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See you down at Goldman Sachs

Dear Friend,

What a week! It seems we had all been deluding ourselves that we’d had all the news we were going to have from Katrina and that things might settle down for a while. But it just turned that it was the relative calm of the eye of the hurricane passing over us — and this week we got the full blast again.

On Monday and Tuesday I was starting to wonder why it seemed that everyone was raising capital when up to that date everyone had been swearing blind that Katrina was not a capital issue, but merely a hit to the 2005 profit and loss account.

When ACE said it wanted its new cash for exploiting new opportunities I was thinking “hang on a minute — WHAT opportunities exactly? Everyone’s been saying that there’s still too much capital sloshing around, so what do you need more for?”

But today I know why — Katrina is going to be a lot worse than we all feared and quite apart from balance sheet repair, it looks increasingly like the powers that be in the ratings world are going to require everyone to carry more capital for doing the same job as before. It’s a stitch in time to make sure the rating can stand up into the renewal season.

First a look at quantum — the only way is up for damage estimates. All the news is of increases and plenty of estimates have more than doubled from that great rash of early statements around the time of Monte Carlo. What’s more, Aspen gave us a peek at the state of its retro protections — and it’s not pretty.

And some markets are losing their nerve— we’ve had one temporary withdrawal from business pending a review and one reinsurer looking for such a significant capital injection that it may mean a possible outright sale. To my mind there is no such thing as a temporary withdrawal a line of business at this time of year — you’re either quoting renewals or you’re not. And if you’re not quoting or committing to renewals through November, your brokers and customers are unlikely to let you back into the game at some future date, even if you eventually decide you want back in.

What’s more there are plenty of indications that the rating model for the Gulf of Mexico has been thrown out of the window by reinsurers and their raters alike.

This has been the dialogue:

Bang! – “losses are worse than we thought”. Wham! “Possible downgrade” – Bang! “Capital raising” – Wham! “We still might downgrade you anyway!”

Thank goodness that Wall Street is ready willing and able to fund all of this.

So I’ll see you down at Goldman Sachs, Citigroup, Lehman Brothers etc. And here’s a sobering thought — if enough of us go, there’s still time to nip this possible hard market in the bud!

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