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Six steps to ruin

Dear Friend,

Wow, that PXRE news was a bit of a shock!

I hope it all works out well for everyone, although I personally can’t see any easy way out of this. I don’t think capital-raising is an option any more — about $800m has already been raised.

And outright sale is hardly attractive — who wants mercurial loss reserves and a B rating?

Potential buyers can just wait for to get offered PXRE’s business as ratings clauses trigger mid-term cancellations on policies on which the ink is barely dry. And of course, the timing is dreadful for selling renewal rights. It’s too early to say that this is the death of the monoline model – because there is no corpse as yet — but the sad fact is that we won’t have to wait long to be put out of our misery.

But something else is on my mind that is bigger than the loss of a relatively high volatility Cat reinsurance specialist.

Now that the renewal season presentations are almost all in, let me run you through a series of quotes — not my words, but those of the captains of your industry:

1. “There has been no giant tidal wave of rate increases around the world”

2. “The speed of new money to the market was unprecedented, so we were very realistic in that, other than the US coastal areas, what would happen rate-wise. And what we expected happened.”

3. “The start-ups made a minimum impact”

4. “Heightened competition was noticeable”

5. “…Investor expectations for double-digit returns run high. Should the currently perceived market opportunities in property not be significantly realised, the companies that received much of the new capital that recently flowed into these markets might be forced to find alternative strategies”.

6. “There was a knock-on effect of previous monoliners desperately seeking diversification”

Now let’s run through all this — so what we are saying is:

This is not a hard market…

It can get softer…

If the class of 2005 starts deploying its capital it can happen at a speed that takes everyone by surprise…

The competitive pressures that became obvious in late 2004 never really went away…

Be prepared for a bloodbath in all non-cat classes if there is a hurricane. Now for the scary part — be prepared for a bloodbath in all non-cat classes if there isn’t a hurricane!

That fist fight for non-cat market share is already underway in many long-tail US classes, — how long before it goes global and multi-class?

The conclusion must be that the nascent soft market stayed with us all along — and like all proper soft markets, we will only truly notice it is upon us when it is too late to do anything about it!

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