Reinsurer in the Sun

Finding some things to like about Ace, an intriguing Bermuda P&C company.
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I often argue in this space that individual investors armed with common sense, the Internet, and no one to please but their spouses can be on equal footing with institutional investors. Nevertheless, there are exceptions to the rule, such as when we get invited to all sorts of industry conferences where we can become completely immersed in an industry. Imagine spending 72 hours with companies and analysts you didn't know before, all with the hope of coming away with a money-making idea.

This may explain why -- on my birthday no less -- I can be found at the

Association of Insurance and Financial Analysts

, or AIFA, shindig in Phoenix with 20 or so companies and 150 insurance analysts. What did I do to deserve this? Only in jest, dear reader, because, truth be told, I

love

this stuff.

First off, like a moth to the flame I am usually attracted to the offbeat, the underfollowed and therefore, the hopefully undervalued. Secondly, most investors find insurance stocks terribly unexciting. This despite the presence at this conference of such sharpies as the

Buffetts

, the

Markels

, the

Tischs

, the

Byrnes

, etc. -- all of whom have clearly demonstrated the beauty of a business model that can take money from people at very little or negative cost and make money by investing it. Finally, what, over the past year, has proven to be more of a dog than insurance stocks -- with the possible exception of oil and gas?

I'd be lying to you if I did not say that insurance analysis can be a bit dry, and the personalities associated with the industry in many cases tend to be a case of the collar matching the cuff. So while I went with the idea of looking for small-cap life and property-casualty companies certain to be victims of an inevitable consolidation, I wound up being blown away by something completely different: A large-cap property-casualty, or P&C, company that I hardly even knew existed, with a CEO that I'll call my Ace (there'll be a quiz later) in the Hole.

That's what happens when you run into

Brian Duperreault

, the chairman, president and CEO of

Ace

(ACL)

. He's the kind of guy who gets your attention.

Let's start with pedigree. He comes from

American International Group

(AIG) - Get Report

(which we have owned forever and would buy on

any

20% dip) which is the

General Electric

(GE) - Get Report

of the financial services industry (not that GE isn't also the GE in financial services as well). Duperreault spent 21 years at AIG in a variety of very successful senior management positions with a healthy dose of international exposure, which is about as good a pedigree as you can get in the financial services business.

What makes AIG wonderful is 1) management, 2) an earnings stream that is diversified by product, clients and geography, 3) an international presence that would take another millennium to build from scratch, and 4) did I mention management?

Hank Greenberg

is one of three CEOs of AIG over the last 100 years who is, in every way and then some, the equal to GE's

Jack Welch

.

Both GE and AIG are famous for spawning management offspring that go on to create terrific shareholder success stories. Before Duperreault came on board, Ace started life as one of the Bermuda reinsurance companies that were created post-Hurricane Andrew ('93) to take advantage of a variety of tax and regulatory advantages. These enabled insurance companies there to have much more flexibility than their counterparts in the U.S. or Europe. It was focused on two core lines of business when Duperreault joined in 1994.

Armed with a lot of capital and a decent stock price at the time, Duperreault started building AIG Jr. He focused on three issues: building an AIG-style management team, underwriting profitably (still a foreign concept to many insurers) and pursuing product and geographic diversification. He also made a number of small acquisitions, and shifted the underwriting focus to diverse specialty lines. But when you're small, you're small, and you do the business you can.

What brought Ace to everyone's attention was the January announcement that it was going to buy

Cigna's

(CI) - Get Report

P&C business for $3.4 billion. This is a big deal for the insurance industry, and gives Ace the size and breadth to be in a position to be AIG Jr. I'll start liberally quoting from the presentation as to why this makes Ace one of a handful of big players:

Fifty percent of Cigna is international, and that means local presence selling local products to local people, not the unprofitable kowtowing to multinationals. This was Duperreault's business at AIG and he knows this company cold: "This is a unique franchise ... I can't believe it was sold ... I will never part with this business." In one stroke, it puts Ace in a class of three or four worldwide players.

The US business is perceived to be unprofitable and a mess, but Duperreault notes: "They have a 39% expense ratio, my former company wrote business at half that ... they have checkers checking the checkers." What that means is that the underwriting is not so bad, it's just that the company has 31 layers of management. Ace, in contrast, is notably lean, and interestingly, Duperreault claims the Cigna employees cheered him as the Superman who will deliver them from a smothering bureaucracy.

This is actually kind of ironic, since a good chunk of them will see nothing of Ace but a pink slip. As part of the deal,

Berkshire Hathaway

(BRK.A) - Get Report

agreed to wrap a huge piece of reinsurance around Cigna's old liabilities. Besides representing an informal blessing from Buffett himself, this walls Ace off from 50 years of Cigna's exposure to asbestos, environmental and whatever other spurious claims our fine legal system can throw at it.

I have learned not be grossly swayed by the cult of personality, but I still salute a CEO who gets in front of a room and gives a 30-minute soliloquy on his business and strategy in intimate detail without having to look down to the podium.

It should be clearly noted here that I am just now starting to get my hands dirty on Ace. Nor do I believe that anyone should run out and buy a stock after being really impressed upon first meeting that company's product, service, or, for that matter, CEO.

So, I've got a lot of work to do to better understand this rapidly changing company in a complicated industry. But what I can say is this: I was bowled over, and now it's up to me to put some flesh on those bones.

Most likely, there's time here: The stock has been whacked along with most of the insurance group, and it will probably stick here for a while as institutional investors wait for some $1.1 billion of equity and equity-related financing to be coming down the pike over the next three months. Nor should I expect Ace to earn AIG's credibility and multiple in a mere two years.

But it still intrigues me; so I'll close with an open question about my potential Ace in the Hole to those paid-up subscribers with knowledge of the insurance industry: Is this the Son of Hank?

Jeffrey Bronchick is the chief investment officer of Reed Conner & Birdwell, a Los Angeles-based money manager with approximately $1 billion of assets under management for institutions and taxable individuals. Bronchick also manages the RCB Small Cap Value Fund. At time of publication, RCB was long General Electric and American International Group, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. His column, The Buysider, appears every Tuesday on TheStreet.com. He appreciates your feedback at

jbronchick@rcbinvest.com.