Insight and Intelligence on the London & International Insurance Markets 19 Feb 2018
The punishment fits the crime
- 30 January 2018
Are markets stupid?
Last week the handsome takeout price that AIG revealed it would be paying for Validus brought an immediate read-across to the Bermudian's peers.
Aspen, Axis, RenaissanceRe, Everest, XL Catlin and Arch all enjoyed an immediate pricing boost as the rising Validus tide lifted all ships flying the Bermudian flag.
Aspen led the charge, cementing itself as the market's preferred takeover target.
Then later in the week, the group fired out a profit warning and parted company with another insurance CEO. Aspen promptly gave back all its gains and then some more and currently sits near a one-year low.
But conversely the Aspen falling tide didn't sink any of its peers. They are all still buoyed by the Validus high water.
So why is there only read-across at some times and not at others?
It's as if Aspen CEO Chris O'Kane had moored his ship in a lock, shut the gate and cranked the handle so that only his water level went down and the other Bermudian vessels out in the main channel stayed the same.
And that is precisely what he has done, except that a better maritime description for the Aspen predicament is that it is lightly holed below the waterline and is taking on water. The rate of water ingress isn't going to sink the ship, but it needs to head in for dry-dock repairs.
It turns out the market is perfectly capable of differentiating between market-wide and company-specific phenomena.
The Validus effect was market-wide and Aspen was company-specific.
As the soon-to-be-outgoing Validus CEO Ed Noonan explains later on in these pages, it's all about execution.
Peers in the class of 2001 have done better than Aspen and this outperformance has compounded over time.
Aspen is not the first company to be singled out for punishment following disappointing news. As the words imply, market sentiment is an expression of raw emotion.
So while it usually gets the direction of travel right, it also tends to overreact, overshooting on the upside and being overly pessimistic on the downside.
For example, Allied World took a hugely disproportionate beating after spooking investors with a very small but wholly unexpected reserve strengthening in its Q4 2015 results. Market darling RLI suffered a similar fate around the same time.
Allied rebounded pretty well in subsequent quarters.
Zurich has also had its fair share of strife whenever it has produced an unpleasant surprise for investors.
Of course, Aspen itself was similarly punished this time last year. It appointed another new insurance CEO, brought in McKinsey, said it was exiting volatile and unprofitable insurance lines and regained some investor confidence.
Before dashing it again last week.
In grand market tradition Aspen may now have undershot its true value, but its current price does accurately reflect investors' cumulative exasperation.
The firm's insurance-focused growth strategy has been misfiring for a long time - we have lost count of the insurance CEOs it has jettisoned. Its depressed stock market valuation is only reflective of underperformance in the real world.
A good repair job and a vigorous pump of the bilges and the Aspen ship will start floating a little higher in the water. If the re-fit goes well investors will eventually come around to seeing what a pretty ship she has become.
Until then Aspen will be slow, unstable and will find it very hard to hire the best crew.
Moreover, as it limps its way to a safe harbour with a reputable dockyard it will be prone to opportunistic piracy on the high seas.
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