WEBVTT - Merger Monday for Banks and Biotech

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. You're listening to the

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<v Speaker 2>We had an M and A trade.

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<v Speaker 3>Had a few M and A trades hit the tape

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<v Speaker 3>here this morning, one including the regional bank business, maybe

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<v Speaker 3>a super regional bank to be Herman Chen, Bloomberg Intelligence,

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<v Speaker 3>senior analyst for US regional banks, hunting to bank shares,

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<v Speaker 3>buying Cadence.

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<v Speaker 2>Herman talking to us about this deal. What's going on here?

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<v Speaker 4>So, Huntington's fresh off of a deal in Texas. They

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<v Speaker 4>just closed the Veritext deal which added to face Right

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<v Speaker 4>and turned Texas through the Veritext merger. And they're doubling

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<v Speaker 4>down in Texas, adding Cadence, which is in the Houston

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<v Speaker 4>market primarily and also some slower gross Southeast market. It's

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<v Speaker 4>like Birmingham two below. They have some exposure to Arkansas

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<v Speaker 4>and Missouri, but Texas is really the prize.

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<v Speaker 5>Texas is really the prize in Cadence. I believe has

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<v Speaker 5>two headquarters, one in Houston, one in Tupelo. So Huntington

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<v Speaker 5>now has presence in twenty one states.

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<v Speaker 6>And it becomes a super regional. That term super regional.

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<v Speaker 5>What does that mean in terms of regular regulation and

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<v Speaker 5>what kind of capital needs to hold on its bounce stream?

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<v Speaker 4>Yeah, so that's that's a good question. It will clear

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<v Speaker 4>the two hundred and fifty billion asset mark, which is

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<v Speaker 4>a step up in regulation. Really, all that means is

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<v Speaker 4>there's more regulatory reporting, there's a tougher regulation in regards

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<v Speaker 4>to liquidity. But overall, should it mean too much for Huntington?

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<v Speaker 4>And we are expecting some deregulatory efforts from the Fed

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<v Speaker 4>later down the next few months, so that should actually

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<v Speaker 4>work out in Huntington's favor. And I think what we're

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<v Speaker 4>seeing is that just the regulatory efforts increasing M and

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<v Speaker 4>A transactions as a result of the Trump administration being

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<v Speaker 4>very more open to deal making. And you're seeing that

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<v Speaker 4>playouts not only in this deal, but also with the

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<v Speaker 4>Third buying Comerica and also P ANDC buying a bank

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<v Speaker 4>in Denver, First Bank, So more transactions to come.

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<v Speaker 2>Wow, what's the upside for Huntingdon bank shares here? In

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<v Speaker 2>getting bigger.

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<v Speaker 4>Yeah, so they are doubling down in higher growth markets.

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<v Speaker 7>Right.

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<v Speaker 4>So Huntington is based mostly in the Midwest, Upper Midwest,

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<v Speaker 4>lower growth demographics. They've focused on not only hiring folks

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<v Speaker 4>in national businesses, but also expanding in areas like the Carolinas.

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<v Speaker 4>They were doing an organic push in Texas before the

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<v Speaker 4>Veritext deal. So the management team's being much more aggressive,

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<v Speaker 4>and they talked about improving their return profile, increasing their

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<v Speaker 4>return on tangible equity by two hundred basis points over

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<v Speaker 4>the medium term. So the higher, the greater scale, the

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<v Speaker 4>better growth demographics really will fall to the bottom line.

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<v Speaker 5>So what I found interesting in this Hermann is that

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<v Speaker 5>earlier this year Cadence bought another bank industry bank shares.

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<v Speaker 5>Who's a buyer, who's a seller in this great regional

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<v Speaker 5>bank m and a thing that we're seeing.

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<v Speaker 4>Yeah, I think what you're seeing today is and I'm

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<v Speaker 4>just looking at the Kerry Index and all these Texas

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<v Speaker 4>based institutions that are part of that are getting bid up,

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<v Speaker 4>like banks like Prosperity First Financial.

