McDONALD: Chris, that’s always a big issue for the producer sector. What are you seeing?

TREANOR: It really is. It’s increasingly complex. From a personal standpoint, I can’t imagine how we get through this without a major failure. There’s so many big players who are in distress in one form or another. The game is not over yet. So getting through this unscathed I think is unlikely.
What that means is the tough part. Names are consistently bandied about. What we don’t know as an industry is what’s going to happen and who is going to end up with the worst difficultly. If you said to anybody five years ago that Harford, aig, Swiss Re and Liberty Mutual would all be under pressure people would laugh at you. Those are some of the names who are experiencing difficultly at some level.
So there’s more to come. If you look back at the rest of the financial sector, Indy Bank in the first quarter was saying that they were massively overcapitalized and 60 days later the government had to take them over. So there’s just such uncertainty and lack of clarity and lack of ability to fully understand how this is going to play out.
That makes it very difficult for our customers. It makes it very difficult for us. When we advise customers we always start with A.M. Best. That’s a gratuitous plug of course.

McDONALD: We’ll take it.

LASSITER: Absolutely. But you guys have been the industry stalwart for certainly for the 25 years I’ve been doing this and certainly beyond. But we’re going much beyond that. You look at other rating agencies. You look at industry analysts. You stay very close to who is acting irrationally in the marketplace because that’s frequently a sign that there’s trouble on the horizon. But what you have to be careful of and this is what I always caution our people is, don’t trade on rumor. Don’t trade on gossip. That can be very destructive.
Like banking, we live and die based on consumer confidence. So once you get a run on the bank it’s hard to stop it. You can’t trade on gossip. At the same time you don’t want to put your customer in a bad situation. So it’s a really delicate balance trying to give good advice but not trying to give advice that’s based on a hunch or what you hear in the market.

McDONALD: But as you place business and proposals, is financial stability part of the conversation in a way that it hasn’t been before?

TREANOR: Absolutely. What’s really become a bigger part of that is aggregate counterparty risk. One of the difficulties AIG has these days is that they’re a victim of their own success. They over the last 10 years have focused very hard on getting bigger market share on a customer to customer basis. Higher limits per account and cross selling that account, from D&O to property casualty. So when a CFO wakes up and look at his insurance portfolio he’s got half a billion dollars of exposure to AIG and I’m just using AIG as one example. That’s where they’re focused.
So you start with a rating and then you say: what’s my aggregate exposure to any one name. Because you can’t tell for sure. You know something is going to happen. You can’t tell what it’s going to be. You start with strong-rated companies but then you don’t put too much capacity with any of them. So we’re absolutely seeing a) a flight to quality and b) a broader diversification of risk where in the past everybody put more with one carrier because there are a lot of advantages to that. People are much more hesitant to do that at this stage and I think rightfully so.

McDONALD: E.G., financial stability, particularly your outlook on where it’s going in this sector here but also how it’s going to affect your business when you see some of the impact here. What are you seeing?

LASSITER: Well it will have some impact. We are fairly conservatively managed. We’re currently writing at about .6 premium to every dollar of surplus. The industry is roughly 1 to 1. There are carriers out there that are 1.5 or 2 to 1. The overall in the specialty market is more down where we are. Tony, you’re probably right at .9 to 1 or something like that?

MARKEL: Right.

LASSITER: I think those are very conservative approaches to the business. However there are carriers out there that because of the profits that they’ve made the last few years, because of the cost of reinsurance they have more retained more on their own books. Now that their capital is eroded they’re going to be looking to cede more, just at a time when the reinsurers don’t have the capital to accept more or maybe not as much as they’d want to take.
Maybe some of the carriers are capital impaired and we don’t want them to have as much as they have, the counterparty credit that you were talking about a few minutes ago. There’s a lot of things at play that are difficult for us to analyze right now. We will be able to do it with more clarity after December 31st when the financials are published and we see what the changes are that have occurred in October, assuming there’s just no dramatic recovery in November and December, what it’s done to the various people. But right it’s a little bit difficult for us to assess. Those kinds of things do drive changes. It actually bodes pretty positively