Sector Focus: Reinsurance

The Gherkin is an unusually shaped tall building in the City of London. Its unofficial name – adopted by popular consensus because of the building’s likeness to the green vegetable – overlooks the identity of its anchor tenant, the reinsurance giant Swiss Re, which commissioned the Norman Foster design for its London headquarters.

The reinsurer has grounds to feel aggrieved: other companies with large premises in the City have been allowed to give their own names to the buildings they occupy, including the NatWest Tower, former home of the retail bank now owned by Royal Bank of Scotland, and the BT Tower.

But telephones and bank accounts are familiar instruments; Swiss Re’s products – the policies it underwrites for insurance companies – are not as widely known. ‘The sector is not well understood by the public,’ concedes Susan Holliday, head of IR at Swiss Re. ‘It’s a little different from working in IR in retail, where people can simply walk into, for example, Marks & Spencer and see the products on the shelves.’

At the same time, the disasters and catastrophes underwritten by the likes of Swiss Re increasingly dominate the public consciousness, often on a global scale. ‘Big insurance events tend to be newsworthy,’ Holliday says. ‘Whether it’s the oil spill in the Gulf of Mexico or the earthquakes in New Zealand and Japan, they are all over the TV and the internet and we can get a lot of questions we simply can’t answer straightaway.’

First response
Being in the business of disaster reinsurance is not, however, as chaotic and catastrophic as the disasters themselves. On the same day as a disaster, or even a few day afterwards, a fixed team of people from Munich Re, the world’s largest reinsurer, assembles to assess and quantify the company’s exposure. This team includes the board, the claims specialists, the relevant underwriters, the accountants and the press and IR people.

‘People are very realistic about what they can expect to hear from us and the time it takes to come up with a meaningful loss estimate,’ says Christian Becker-Hussong, head of IR at Munich Re. ‘The market is educated. It doesn’t react in a panic and think the world will fall apart. It knows insurance has limited exposure.’

The Japanese earthquake and tsunami occurred on March 11, and Munich Re issued its ad hoc announcement on March 22. Its estimated claims burden is €1.5 bn ($2.2 bn). Swiss Re announced its $1.2 bn exposure to Japan the day before. ‘There is pressure,’ Becker-Hussong admits. ‘There is a need for communication and a timely response.’ And the rise of social media has increased this pressure, he adds.

Even so, it is not a race to be the first reinsurer to communicate estimated losses to the market. ‘We need to strike a balance between timely and accurate information,’ Becker-Hussong says. ‘In the past, we occasionally were too quick and had to revise upward. Now we take more time in order to be closer to the real outcome. We gathered opinion from the market and its feedback was, Do not try to be the quickest.’

Becker-Hussong previously worked in IR at two German banks. ‘Insurance – specifically reinsurance – is different from the banking industry,’ he says. ‘There is a different way of thinking about the business model. Analysts and investors take into account that our performance can’t be measured on a quarterly basis.’

The top three qualities of the typical insurance investor, according to Becker-Hussong, are patience, a willingness to become familiar with the specifics of the industry and a medium to long-term outlook. ‘There is always the potential for volatility,’ he says. ‘Unpredictable losses can occur, and Japan is a perfect example of this. Analysts and investors know that this is part of our job, however, and we are paid to take this risk.’

Staying power
The complexity of the insurance sector demands a high-level of sophistication from investors and analysts, which in turn encourages specialisation and continuity of personnel. ‘Investors and analysts in insurance typically tend to stay longer than in banking,’ says Becker-Hussong. ‘In banking there seems to be more change. Insurance is so specific – the degree of knowledge you need to build up is so large, and it makes you valuable to the company.’

Holliday has been in insurance for 23 years. Prior to heading up investor relations at Swiss Re, she was an equity analyst at three investment banks. She says some of the analysts covering her company have been involved in insurance longer than she has and the biggest challenge of the job for her is trying to explain the accounting issues to non-specialists.

Dealing with this level of sophistication and complexity can be intimidating to newcomers. ‘Being new to the industry, it was a challenge to cope with [the analysts’] level of knowledge,’ Becker-Hussong admits. ‘At first it was tough dealing with these guys. Now, however, from an intellectual standpoint, the mutual exchange of knowledge, thoughts and ideas is really interesting.’

At the moment, Holliday and Becker-Hussong are both fielding questions from investors about the European sovereign debt crisis. The conversation about global warming, conversely, is less frequent and intermittent, despite the magnitude of recent natural disasters. Holliday says the subject is sometimes discussed, but the conversation was put on the back burner during the financial crisis. ‘Climate change is on the agenda with investors and analysts but not always on the level we would expect,’ says Becker-Hussong. ‘It is not irrelevant, but it is not a fixed question.’

Equally, investors want to talk about newer risks. ’20 years ago we wouldn’t have thought of cyber risk; now people are increasingly aware of it and we start to think of it more often,’ says Becker-Hussong. ‘We often ask: is our world still insurable?’

Changeable outlook
Needless to say, it’s not every day the IR teams at Swiss Re and Munich Re have to deal with earthquakes, tsunamis and terrorist attacks (9/11 remains by far the single largest loss in Munich Re’s history). Outside of disaster communications, Holliday says she deals with queries about business drivers, capital requirements, financial targets and regulatory developments, just like most other professionals in the IR field. Unforeseen risks remain, however. The uncertain future of the mono-line insurance sector, for instance, is a useful reminder of the potential highs and lows for companies operating in the unpredictable insurance industry.

Assured Guaranty, the Bermuda-based bond insurer, currently finds itself in the enviable and equally precarious position of being the only company in its sector welcoming new business. Each of its competitors, including Ambac and MBIA, have fallen casualty to the guarantees they issued on the types of collateralized debt obligations that came to be seen as the cause of the global financial crisis.

‘We went public in 2004 as the seventh company in the market, and the smallest one,’ explains Sabra Purtill, head of IR at Assured Guaranty. ‘If people had told us back then that, seven years later, we would be the only company standing, the largest firm in the market and the only one writing new polices, I would have said they were drunk.’

In 2009 the company bought FSA from Dexia, the European bank bailed out by the French and Belgian governments. ‘If anyone had added that we would have bought our largest competitor for 25 per cent of book value and we would be trading at 60 per cent of book value I would have said he or she was insane,’ says Purtill.

But having a monopoly on writing new business does have its downside: the contraction of the industry has damaged the credibility of the bond insurance product and the ratings agencies are considering a potentially ruinous rule change. On a practical level, the entire IR burden for the industry has now been shifted to one company. ‘The onus of explaining and defending the industry falls solely upon you,’ admits Purtill.

The number of analysts covering Assured Guaranty has fallen from 13 to seven, and without a large IPO Purtill is not waiting for a call from an analyst at Goldman Sachs. ‘We’re an orphan industry right now,’ she says. ‘We’re not as pretty as we used to be. But we’re still here, writing new business.’

[Article by James Chambers, IR magazine]