P&C Insurers And Climate Change: Industry Surplus Is Key


P&C Insurers And Climate Change: Industry Surplus Is Key by David Merkel, CFA of Aleph Blog

Here’s a letter from a reader on insurance topics:

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Hi David. I’ve been following your blog. Just want to say thank you for willing to share your knowledge in the public domain.

I have a question for you – as you know, “climate change” is happening… whether human caused or not, it certainly feels like we are seeing more extreme weathers of late.

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How do you see this affecting P&C insurers? Does this give them the chance to start rising prices?  

Lastly, just wondering if you have an opinion about Markel Corporation (NYSE:MKL) and Lancashire Holdings Limited (LON:LRE) and Allied World Assurance Co Holdings, AG. (NYSE:AWH). I owned allied for a long time. Made some gains. But the recent blow up at tower and short attack at Am Trust prompted me to really stick with firms that have a much longer record. Which lead me to Markel and Lancashire. Not that this verifies these guys are clean. I’m not an accountant and nor do I think accountants can catch anything. Nonetheless, their long term record offers me a better sense of security in my mind. 

First, I *don’t* know that climate change is happening, except that it always happens.  Evidence for climate science is weak, like that for economics.  We don’t have a good model yet.  If we had a good model, we would have better predictions on hurricanes, which have been uniformly lousy for the last ten years.  And as for warm climates, the Earth has been warmer than now in the past, and far colder, if the history books are correct.

As to how it affects P&C insurers and reinsurers, for that we do have a simple and reliable model.  Look at industry surplus relative to the past — when it is high, as it is now, premium rates will be lower than the risk demands.  Most P&C pricing is weak now — I have been decreasing exposure to P&C insurers.

Markel and Allied World I know and respect.  Good companies both, though I own neither of them.  I’ve heard of Lancashire, but I do not know them in any detail.  To analyze, look in my On Insurance Investing series.

Thanks for writing.

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.
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