David Merkel
Sometimes the answers get a little more subtle. In personal lines insurance, it took analysts a long time to catch up with the safety trends that were bringing down the frequency and severity of losses, particularly graduated licensing for young drivers. Internally, the companies had figured it out long before they told the analyst community. The analysts who asked why severity and frequency of loss were so good and got an answer that allowed them to "connect the dots" to the regulatory change realized that there was a secular, not cyclical, change going on. Thus they were able to make money buying personal auto insurers, because the trend was likely to extend to more states.
Mergers and Acquisitions
Without naming names, what types of business alliances do you think could be most valuable in the future? This helps flesh out competitive strategy. Managements will be reluctant to part with details, but usually are willing to explain their approach to supplier agreements, joint ventures and so on. The answer to this question can also highlight the "missing pieces" for the current business, and how the management team is trying to source them. It can also shine a light on new products and services that management is considering. Is it cheaper at present to grow organically or through acquisitions? The right answer is almost always organic growth. Acquirers usually overpay, particularly in acquiring scale. Intelligent acquisitions are usually small and often private firms, where the sale is negotiated and not an auction. The goal is to gain new core competencies or markets that can grow profits in concert with the capital and other resources that the company can add to their new acquisition.
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