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<v Speaker 8>Origin.

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<v Speaker 4>These are We've seen a number of bank deals in Texas,

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<v Speaker 4>both larger and smaller. Remember, coll America is a Texas

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<v Speaker 4>based bank as well. So these are that's that seems

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<v Speaker 4>to be the area of choice for these regionals and

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<v Speaker 4>we're seeing that activity really pick up.

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<v Speaker 2>Stay with us more from Bloomberg Intelligence coming up after this.

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<v Speaker 1>You're listening to the Bloomberg Intelligence podcast. Catch us live

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<v Speaker 3>No Artist agrees to buy Avidity in a twelve billion

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<v Speaker 3>dollar biotech deal, Sam Fazzelli, you became an analyst, You

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<v Speaker 3>should have become a banker.

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<v Speaker 2>I don't know what you're thinking.

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<v Speaker 3>Back in the day, Sam Fazzelli, Director of Research for

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<v Speaker 3>Global Industries and the Senior Farmer Analysts Folks is one

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<v Speaker 3>of the best out there on the street or in

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<v Speaker 3>the city of London, as they say, for Bloomberg Intelligence.

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<v Speaker 3>Is this just another deal kind of right out of

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<v Speaker 3>central casting, Sam, Pharma buying biotech?

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<v Speaker 7>Yeah, well, so, Paul, before we do that, can I

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<v Speaker 7>just make sure that when we come back in our

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<v Speaker 7>next life, can I work with you there we both

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<v Speaker 7>do this together, and can just you know, go and no,

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<v Speaker 7>but look, farmer copies. The story is similar here. We

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<v Speaker 7>have a company here of artists doing okay. They have

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<v Speaker 7>a atent exspirery that they're dealing with. Now remember that phrase,

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<v Speaker 7>it's always the one that rears itsumily head eventually, which

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<v Speaker 7>is good for consumers and drug budgets, but obviously in

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<v Speaker 7>the end bad for the top and bottom line of

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<v Speaker 7>pharma companies. They have another drug that's really big, expected

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<v Speaker 7>to hit about seven point four billion dollars of sales

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<v Speaker 7>by twenty twenty nine twenty thirty, called Cocentics that's going

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<v Speaker 7>to go off pattern. So what do they need. They

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<v Speaker 7>need assets and products to feed it. They do their

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<v Speaker 7>own R and D, but here they also have an

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<v Speaker 7>opportunity to go and get really exciting stuff from biotech companies,

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<v Speaker 7>which is exactly what Novartist is doing twelve billion dollars

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<v Speaker 7>for Avidity Biosciences. And then what they're getting here is

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<v Speaker 7>three products there are at different stages of development but

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<v Speaker 7>very soon to get to hit the market, all rare diseases.

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<v Speaker 7>So it's one that's harder for people to argue against

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<v Speaker 7>in terms of price, et cetera. And it will help

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<v Speaker 7>them with that post twenty twenty nine, twenty thirty revenue

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<v Speaker 7>growth and earnings growth, so pretty much fits perfectly in

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<v Speaker 7>this sweet spot of what they need and what this

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<v Speaker 7>company and for their growth and also their technology platforms.

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<v Speaker 5>Sam you laid out beautifully strategically why Novartists is buying Avidity.

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<v Speaker 5>The CEO of Novartists, Vasenara Simhun, has been making some deals,

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<v Speaker 5>but mostly they've been focused on deals under five billion dollars.

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<v Speaker 5>Regular therapeutics you bought for one point seven billion, and

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<v Speaker 5>those therapeutics also in that neighborhood. Is this purchase, this

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<v Speaker 5>twelve billion dollar purchase a shift in strategy?

