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The next few years will present significant opportunities for investment gains in the property and casualty insurance industry coupled with a large and equal amount of failure. As always, the profits reported by insurance companies are only as factual as you want to believe. You need to look beyond operating ratios, leverage and liquidity tests, and loss reserve development to core business practices in order to decide whom you want to financially support.   

For example, last week the senior management changed abruptly at a company I was once closely tied to. A decade ago, my agency produced 15% of the underwriting profit for this company, over a seven-year period. We understood and believed in their core philosophies. Things changed and we sold that book of business. We no longer represent them, but it still is hard to see them going through this trauma, which will no doubt impact many of their personnel.

The company I’m referencing has an “A” rating by Best and a “positive” outlook. They recently posted a combined ratio over 100, which isn’t unusual in this environment. However, they also have an expense ratio of nearly 50%, which might be considered atrocious. Also troublesome is the drop in policyholder surplus (net worth) over the last five years.

Since they write a large percentage of bond business an expense ratio of 50% isn’t really all that bad. Western Surety Company is a pure bond market and has an expense ratio of just over 50%. In contrast they’ve combined that with a loss ratio around 20% and have consequently doubled their policyholder’s surplus over the last five years. They’re also “A” rated by Best’s.



Corporations create cultures around their goals. Management fosters those cultures through carrots and sticks. Their actions often have unintended consequences. Those unintended consequences usually come home to roost when the market moves to where we are in the insurance cycle. When loss and expense ratios deteriorate improper actions become apparent.

The above company I once represented had a system of significant bonuses for their employees tied to underwriting results. Although only the most foolish companies instruct their claims departments to knowingly under-reserve losses, I’ve personally experienced corporate cultures that question those with “overactive scruples”. Every reserve contains an element of conjecture and surmise. Companies run afoul when their internal questions put pressure on “adequate” reserving. Companies set their rates for the future based on their prior loss experience. If their prior loss experience is understated due to inadequate reserves, they set rates that will naturally be inadequate for the risk they assume.

I’m not aware of this particular company having any of these specific problems. It’s possible their holding company is merely taking them in a new direction, but I’ve seen many companies experience severe trauma, including the company that gave me my first job, which no longer exists.

The personal lines insurance segment of the property and casualty insurance industry has been experiencing difficulties. Much of this can be blamed on the weather. Over the last fifteen years, the amount of total loss attributed to weather related catastrophes has gone from approximately one percent to six percent.

Many insurance companies state that they don’t know what the “new normal” is. They have set their rates based on their best estimate. The good companies have planned for the worst, setting their rates based on weather stabilizing at something around six percent and are monitoring trends.

During 2013 the property and casualty industry had a very good year with less than one percent in weather-related catastrophe losses. Yet, the personal lines segment of the industry had a combined ratio over 100.  Even though a small amount of the loss ratio gain was due to increased bodily injury severity, a combined ratio over 100 threatens disastrous future underwriting results, because even in a good year many companies still posted an underwriting loss.

Many more had “bad” years, despite the good weather, with combined ratios of 105 to 110. Given an investment income of under three percent, in most cases, many companies suffered surplus impairment. I expect that we will eventually discover that they’re the same companies who are waiting to see what the new weather “normal” will be before adequately adjusting their rates.

Getting behind the rate-taking curve can be lethal. If a company missed several years of normal rate taking and has to increase their rates by twenty to thirty percent in one year, they’ll lose premium volume and experience a reduction in policies in force.

Once premium decreases, expense ratios can become adverse without substantial accompanying decreases in underwriting expense. Much of that expense is fixed, or close to fixed making adequate decreases easy to achieve.

Those companies who had a poor underwriting year in 2013 should be reviewed closely before increasing your investment. A better investment would be with those companies who posted profits or near profits during 2013. As stated above, all numbers aren’t created equal, so due diligence is necessary.

Over the next few years it’s obvious if the “cat” levels stay at six percent or above several companies will suffer seemingly irreversible losses. Others will have a substantial opportunity to gain market share at profitable levels.

Some of this might be mitigated by the black box capabilities for rate adjustment, but the market competitive position will restrict the ability to “catch-up” quickly.

