Yeah … but what does Alice Schroeder think?

Risk & Insurance, April 15, 2002 by Patricia Vowinkel

Morgan Stanley's all-star insurance analyst is the only one Warren Buffett will speak to and one of the most respected--and unafraid--thinkers on Wall Street. Pouring cold water on conference calls and putting the property-casualty industry on notice, Alice Schroeder grants us an exclusive interview.

Alice Schroeder has risen fast in her eight years as a Wall Street property-casualty insurance analyst. Indeed, the Morgan Stanley Dean Witter & Co. analyst was top ranked by the 2001 Institutional Investor All- America Research poll and has been a member of the All-America Research team for the past five years. She also has been twice recognized as a member of the Wall Street Journal's All-Star Analyst Team.

It's no wonder, then, that in late February, she testified at a daylong House financial services committee hearing on the lack of terrorism insurance and its effect on the economy.

"I think there may be renewed momentum (for a federal backstop)," Schroeder says. "The disruption appears to be growing and you've now got what appears to be a coalition building of labor, business, nonprofits, government and insurers. All this is saying that there's a problem and that may give the momentum what's needed."

Described as intense and driven, the Texas native is known to work long hours and to be a relentless interrogator. "She does exhaustive research on an industrywide level, and she has pretty good contacts around the insurance industry," says Tom Goggins, co-portfolio manager on John Hancock Funds' Financial Institutions investment team.

"She probably works harder than any other sell-side analyst I know, in terms of hours definitely," another institutional investor says. "She's very focused on getting to the bottom of a story."

Schroeder also forms strong opinions and is unafraid of breaking with convention. "She's the first one to pour cold water on a positive conference call," the investor says. "When she makes a negative call, she does it with a bit of passion."

But Schroeder will probably always be known for getting Warren Buffett, the Sage of Omaha and the chairman and CEO of Berkshire Hathaway, to talk to her in 1998 when she was an analyst at Paine Webber. It created a stir because it was the first time Buffett had provided access to an analyst--and she's still the only analyst to whom he speaks. "Obviously she got kudos for being the one to interview Warren Buffett," the investor says.

Schroeder says she got to meet with Buffett because she was one of the few analysts who had continued to write research on General Re after it agreed to a merge with Buffett's Berkshire Hathaway. "Most analysts immediately, or very shortly thereafter, stopped focusing on this situation and we decided to pick up coverage of Berkshire Hathaway and began working on a report," she says.

She says she contacted Buffett in a letter and asked if she and some General Re shareholders could attend a Berkshire Hathaway investors meeting in September 1998 and if he would then be willing to meet with them. He agreed. "I think, largely by default, I was the only one doing anything much about it. He had read my research and I was there. Half of life is just showing up."

Risk & Insurance caught up with Schroeder in early March and asked her a few questions about the state of the insurance industry.

Q: What do you think are the biggest problems facing the U.S. insurance industry this year and in the next five years?

A: The biggest short-term issue facing the industry right now is addressing terrorism exposures from an underwriting standpoint, a customer relations standpoint, and a legislative standpoint. The issue is making a lot of progress in all these areas, but it certainly is the biggest challenge in my mind.

Over the next five years, the industry will be facing a radically different macroeconomic environment in which investing returns are much lower than they were in the 1990s. The industry will be looking at inflationary trends rather than at costs that are coming down. Those two trends are so overwhelmingly important to the industry's economics that entire business models are going to have to be changed to address these issues.

I believe that many companies coasted through the 1990s, making money and blissfully unaware of the fact that the reason they were profitable was because they were capital rich at a time when the investment climate was showering returns on investors, and insurers were able to cut prices at a time when costs were declining. Both of these trends have reversed.

The investing environment is much tougher now. Costs are rising, and the only way to make money now is through solid underwriting. The reinsurers are no longer the patsies at the poker game so the underwriting can't be outsourced to them anymore. Now, making a profit on a gross lines basis, before reinsurance, is going to be required. We think that some companies are not set up to do that, and these companies are going to have to rethink their whole strategy.

Q: Which companies or sectors will be most under pressure?