00:58:35,280 --> 00:58:41,280
and so that's kind of like, I wouldn't maybe not put a nail in the coffee in a of insurtech but,

643
00:58:41,280 --> 00:58:47,280
it certainly changed the sort of conversation to one of partnership and I think again
,
644
00:58:47,280 --> 00:58:53,440
you know the better insurances out there are engaging with a lot of these start-up companies

645
00:58:53,440 --> 00:58:58,960
and really augmenting what they already do so there's a there's definitely potential

646
00:58:58,960 --> 00:59:04,080
to work together and this is a little bit I'm going outside of my own sort of circle of

647
00:59:04,080 --> 00:59:08,640
Competence, but it certainly seems to me to be quite different when you look at something like

648
00:59:08,640 --> 00:59:13,120
banking and what FinTech has done to that is it's very different at least in the property

649
00:59:13,120 --> 00:59:19,280
casualty world from what I see. Yeah, so that brings me to another question and this one actually came in

650
00:59:19,280 --> 00:59:25,040
from a listener and I'm trying to put my hands on it now, but you'll like it because it starts out

651
00:59:25,040 --> 00:59:34,640
With, Nick is the best! Yeah, we always ask for listeners to write in and give us questions

652
00:59:34,640 --> 00:59:39,040
and so we said that you were coming on the podcast and this particular person wrote in and said

653
00:59:39,040 --> 00:59:45,120
Nick is the best, with Alleghany off the board which P&C players are most reminiscent of

654
00:59:45,120 --> 00:59:51,200
Berkshire Hathaway in terms of approach and prospects? Bonus question: in a hardened market

655
00:59:51,200 --> 00:59:57,680
does he anticipate any consolidation among the remaining public reinsurance players? Yeah, I

656
00:59:57,680 --> 01:00:03,440
definitely now know but it wasn't my wife who wrote that question so she might hopefully should have

657
01:00:03,440 --> 01:00:08,560
started off with Nick is the best but I'm not sure she would have stayed there either, but I think you

658
01:00:08,560 --> 01:00:15,440
know it in terms of you know we mentioned sort of Berkshire Hathaway then by Alleghany, it was

659
01:00:16,240 --> 01:00:23,600
near a $12 billion deal in March of last year and I think Berkshire's biggest acquisition

660
01:00:23,600 --> 01:00:31,920
in the insurance and reinsurance market for over 20 years so interesting sort of a timing but

661
01:00:31,920 --> 01:00:39,360
I think in Alleghany, you know, it is arguably you know it has been described as a baby Berkshire

662
01:00:39,360 --> 01:00:45,040
you know it had a very sort of similar sort of strategy run by some people who you know

663
01:00:45,040 --> 01:00:53,040
to a certain Berkshire sort of people and it's an interesting thought to think about it and why

664
01:00:53,040 --> 01:00:59,360
hasn't sort of you know Berkshire with its insurance driving a lot of that certainly, early success

665
01:00:59,360 --> 01:01:06,400
really been tried to be replicated and it's not really been done one or two sort of on their way

666
01:01:06,400 --> 01:01:12,960
I would say and there was an interesting book by a mutual friend of ours Larry Cunningham and

667
01:01:13,680 --> 01:01:20,480
that I've certainly been on your podcast, and he wrote a book with his wife Stephanie called,

668
01:01:20,480 --> 01:01:26,960
Margin of Trust and that was you know really looking out when a why, you know it touched a lot on

669
01:01:26,960 --> 01:01:31,360
widely insurance industries well suited to Berkshire that sort of trust element a whole element

670
01:01:31,360 --> 01:01:38,320
of decentralization that is very sort of important and in that book, he sort of called out you know

671
01:01:38,320 --> 01:01:44,160
a number of companies so they sort of you know the probably the more well-known ones that they know

672
01:01:44,160 --> 01:01:50,720
the Danaher's, the Constellation Software of this world but within the within it was probably

673
01:01:50,720 --> 01:01:55,120
only sort of eight to ten companies kind of thought of of, sort of named three of them were

674
01:01:55,120 --> 01:02:02,000
from insurance and Alleghany was one and then Markel and Fairfax were already the other two

675
01:02:02,000 --> 01:02:08,400
and certainly, you know people have said for both of them been a, particularly Markel, being

676
01:02:08,400 --> 01:02:13,920
a being a bit of a baby Berkshire so though those are sort of ones who are, and I think you're

677
01:02:13,920 --> 01:02:20,480
being the expert on Fairfax so I'll leave that one to you but um but it's uh you know I think

678
01:02:20,480 --> 01:02:24,560
it's so it's not an easy thing to do but certainly there are those that are trying to have

679
01:02:24,560 --> 01:02:29,840
that model that's a little bit different from just for most of our portfolio it's really about

680
01:02:29,840 --> 01:02:34,160
the importance of underwriting profit, the investments kind of they are what they are, its sort of

681
01:02:34,160 --> 01:02:38,640
whereas you know with some of those other companies you know and it's really a handful they take a

682
01:02:38,640 --> 01:02:44,080
more total return approach to investments and in and in their cases of well have some

683
01:02:44,080 --> 01:02:50,400
noninsurance businesses that that sort of balance things up a little bit and therefore look

684
01:02:50,400 --> 01:02:56,800
a little bit more like Berkshire so that those are sort of some that are trying to do that.