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<v Speaker 7>Yeah, I mean it's so hard us on lists, we

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<v Speaker 7>love asking a pharma companies, so what kind of deals

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<v Speaker 7>are you going to be doing? And you go back

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<v Speaker 7>and look at the Q two results. Ah, we like tukens,

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<v Speaker 7>et cetera. Right, and here we go. I mean, you know,

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<v Speaker 7>in my world, a tuck in is three to five

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<v Speaker 7>billion dollars, two to four billion dollars that sort of size.

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<v Speaker 7>So but they all give you this caveat we will

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<v Speaker 7>be opportunistic. And I think here there was an opportunity,

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<v Speaker 7>an opportunity that came up to access some very novel technology.

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<v Speaker 7>I have to say, it's really interesting what these guys

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<v Speaker 7>are doing, and it's late stage enough for it to

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<v Speaker 7>make a difference to the bottom line of the company,

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<v Speaker 7>and it's not after you get that mix. So I

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<v Speaker 7>think the artists decided this is this takes so many

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<v Speaker 7>boxes that it was worth doing. Particularly it fits also

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<v Speaker 7>with their internal assets and their approach to some of

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<v Speaker 7>the other diseases. So it is really pretty good, pretty

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<v Speaker 7>good fit.

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<v Speaker 8>Sam.

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<v Speaker 3>Is the patent runoff or expiration for this industry?

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<v Speaker 2>Is it abnormally high these days?

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<v Speaker 3>Or is this this kind of a normal course of business,

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<v Speaker 3>because it seems like we hear about it more and

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<v Speaker 3>more or less several years.

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<v Speaker 7>Well, the companies have got bigger, there's broader pipelines, and

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<v Speaker 7>you know, I mean there was a period where it was,

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<v Speaker 7>you know, we had the pattern cliff in the twenty

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<v Speaker 7>ten eleven twelve time period. I don't remember exactly. It

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<v Speaker 7>was a while ago now and now we have another.

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<v Speaker 7>It's not quite a cliff, it's a hill that but

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<v Speaker 7>this is this is how it should be. These companies

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<v Speaker 7>get rewarded with reasonable pricing for the ten to twelve years,

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<v Speaker 7>and then it becomes generic so that it creates more

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<v Speaker 7>space in the drug budgets for the governments to pay

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<v Speaker 7>for the next good drug. So I don't think there's

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<v Speaker 7>anything new here, which is it varies by company by company, Sam.

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<v Speaker 5>We know that Novartis is going to be reporting earnings tomorrow,

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<v Speaker 5>I believe, and it's already raised its profit outlook I

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<v Speaker 5>believe two times. What are you anticipating is how much

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<v Speaker 5>is it going to tell us in terms of whether

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<v Speaker 5>this deal, this Avidity deal will add to earnings in

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<v Speaker 5>the near term.

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<v Speaker 7>Yeah, but they already told us that they think that

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<v Speaker 7>it's going to be clearly dilutive next year. And of course,

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<v Speaker 7>as soon as you do these deals, a large amount

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<v Speaker 7>of the value goes into what's called IPR and D,

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<v Speaker 7>which which you have to charge to your p and

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<v Speaker 7>lic cont just put it onto a goodwill anymore and

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<v Speaker 7>just live with that as an intangible. So here there

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<v Speaker 7>would be dilution next year, but I think they could

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<v Speaker 7>start seeing some at least a positive contribution maybe from

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<v Speaker 7>twenty seven to twenty eight on Wehre's definitely twenty nine

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<v Speaker 7>thirty as these drugs hit the market. Of course, they

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<v Speaker 7>have to still get to the market and they have

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<v Speaker 7>to be successful. But the drugs are looking really interesting

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<v Speaker 7>and the dates is looking very powerful.

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<v Speaker 2>Stay with us. More from Bloomberg Intelligence coming up after this.

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<v Speaker 1>You're listening to the Bloomberg Intelligence podcast. Catch us Live

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<v Speaker 1>weekdays at ten am Eastern on apple Cocklay and Android

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<v Speaker 1>Otto with the Bloomberg Business app. Listen on demand wherever

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<v Speaker 5>All right, let's talk about what's happening in the Caribbean.