Worse yet, many of the companies who are behind on the rate adjustments to adverse catastrophe losses are also those companies who still are trying to understand “predictive modeling”.  Under “predictive modeling” it is seemingly as important to underwriting profits to be able to accurately pre-determine length of retention as it is loss costs.

If those companies get their predictive modeling wrong and stumble on setting length of retention they may never recover the loss involved in their initial “teaser” premiums.

Companies that will be successful in the future, in the attention by establishing a “trust” sale, rather than going toe-to-toe on a “commodity” sale. Those companies will succeed by constructing their product to make it easier for the independent agent to be a “trusted counselor” rather than an “order taker”.

In conclusion,

  • If a personal lines property and casualty company has a combined ratio of 101 or less, that appears valid in all respects, and
  • the company is actively engaged in predictive modeling and has been for more than a few months, and
  •  the company is truly committed to the independent agent and is willing to work to help the independent agent with a “trust” sale,

they appear to be a good place for you to consider an investment.

If the company lacks one or more of the above, I would avoid them.

I’m not a financial advisor. I’m merely an insurance agent who has been watching companies succeed and fail for forty-four years. As always you’re responsible for doing your own due diligence and to take my advice purely as one man’s opinion.

About the Author

Jim Holm is the president of Enhanced Insurance, was National Agent of the Year for Metropolitan in 1993 and Midwest Agent of the Year for Travelers in 2011. He also serves as a founding board member of Surplus Lines Association of Minnesota.


COVID-19 and PCL property – a market on the rise?



COVID-19 and PCL property – a market on the rise? 1

By Alpa Bhakta, CEO of Butterfield Mortgages Limited

Over the last five years, demand for prime central London (PCL) property has been fairly inconsistent. Sudden peaks in interest from buyers could be followed by periods of stagnate price growth. Nonetheless, the advantages of PCL property investment, particularly by international investors, has remained well known.

Well-funded development and neighbourhood re-generation schemes, alongside an influx of overseas investment, has resulted in a vibrant market with a diverse range of opportunities for prospective buyers.

Nonetheless, the PCL market has not been immune to the impact of the COVID-19 pandemic. During the first half of the year, the lockdown meant physical valuations and onsite inspections could not take place. People in the UK were also discouraged from moving properties unless they found themselves in extreme circumstances.

However, as we now enter the final weeks of 2020, I believe there’re plenty of reasons to be optimistic about the future prospects of the PCL property market. Buyer demand has resulted in a new wave of activity, and this is resulting in significant house price growth. Indeed, it was recently revealed by Halifax that the average rate of house price growth in November was at a four-year high.

Obviously, there are multiple factors that have helped sustain this strong level of house price growth. Most notably, the Stamp Duty Land Tax (SDLT) holiday has succeeded in coaxing buyers back to the property market––be they seasoned buy-to-let (BTL) investors or first-time buyers––by offering up to £15,000 in tax savings on any given property purchase.

However, it’s worth considering the other factors underway in London’s property market. With the UK in a second national lockdown, many investors will be keen on hedging against future COVID-imbued market uncertainty through acquiring safe-haven assets like British property. As you’ll read below, this is having a positive impact on the PCL market.

Investors are flocking to PCL opportunities

The PCL property market has managed to be one of the most active areas of the UK’s real estate market during the whole of 2020. When discussing why this is so, we must first begin by understanding the behaviours of overseas buyers.

Given that international investors represented over half (55%) of all the PCL property purchases recorded in the second half of 2019, anything to further incentivise or dissuade such foreign actors would hugely impact PCL property transaction figures.

Earlier in the year, alongside the announcement of the aforementioned SDLT holiday, UK Chancellor Rishi Sunak indeed announced that he would be implementing 2% SDLT surcharge for non-UK based buyers of British property from April 2021 onwards.

So, for those seeking properties worth over £5 million in the UK capital, a 2% additional cost may represent a substantial amount of wealth. To avoid this, many overseas buyers who may have been contemplating a PCL property acquisition have rushed to buy such properties before this surcharge is applicable. This trend will undoubtedly continue until 1 April, 2021.

