Jack Degnan Speaks Part II

Talking about the market, Mr. Degnan predicted that "2009 will see dramatic hardening across all lines, all sectors" because of deteriorated combined ratios, investment return, rate reductions and poor yields in the market. Chubb CSI saw Q4 rate increases, the first in 18 quarters.

Countervailing measures are there:

• forecasts like the above seem rational, but the insurance industry doesn't act rationally
• the economic implosion reduces exposures and it's hard to raise the top line when demand shrinks

Speaking of the credit crisis, Mr. Degnan thought the "hyperbolic forecasts" of big losses were way overblown. Citing high dismissal rates and other measures he discussed in Chubb's last earnings call, Mr. Degnan thought the $10, 15 20b numbers are overblown. Was he subtly asking Advisen to revise its forecast?

In the Q&A he was asked about direct distribution and said it had been seriously reviewed at Chubb but Chubb is "strongly committed" to working with brokers who provide a significant "value add".

Jack Degnan Speaks Part I

I had the opportunity at an industry function to hear a terrific speech by Chubb's Vice Chairman John Degnan (see bio here). As a former New Jersey politician and lawyer, and as head of most of Chubb's operations, he's a very effective and entertaining speaker with good stories.

Mr. Degnan started with the experience of the last two days testifying in front of Congress in Washington and forecast that "by the end of this year there will be a Federal Systemic Risk Regulator" and that while insurance is not likely to be covered in phase I, regulation is moving to the federal government from the states.

Mr. Degnan compared the relative pain for European insurers trying to do business in the US and how they have to open in 50 markets, not just 1 market and wonders if they will take countermeasures at some point for US firms operating in Europe.

Analyzing recent testimony by NY State Insurance Superintendent Eric Dinallo (bio here) that NY regulation saved the markets from AIG's implosion, Mr. Degnan called it a "truism" because they only regulate the insurance company subsidiaries and not the rest of the holding company such as the Financial Products division that caused the implosion.

Mr. Degnan also reminded the audience of Mr. Dinallo's approval of $20b in AIG subsidary dividends going to the parent before the federal government bailout. While noting that this might have been politically motivated (saving jobs in NY), it was ironic nonetheless.

Mr. Degnan said that before Chubb got out of credit derivatives in 2002 not one state regulator had asked Chubb about these, and that state regulators aren't equipped to regulate this type of thing. "Federal Systemic Risk Regulation is happening" and while "systemic" is hard to define, there may be a role for the ratings agencies and wondered whether it would be more than solvency regulation.

Noting resistance to this movement, Mr. Degnan said insurance agencies are so numerous and such effective lobbyists and that agencies favor the state system. I assume this is because agencies compete in niches such as geographical areas that global or national brokers don't serve as well.

Noting that he's a Democrat, Mr. Degnan told the audience to be very aware of "economic populism" in Washington and while the industry might enjoy federal oversight, it might watch what it asks for.

Noting that trial lawyers own Democrats, Mr. Degnan warned of the ascendancy of the Trial Bar. Citing one of the "very few" positives from the George W. Bush years, Mr. Degnan cited good legislation that kept the trial lawyers down (e.g. District Attorneys outsourcing to trial lawyers). "Even the stimulus bill had pro-plaintiff language." Part II tomorrow.