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<v Speaker 5>Hurricane Melissa plowing towards Jamaica. It's a powerful Category five storm,

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<v Speaker 5>the third Category five storm this Atlantic season, and Melissa

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<v Speaker 5>threatens to bring widespread destruction to the island. Matthew Paalazola

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<v Speaker 5>has been monitoring this development. He is the senior analyst

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<v Speaker 5>of p See Insurance for Bloomberg Intelligence, and he joins

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<v Speaker 5>us now with more. Matt, good to speak with you

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<v Speaker 5>when you try to figure out what kind of economic

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<v Speaker 5>damage this storm could reak.

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<v Speaker 6>What historical analogs are you using?

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<v Speaker 8>Yeah, so it is a lot easier for the US.

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<v Speaker 9>We have a lot more data, a lot more storms

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<v Speaker 9>for this one. The method we use as the same,

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<v Speaker 9>We look at older storms, older hurricanes, and we try

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<v Speaker 9>to see in what they did, we adjust for property

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<v Speaker 9>values inflation and try to come up with something. The

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<v Speaker 9>issue has been there haven't been a lot of major

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<v Speaker 9>hurricanes that have made landfall on Jamaica. It's really only

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<v Speaker 9>two since nineteen eighty actually hit the island. A bunch

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<v Speaker 9>of passed. The one that we're looking at is nineteen

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<v Speaker 9>eighty eight Hurricane Gilbert, and that one there's not great

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<v Speaker 9>insurance data, there's not great damage data. The best we

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<v Speaker 9>can find was one hundred thousand homes wiped out power communication,

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<v Speaker 9>killed forty five people. The economic damage, inflation adjusted, maybe

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<v Speaker 9>in the mid single digit billions. The way Melissa's shaping

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<v Speaker 9>up could be a lot worse than that.

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<v Speaker 3>Actually, So in your note, you're saying that Jamaica has

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<v Speaker 3>a low insurance penetration, and but what coverage is written

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<v Speaker 3>there is heavily seated.

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<v Speaker 2>What does that mean?

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<v Speaker 9>So that means that it's your your favorite business, Paul's

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<v Speaker 9>heavily seated to reinsurance. That's so you know, I was

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<v Speaker 9>talking about one hundred thousand homes ashured in Gilbert. That's

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<v Speaker 9>where the low insurance penetration comes in. So people's homes there,

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<v Speaker 9>they just they don't have insurance on them, so there'll

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<v Speaker 9>be a wide gap between the economic losses and the

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<v Speaker 9>insured losses. So that's kind of a real unfortunate aspect

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<v Speaker 9>of this. Like the resorts and things like that will

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<v Speaker 9>have insurance on them, that'll be the majority of the

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<v Speaker 9>insured losses. But so that's what we're saying with the

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<v Speaker 9>low penetration and even all any of the business there

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<v Speaker 9>is heavily seated to the reinsurance market.

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<v Speaker 6>So which reinsurers then are exposed?

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<v Speaker 8>You think, So, I don't. I don't have specific names

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<v Speaker 8>to be a lit over remiss.

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<v Speaker 9>You hear about Lloyd's of London kind of does you

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<v Speaker 9>know one off or special risks like this, So you

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<v Speaker 9>might have a big, a big resort that might you know.

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<v Speaker 8>Have a policy with them.

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<v Speaker 9>So a lot of the business might not be written

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<v Speaker 9>by the domestic companies. We cover the Bermuda reinsurance companies,

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<v Speaker 9>and it wouldn't be surprised if they had some the

0:12:17.480 --> 0:12:20.920
<v Speaker 9>big big European companies like Swiss Raad Munich Race. So

0:12:20.960 --> 0:12:23.240
<v Speaker 9>those are kind of the usual suspects, but I wouldn't

0:12:23.559 --> 0:12:25.840
<v Speaker 9>ascribe losses to any of them, just Yet.