Remote working and PCL

On the topic of the PCL market’s future, many property speculators were concerned earlier this year that London’s property market would potentially collapse entirely as a result of remote working. With homeworking set to remain the norm for the foreseeable future, commentators predicted that professionals would escape the capital en-masse in favour of roomier, cheaper properties farther from their London employer’s offices.

While there have been some signs of shifting demand from urban London neighbourhoods to suburban ones, according to Rightmove statistics, there has been no recordable effect on the UK’s property market as a result.

Conversely, property specialists Savills have actually discovered that over half of all transactions including properties worth more than £5 million in the UK this year were all located in just five central London postcodes.

A busy few months

Given the performance of the PCL property sector in 2020, I only foresee this market growing stronger and stronger in the years ahead. Recent developments in the production of COVID-19 vaccine have many hoping that we may return to normality by Spring 2021, which would represent fantastic news for those involved in bricks and mortar, should it transpire.

In the coming months, I anticipate a surge in activity across the PCL market as buyers look to take advantage of the tax breaks on offer. As such, it will be important that these buyers have access to the financing needed to complete these transactions quickly. If not, there is a risk any purchase they attempt might be concluded in April 2021 when the current tax breaks in place are removed.

Overall, I cannot help but be impressed by the performance of the property market more generally during the pandemic. Having experienced slow growth in the years following the EU referendum in June 2016, it is clear that buyers are eager to take advantage of the opportunities on offer. This is particularly true when it comes to PCL property.

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An outlook on equities and bonds



An outlook on equities and bonds 2

By Rupert Thompson, Chief Investment Officer at Kingswood

The equity market rally paused last week with global equities little changed in local currency terms. Even so, this still leaves markets up a hefty 10% so far this month with UK equities gaining as much as 14%.

The November rally started with the US election results but gathered momentum with the recent very encouraging vaccine news. This continued today with the AstraZeneca/Oxford vaccine proving to be up to 90% effective in preventing Covid infections. This is slightly below the 95% efficacy of the Pfizer and Moderna vaccines already reported but this one has the advantage of not needing to be stored at ultra-cold temperatures. One or more of these vaccines now looks very likely to start being rolled out within a few weeks.

Of course, these vaccines will do little to halt the current surge in infections. Cases may now be starting to moderate in the UK and some countries in Europe but the trend remains sharply upwards in the US. The damage lockdowns are doing to the recovery was highlighted today with the news that business confidence in the UK and Europe fell back into recessionary territory in November.

Markets, however, are likely to continue to look through this weakness to the prospect of a strong global recovery next year. While equities may have little additional upside near term, they should see further significant gains next year. Their current high valuations should be supported by the very low level of interest rates, leaving a rebound in earnings to drive markets higher.

Prospective returns over the coming year look markedly higher for equities than for bonds, where return prospects are very limited. As for the downside risks for equities, they appear much reduced with the recent vaccine news and central banks making it clear they are still intent on doing all they can to support growth.

Both factors mean we have taken the decision to increase our equity exposure. While our portfolios already have significant allocations to equities and have benefited from the rally in recent months, we are now moving our allocations into line with the levels we would expect to hold over the long term.

Our new equity allocations will be focused on the ‘value’ areas of the market. The last few weeks have seen a significant rotation out of expensive high ‘growth’ sectors such as technology into cheaper and more cyclical areas such as financials, materials and industrials. Similarly, countries and regions, such as the UK which look particularly cheap, have fared well just recently.

We think this rotation has further to run and will be adding to our UK exposure. This does not mean we have suddenly become converts to Boris’s rose-tinted post-Brexit view of the UK’s economic prospects. Instead, this more favourable backdrop for cheap markets is likely to favour the UK.

We will also be adding to US equities. Again, this does not represent a change in our longstanding caution on the US market overall due to its high valuation. Rather, we will be investing in the cheaper areas of the US which have significant catch-up potential.

We are also making a change to our Asia ex Japan equity holdings. We will be focusing some of this exposure on China which we believe deserves a specific allocation due to the strong performance of late of that economy and the sheer size of the Chinese equity market.