685
01:02:57,520 --> 01:03:04,880
In terms of consolidation and the like of it over you know fair time now the reinsurers, is that

686
01:03:04,880 --> 01:03:08,800
there's been quite a lot of consolidation in that market already you know what's been

687
01:03:08,800 --> 01:03:15,440
interesting in this sort of period of sort of, more elevated catastrophes you haven't had a wave

688
01:03:15,440 --> 01:03:22,240
of startups that you had after World Trade Center in 2001 and then Katrina in 2005 you know there's

689
01:03:22,240 --> 01:03:28,240
another sort of wave as well in sort of 2011, sort of time you haven't really had that it

690
01:03:28,240 --> 01:03:34,560
is one or two but not there so and a lot of that's because that's sort of the days of a

691
01:03:34,560 --> 01:03:40,080
reinsurer having a couple of billion dollars  worth of capital I think are behind us, you need

692
01:03:40,080 --> 01:03:47,200
a much more scale than that and even you know I think you've seen the a lot of the traditional

693
01:03:47,200 --> 01:03:52,800
you know insurers where they've had reinsurance businesses looking to sort of to exit that as

694
01:03:52,800 --> 01:03:58,720
well because you know the, you know the investors don't like volatility and reinsurance can kind

695
01:03:58,720 --> 01:04:03,680
of bring that and some of this comes down to a debate and a do you prefer the, you know Warren and

696
01:04:03,680 --> 01:04:10,000
Charlie's 15 lumpy 15% or a steady 12 that that kind of thing and many investors seem to

697
01:04:10,000 --> 01:04:17,920
prefer the steady returns and you saw just recently Renaissance Re re-take the reinsurance business away

698
01:04:17,920 --> 01:04:24,320
from AIG and there's other sort of muted sort of smaller transactions in the market

699
01:04:24,320 --> 01:04:30,240
so, you could see a little bit about but in terms of actual reinsurers being bought it's

700
01:04:30,240 --> 01:04:35,680
they're probably oversized now whether that becomes a little bit more difficult and where we've

701
01:04:35,680 --> 01:04:41,920
we certainly never, sort of when it comes to our strategy, sort of said you know M&A is a reason to own

702
01:04:41,920 --> 01:04:47,920
the sector I think it is it's a little bit of an added bonus if it happens. Yeah that makes sense

703
01:04:47,920 --> 01:04:54,160
and I think my listeners know or my normal listeners know that I am on the board of Fairfax so

704
01:04:54,160 --> 01:04:59,600
just out of full disclosure, I am on the board of Fairfax. Nick and I saw each other this year at the

705
01:04:59,600 --> 01:05:04,640
Fairfax AGM in Toronto we were actually at an investment conference sitting next to each other

706
01:05:05,600 --> 01:05:13,040
prior to the AGM and I believe I also saw you in Omaha at the airport, on the way out of the airport yeah

707
01:05:13,040 --> 01:05:20,800
yeah so do you also attend Markel and all these other meetings? Yeah, so usually there's the

708
01:05:20,800 --> 01:05:27,840
calendar is it is squarely focused on Omaha in sort of late April early May and sadly that

709
01:05:27,840 --> 01:05:32,480
the Markel event is only shortly after that so being sort of London- based it's a bit a bit a

710
01:05:32,480 --> 01:05:38,640
sort of challenge into sort of to do both but I hear some very good things about what happens

711
01:05:38,640 --> 01:05:46,960
with Markel with Fairfax of course in a sort of mid-April in Toronto you know great to see the teams

712
01:05:46,960 --> 01:05:52,240
there I think it's not just about you know learning a bit more about those companies and I don't

713
01:05:52,240 --> 01:06:00,320
need to tell you or probably your audience, it's just the ability and just meeting other people

714
01:06:00,320 --> 01:06:06,640
within them with what you do and spend some time with people, and I think Markel were very smart to

715
01:06:06,640 --> 01:06:12,480
sort of understand that the kind of people who might be interested in only Markel stock

716
01:06:12,480 --> 01:06:19,600
probably already own Berkshire, so many years ago they sort of started to do a to do a brunch

717
01:06:19,600 --> 01:06:24,640
on the Sunday after the Berkshire meeting which is always on a Saturday I think it started with

718
01:06:24,640 --> 01:06:31,680
eight people or something like that and now is probably pushing a couple of thousand yeah, it's

719
01:06:31,680 --> 01:06:39,280
on a Sunday right yeah no that brunch is great to go to and the Markel AGM is really

720
01:06:39,280 --> 01:06:45,840
enjoyable I was actually supposed to speak this year at an event prior to that, that Bob Robotti put

721
01:06:45,840 --> 01:06:51,280
on and Scott was in the hospital, so I had to cancel so for anybody out there who was waiting for me to

722
01:06:51,280 --> 01:07:00,000
show up in Richmond, I apologize I was with him. Nick this has been a fascinating conversation, I

723
01:07:00,000 --> 01:07:06,000
could talk about this industry all day long you're clearly an expert. I'm so happy that you are

724
01:07:06,000 --> 01:07:12,720
on the podcast today, where can my listeners learn more about you, learn more about Polar Capital

725
01:07:12,720 --> 01:07:19,120
if they're interested? Yeah, I think there's a lot of information on our website so I would probably

726
01:07:19,920 --> 01:07:28,160
direct you there for about Polar itself and so the strategy so yeah, head to the website and I m

727
01:07:28,160 --> 01:07:37,600
not too hard to find. Great, and they can always find you in Omaha and that's right okay all right

728
01:07:37,600 --> 01:07:39,760
well thank you Nick!