0:12:25.679 --> 0:12:27.679
<v Speaker 3>When I owned a home in California, it got to

0:12:27.720 --> 0:12:30.120
<v Speaker 3>the point where the only place we could get home

0:12:30.160 --> 0:12:32.600
<v Speaker 3>insurance was Lloyd's of London. Really, I mean as saying,

0:12:32.600 --> 0:12:35.480
<v Speaker 3>people who ensure you know, tankers going through the strait

0:12:35.520 --> 0:12:36.079
<v Speaker 3>of her moves.

0:12:36.120 --> 0:12:36.920
<v Speaker 2>That's why I had to.

0:12:36.840 --> 0:12:38.440
<v Speaker 6>Go to Well, no one's even doing that now. You

0:12:38.480 --> 0:12:40.920
<v Speaker 6>only have the state insurers, the lender of nature of

0:12:41.000 --> 0:12:41.480
<v Speaker 6>last resort.

0:12:41.520 --> 0:12:44.319
<v Speaker 4>At this point, I think mine is like Joe's Insurance

0:12:44.320 --> 0:12:46.600
<v Speaker 4>of South Jersey, only one.

0:12:46.720 --> 0:12:49.559
<v Speaker 3>Exactly talk to us about the hurricane season for from

0:12:49.600 --> 0:12:51.839
<v Speaker 3>your perspective, it doesn't seem like it's been that bad.

0:12:51.960 --> 0:12:54.040
<v Speaker 8>No, it's been. It's been quite good for.

0:12:55.520 --> 0:12:58.959
<v Speaker 9>People who suffer from hurricane losses and for insurance companies.

0:12:59.000 --> 0:13:05.360
<v Speaker 9>So very mild. I think minimal US activity. We look

0:13:05.360 --> 0:13:09.720
<v Speaker 9>at catastrophe lost estimates for our companies. We started off

0:13:09.720 --> 0:13:11.480
<v Speaker 9>the year with the wildfires and I said, oh, no,

0:13:11.559 --> 0:13:13.200
<v Speaker 9>like this is going to be bad. We're going to have,

0:13:13.280 --> 0:13:15.760
<v Speaker 9>you know, major another major hurricane. It was going to

0:13:15.760 --> 0:13:20.560
<v Speaker 9>be pretty significant. Third quarter was very mild. We've only

0:13:20.559 --> 0:13:23.840
<v Speaker 9>seen a couple of companies report earning so far. Those

0:13:24.080 --> 0:13:26.840
<v Speaker 9>have been good. The catastrophellas have been very low, so

0:13:27.840 --> 0:13:30.200
<v Speaker 9>hurricane season mild. This is pretty rare to have a

0:13:30.200 --> 0:13:33.520
<v Speaker 9>major hurricane this late. We did a hurricane Sandy was

0:13:33.600 --> 0:13:36.680
<v Speaker 9>around this time when it hit. But the hurricane season

0:13:36.720 --> 0:13:40.040
<v Speaker 9>technically runs through November. But it's pretty rare for major

0:13:40.080 --> 0:13:42.240
<v Speaker 9>storms to hit that late.

0:13:42.600 --> 0:13:45.880
<v Speaker 5>Yeah, hurricane season officially ends November thirty, so we just

0:13:45.880 --> 0:13:48.240
<v Speaker 5>have to get through the next month or so. Matt,

0:13:48.320 --> 0:13:50.840
<v Speaker 5>if you have a mild hurricane season, does that mean

0:13:51.200 --> 0:13:54.439
<v Speaker 5>people's insurance premiums won't go up at that stay static?

0:13:55.640 --> 0:13:56.080
<v Speaker 8>Probably not.

0:13:57.160 --> 0:13:58.120
<v Speaker 2>That's pretty as.

0:14:00.200 --> 0:14:01.960
<v Speaker 8>Yeah, no bologna on that one either.

0:14:02.080 --> 0:14:09.960
<v Speaker 9>But yeah, and the issues behind home insurance haven't necessarily

0:14:10.000 --> 0:14:13.600
<v Speaker 9>been the large losses. It's been inflation and building materials.

