Top American analyst blasts underwriters
By Andrew Cave, Associate City Editor (Filed: 04/11/2003)
Alice Schroeder, America's top-rated insurance analyst for the past two years, launched a blistering attack on the commercial underwriting industry yesterday, saying it wastes investors' money and never learns from its mistakes.
Speaking at Lloyd's of London, the Morgan Stanley advisory director said insurance was an industry where: "if there was an extra dollar, it would piss it away."
"In insurance you can nearly always hope that the future will be better than the past," she said, adding that there is no reason to assume that the cyclical industry will change its boom-to-bust nature.
"There are two types of people: the Pollyannas who say everything will be wonderful tomorrow, and then you have the Jeremiahs who are in the business of saying the Pollyannas are wrong," she said.
"History always shows that the Jeremiahs in this industry are the ones who are right."
She said investment banks that earn fees from corporate activity when the insurance market is booming are "the only ones who do well".
"Why does this happen?" she asked. "Will no investors learn something from this endless repeated cycle of mistakes. Life is not Groundhog Day. We do not learn from our mistakes."
Ms Schroeder, ranked top American research analyst in the past two years by Institutional Investor magazine, was a managing director heading Morgan Stanley's New York-based property and casualty insurance research team until earlier this year.
Said to be the only insurance analyst that billionaire Warren Buffett will speak to, she is currently on sabbatical from her research role to write a book about the investment billionaire nicknamed the Sage of Omaha.
Speaking at a conference organised by the Association of Lloyd's Members, a society of Lloyd's Names, she said the insurance industry progresses repeatedly from "hard" to "soft" markets, failing to manage capital and risks as if underwriters were investing their own money.
"All financial services companies are commodity businesses but they all set personal accountability based on results," she said.
"In insurance, as far as I can tell, it is the only business in which there is no personal liability for bad results. If things go wrong, nothing happens."
She said what was different this time around was that the heads of major insurance companies were getting sacked.
They were now "not as important any more," she said, missing out on glitzy trips to Colorado and getting under the feet of their wives.
"The company plane has gone and you have to fly commercial," she said. "That really hurts.
"Once you are sacked your name is not in the press any more. If you are divorcing your wife, you have seen what happened to [former General Electric chief executive] Jack Welch.
"The moral of the story is that if you treat your shareholders terribly and behave like robber barons, then your goodies will be taken away. We are in a new era of accountability."
Separately, Grahame Chilton, chief executive of reinsurance broker Benfield, told the conference that investment banks had earned "a minimum of £1 billion in fees" from helping insurers raise funds since September 11. "They are the real winners from the hard market," he said.