On the fixed income side, we will be reducing our allocation to short maturity high quality UK corporate bonds, where return prospects look particularly limited. We are also taking the opportunity to add an allocation to inflation-linked bonds in our lower risk, fixed income heavy, portfolios. These have little protection against a rise in inflation unlike our higher risk portfolios, which are protected through their equity holdings.

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Optimising tax reclaim through tech: What wealth managers need to know in trying times



Optimising tax reclaim through tech: What wealth managers need to know in trying times 3

By Christophe Lapaire, Head Advanced Tax Services, Swiss Stock Exchange

This has been a year of trials: first, a global pandemic and, now, many countries facing the very real possibility of a recession. For investors, private banks, and wealth managers, these tumultuous times have manifested largely in asset price volatility, ultra-low interest rates and uncertainty about when things may level out, as well as questions about what can be done to safeguard portfolio performance.

The answer here lies within identifying and creating efficiencies to maximise performance and minimise cost, and while there is a slew of options as to how to do this, they are often siloed or have a single USP. Tax optimisation, on the other hand, provides benefits to all, not just in increasing returns for investors, but also in creating economies of scale across stakeholders, creating millions – if not billions – in savings for banks.

Evolving tax reclaim

The tax reclaim process used to be a tedious one banks had to manage themselves, and required detailed, industry and country-specific knowledge to stay on top of constantly shifting requirements and regulations. And when we consider that many countries – such as the UK – allow for capital gains exemptions, tax optimisation may not seem like an integral part of the process. However, this isn’t the case for all countries, and can lead to severe after-tax implications on global portfolios.

Furthermore, even if you’re able to avoid double taxation, getting the money back is not always as simple as it sounds. This, combined with the fact that countries often have contradictory taxation rules or requirements, makes navigating the tax reclaim space a challenge even for those with the right expertise and experience.

Ultimately, providing tax optimisation to investors ends up being a heavy lift for private banks and wealth managers, who often don’t have the right solutions, are relying on outdated technology and manual processes. While this is generally fine for business, it is no longer fit for the purpose when it comes to tax optimisation. To date, knowledge and expertise have been the key to protecting and maintaining profitable investments and avoiding tax leakage. However, through tax optimisation services starting to emerge, portfolio managers can now manage and reinvest easily.

Today, technology has evolved the process so that banks are able to access and submit tax reclaim – and the relevant documentation – online, leaving the tech provider to coordinate next steps with custodians and tax authorities behind the scenes. In essence, taking the legwork out of the process while assuring consistency and completeness in execution.

Simplifying tax through tech

While tax optimisation may seem like an easy choice in theory, it is not always the go-to for every private bank or wealth manager. Without the right supports and setup, including innovative technologies and automation, tax reporting must be done manually, leading to labour intensive processes and huge time wastage. Changing these processes can be overwhelming for those used to a certain way of operating.

By making tax reclaim digital, banks will be more able to optimise returns and gain efficiencies while reducing redundancies and unnecessary complexities. Cloud based solutions or platforms can offer a safe and secure solution for banks, wealth managers, and investors to access and submit any information required, processing the data automatically for conformity and completeness.

It is critical that providers who intend to offer tax services are able to do so efficiently with the right software and data processing capabilities. Not only does this drive continuity in service and efficiencies in process, but it is the only sustainable way to handle such a complex landscape sustainably without wasting time or money.

End-to-end, technologically driven tax services offer a huge number of advantages to private banks and wealth managers, the most important of which is the ability to provide continuity through tumultuous times. As we move through the end of 2020 into 2021 this will only be increasingly important as banks, managers and investors look to provide new services to clients and strengthen existing relationships in a difficult market.

As investors seek to find returns amid the global economic downturn, the demand for innovative solutions will only increase. Technology like cloud-based software, AI, and data optimisation can all serve to improve not just the tax reclaim processes, but the overall client experience within capital markets.  Private banks and wealth managers are suitably equipped to provide these innovative solutions, but those who do not prepare themselves effectively and keep ahead of trends will run the risk of losing current and new clients to someone who can offer more for less.

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