0:14:14.200 --> 0:14:19.000
<v Speaker 9>It has been kind of poor regulation in certain markets

0:14:19.040 --> 0:14:23.520
<v Speaker 9>like Florida and California and causing reinsurance rates to go up.

0:14:23.880 --> 0:14:26.400
<v Speaker 9>So the things that are driving that hasn't necessarily been

0:14:26.480 --> 0:14:27.760
<v Speaker 9>these these large losses.

0:14:28.680 --> 0:14:31.320
<v Speaker 5>When is the next wildfire season or is there even

0:14:31.320 --> 0:14:33.200
<v Speaker 5>a wildfire season or is it kind of year around now?

0:14:33.320 --> 0:14:38.000
<v Speaker 9>Yeah, so in California there are times where the Santa

0:14:38.040 --> 0:14:40.640
<v Speaker 9>Ana wins are stronger. I don't have the exact dates

0:14:40.640 --> 0:14:42.760
<v Speaker 9>off the top of my head. There kind of are

0:14:43.040 --> 0:14:46.680
<v Speaker 9>seasons to it, but you know they could break out

0:14:46.960 --> 0:14:48.400
<v Speaker 9>kind of at any time.

0:14:49.280 --> 0:14:51.520
<v Speaker 2>How are they property and casualty socks doing this year?

0:14:51.600 --> 0:14:57.560
<v Speaker 9>Yeah, not great. So you know, despite the mild hurricane season,

0:14:58.160 --> 0:15:01.960
<v Speaker 9>good jumps and book value good are 's The fundamentals

0:15:02.000 --> 0:15:06.600
<v Speaker 9>are I think past the peak. So the valuations of

0:15:06.640 --> 0:15:08.800
<v Speaker 9>these stocks on a price to book basis usually peak

0:15:08.880 --> 0:15:12.880
<v Speaker 9>before they're ros. The ros have probably peaked. It's tough

0:15:12.880 --> 0:15:15.120
<v Speaker 9>to see. I keep saying it, and they keep kind

0:15:15.160 --> 0:15:18.360
<v Speaker 9>of incrementally being a little bit better, but it's tough

0:15:18.360 --> 0:15:21.120
<v Speaker 9>to see their underwriting get better next year. Interest rates

0:15:21.160 --> 0:15:24.680
<v Speaker 9>clearly are you know, at least going slightly down by

0:15:24.760 --> 0:15:28.320
<v Speaker 9>step by step. So the fundamentals are not great. Valuations

0:15:28.320 --> 0:15:30.560
<v Speaker 9>were high, so going into the year it was not

0:15:30.640 --> 0:15:31.560
<v Speaker 9>great for performance.

0:15:31.720 --> 0:15:33.320
<v Speaker 6>Does that mean there's going to be M and A

0:15:33.400 --> 0:15:34.000
<v Speaker 6>in this sector?

0:15:34.600 --> 0:15:35.080
<v Speaker 8>Probably not.

0:15:35.200 --> 0:15:39.040
<v Speaker 9>So the issue there is these companies have reserves, right,

0:15:39.080 --> 0:15:42.440
<v Speaker 9>so we write liability business for things that happen and

0:15:42.520 --> 0:15:45.400
<v Speaker 9>it could impact me many years in the future. What

0:15:45.520 --> 0:15:49.760
<v Speaker 9>has been happening is those losses from the past have

0:15:49.840 --> 0:15:53.560
<v Speaker 9>been higher than companies expected. So you'd be remiss to

0:15:53.560 --> 0:15:55.560
<v Speaker 9>want to buy another company and have this book of

0:15:55.600 --> 0:15:57.960
<v Speaker 9>business that could be worse than you expected. It's usually

0:15:57.960 --> 0:16:00.920
<v Speaker 9>the biggest obstacle to m and asrugs.

0:16:01.520 --> 0:16:06.200
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