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May 26, 2006

Never forget - insurance is just finance

Dear Friend,

As a broker just starting out in the London market, the first year is probably the hardest.

In these first 12 months, all your pre-conceptions are thrown out of the window (if indeed you are one of the few entrants to the industry to have any!) and your useful knowledge ascends an almost vertical growth curve from precisely zero.

Early into my second month on the job I traipsed into an underwriting room, probably bearing an impossibly cheap Spanish property risk, or a dull-as-ditchwater endorsement changing a schedule of Venezuelan co-reinsureds, to learn a very important first lesson.

The friendly underwriter duly put his button stamp down on the slip and started making polite conversation as we watched the photocopier do its thing.

“So, how are you taking to the world of high finance?” He asked.

I was taken aback — I really hadn’t thought of what I was doing as “finance” and, whilst I didn’t think it was a lowly occupation, I certainly didn’t regard any of what I was doing as particularly “high” either.

But as I chewed the idea over on the way back to the office, I concluded that finance was a pretty good description of what we were both engaged in.

If a man wants a house — without finance, he has to save up for most of his life before he can buy one outright. With finance he can have one right away and spend the rest of his life paying it off!

Not having been able to afford the house in the first place, the proud new homeowner now realises that he can scant afford anything bad to happen to the house —it’s his biggest asset, and the only thing standing between him and the insolvency courts.

He also realises that having entered into a 30-year mortgage, dying would probably be a bad idea too.

Thus the global (re)insurance edifice is constructed — on the twin pillars of Life and Non-life.

Now the conclusion of this amateur moral philosophy is only of value when you realise that if insurance is just another form of finance , it cannot exist in a mutually-exclusive bubble away from the wider financial world.

Once you realise this, you start to see that the idea that the insurance market does not correlate with other financial markets is an extremely dangerous one.

Hedge fund managers beware — if insurance is merely a form of contingent finance, it must be affected by the global markets as a whole. Everything is inter-related, it’s just that we don’t yet fully understand how the relationship works. Yes, it might end up that the reinsurance cycle is inversely correlated to bond markets fluctuations — but we can’t know with any certainty.

It is just as likely in the grand scheme of things that a perfect storm hits the bond, stock and insurance markets simultaneously.

Until that unlikely, but probably inevitable day, good luck with your high finance everyone.

May 19, 2006

Great minds think alike

Dear Friend,

Ask and you shall receive! Air an idea in this business and someone usually runs with it.

So, well done to Validus for taking up my idea of boosting capacity for excess wind cover in the Gulf of Mexico to take advantage of the storming deals you can do down there right now. I assume the cheque’s in the post?

Actually, when I say my idea, that would perhaps be stretching the truth a little.

Okay — it would be stretching the truth a lot.

My inspiration came from a one-to-one interview with Chris Clark, CEO of Willis Re speciality. I had been transcribing the interview tape recording when the business opportunity emerged.

Mr Clark’s suggestion was to start up in Lloyd’s to take advantage of its full ‘A’ rating and great distribution network as well as avoid the potential stigma that the ‘minus’ suffix can bring the start-up community.

He also mentioned that of the class of 2005 it was Validus that had probably made the biggest impact in his market. The full piece will be in the June magazine, so make sure you look out for it then — what Chris Clark doesn’t know about the marine reinsurance market is probably not worth knowing.

Still, hats off to Validus for getting tooled up with a $200m sidecar. What is really interesting here is that the backers, First Reserve Corporation, are not high-octane hedge fund managers, who might be into reinsurance one minute and coffee futures the next, but global energy venture capitalists of long standing.

These guys can spot an opportunity because they’re on the inside from the oil and gas exploration buyers’ perspective.

Still — $200m is a drop in the ocean — at the rate Validus has been doing business, this capacity could probably be fully deployed before the end of the month — so roll up for more!

Come on Brit — you’ve kept us waiting long enough, it’s time to get back in — (the water’s lovely and warm, too!)

But don’t let that put you off

May 12, 2006

The underwriter with no brain

Dear Friend,

Perhaps I’ve gone mad, but I’ve just had a cracking business idea.

Here’s the problem — the global retro market is in meltdown. I’ve just seen an analyst note showing that even Munich Re’s global retro programme is not fully placed and resorting to a high degree of co-reinsurance.

Now if the world’s most diversified reinsurer right at the top of its game can’t get enough cover, what hope is there for the rest of us?

Last week I pointed to anecdotal evidence that the class of 2005 start-ups had been unable to make inroads into this most problematic of classes because of their A minus ratings and lack of track record.

But now I think I’ve found the solution — Lloyd’s. Buyers have got to be happy — you’ve got a 300-year track record, an A rating and an overall solvency position that has improved year on year.

So who’s ready? I’m talking a 30-40% rate on line, with the benefit of a reinstatement, for writing in excess of a Katrina.

Now the latest boffin numbers call Katrina a 1-in-14 year event at worst, so at worst you’re writing a 7% risk for a 30% rate — but don’t forget you’re already sitting in excess of the worst loss ever and you get the first 60% of the loss covered by premium once you’ve taken the reinstatement into account.

And don’t forget that for Gulf of Mexico Marine energy, the underlying is completely transformed from last year — everything is aggregated up and sub-limited down.

This looks like a no-brainer. But the trouble with no-brainers in this business is that they cause you to doubt your sanity — we’ve had too many of these go wrong in the past.

But just because three big storms have hit the Gulf of Mexico oilfields in the last two years, that shouldn’t mask the fact that until then, storms had only very rarely gone that way.

So is anyone thinking what I’m thinking? (Or not thinking enough!)

At least pick up the phone to Rolf Tolle and see if he laughs you out of court – it won’t cost anything to ask.

May 5, 2006

Why did they bother?

Dear Friend,

No wonder we’re all confused — this crème brûlée market is developing a nasty habit of playing tricks with the mind.

For one thing I don’t understand the retro market right now. Ever since the turn of the year we’ve had tales of hardening, burning, peeling, cracking, flaking and finally crumbling in this most limited and difficult of sectors.

But the signals are massively contradictory — yes — the odd unplaced 1/1 is still floating around, looking for a home and later-renewing programs have been brought forward in anticipation of a capital crunch. Similarly, anyone with any spare capacity has been digging his heels in and upping prices left, right and centre whilst simultaneously pruning coverage back to the bone. I realise I spoke about this at length last week, so I won’t go over the same ground twice

Anyway, from here the logical script would be that this would be the ideal opportunity for the class of 2005 to step in and save the day — after all, filling the gaps in this sort of market breakdown is just what all that money was raised for last year.

But now we get to the really crazy part — the class of 2005 is not being used to the extent one would expect. The reports I have had are that buyers are wary of giving them meaningful shares of business, let alone letting them to quote and lead.

One broker I spoke to last week told me of his frustration at setting up a deal with a class of 2005 player, with extremely competitive pricing and wide coverage, only to see the new reinsurer’s security rejected at the last minute. No wonder the sidecar format is proving so popular because this way of doing things keeps everyone happy — cedents get to do business with the players of their choice and the players get the capacity they need.

But the fact is that buyers just aren’t buying in any volume at these prices — in crude terms, they’re either simply writing half as much for double the premium, or pulling out of Cat areas altogether. And who can blame them when investment returns have made an excellent rebound and all non-cat lines are still making bags of money?

It makes you wonder why the class of 2005 bothered.

And what the nascent class of 2006 makes of this is anyone’s guess

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