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Talking to Management, Part 5: Understanding Major Shifts

This column was originally published on RealMoney on April 20, 2007 at 10:02 a.m. ET. It's being republished as a bonus for University readers. For more information about subscribing to RealMoney, please click here .

Editor's note: We're pleased to present David Merkel's five-part series on questions to ask the management of a public company. In Part 1 , Merkel explained the philosophy behind his approach and presented the big subjects he likes to get out of the way first. Part 2 addressed top financial concerns. Part 3 covered what you need to find out about the competition. Part 4 presented questions on pricing and products. Now, in Part 5, how to find out about shifting business conditions, including mergers and acquisitions, and tips on using the questions in this series.

The Changing Business Environment

What do you think is the most important change happening in the competitive environment at present?

This query can highlight emerging issues and demonstrate how the company is adjusting to the changes. Again, you need to compare the answers of various managers against each other; an odd answer could either be ahead of the pack or out of touch. If you think the answer makes sense, it can open up new questions that further enhance your understanding of the industry and the role that the company you are interviewing plays in it.

After Hurricane Katrina and other storms in 2005, ratings agencies toughened up their risk models, and catastrophe modeling companies increased their frequency and severity estimates. This created an even greater squeeze in the 2006 property reinsurance markets than what the losses of capital alone would have caused, as happened to the 2005 property reinsurance market from losses suffered in 2004. New entrants in the reinsuring property risk space found that they could write only half of the premium that their more seasoned competitors from the class of 2001 could. Further, property-centric writers found the capital required went up more for them than for their more diversified competitors.

There was less effective capital in property reinsurance at the end of 2005 than at the end of 2004, even though surplus levels were higher on net. Those who recognized the change in the rules of the game caught the rally in the stock prices as the price for reinsurance went up more rapidly than most expected for the 2006 renewal season.
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