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October 2006 Archives

October 27, 2006

The Reinsurance time machine

Dear Friend,

Typical! Just as I hit the send button on last week’s email, the biggest news story of the year came flying across the wires — the Berkshire Hathaway-Equitas-Lloyd’s deal.

I expect you’re a bit tired of all the analysis of the transaction(s) by now — but it’s obviously fabulous news for Lloyd’s, Lloyd’s vehicles, older names and any potential new names or institutional players, who were worried about investing previously.

And presumably Ajit Jain of National Indemnity thinks it is a pretty good deal too!

The funny thing about this one is that some of us have been talking about it for so long, we thought it would never happen.

So when it eventually came through it ended up taking us by surprise!

Three and-a-half years ago I was the managing editor at The Fleet Street Letter, the UK’s longest-running investment newsletter. One morning I got a call from one of our regular contributors, Robert Miller. I always took Robert’s calls because his investment ideas had done consistently well for our readers.

At the time the newsletter had made 100%+ gains buy recommending readers buy a number of London-quoted Lloyd’s vehicles through the exceptionally hard market of 2002, so I was all ears for the next money-doubling tip to put before the investment team.

But the idea he pitched me, whilst being ahead of its time, was something our readers had no way of making money out of, so I politely declined. Undaunted, Robert got the article published in Reinsurance Magazine instead.

If you are a subscriber you can read the full text of that article here:

Buffett Lloyd's article 2003

And if not — here are some of the juicy bits:

“One intriguing possibility is that Berkshire might make a bid for Equitas, the company running off old Lloyd's liabilities. This is not as fanciful as it appears. In 2000 Berkshire made what could be seen as a trial run at such a takeover when it reinsured all of CGNU's old-year London market liabilities as the latter had decided to concentrate on life assurance“.
And what was in it for Berkshire Hathaway back then?

Here’s what Robert thought was the reason why:

“A mutually attractive deal might have the following characteristics:

The reinsured Names would receive reinsurance with a limit of, for example, £1.2bn (compared with the surplus of £700m) underwritten by one of the strongest reinsurance companies in the world. In exchange, Berkshire would have Equitas's bond market portfolio, which it could use in whole or in part to make the acquisitions of high-quality businesses that are such a feature of Berkshire's annual reports. Berkshire would also be able to obtain a higher return than Equitas's large bond market portfolio.

Berkshire is perhaps one of only two or three reinsurers that have the combination of size and balance-sheet strength to contemplate such a deal”.
Fast forward to today and the names have eventually done much better than what Robert envisaged.

Do remember where you read all about such things first!

October 20, 2006

Fancy a change of career?

Dear friend,

I’ve been looking for a new reporter for three weeks — and am getting beyond the mildly frustrated stage and spiralling inexorably into the tearing what is left of my hair out stage.

I’ve only had two candidates for the position and the dearth of talent has to be seen to be believed!

I thought journalism was the sexy career option that had young people beating down the door to sign up to, but I must be out of touch. On this showing it must be right down the pecking order along with refuse collection and, (dare I say it?) a career in insurance!

The gap between reality and perception is rarely laid so bare — it’s such a disappointment.

Résumés brimming with ‘Young journalist of the year awards’ on paper, in the flesh reveal lumpen and turgid mounds of inanity and inexactitude, who don’t look like they would be able to tie up their own shoe laces without parental assistance.

So I’m going for a radical solution — as a former broker I know how good the best can be at presenting often complex information. So I wonder if any of you out there felt like a change of career?

Why not swap doing reinsurance for writing about it? Broke some information instead of stressed risks?

The money is not quite so good, but the job satisfaction is tremendous.

Plus I guarantee you will never:

Get called by a client wanting to know why his claim has not been paid
Get called by a reinsurer wanting to know why his premium has not been paid, his line has been signed down, or why on earth his security is not acceptable in Botswana!
Have to argue about the price of beans or worry about another potential E&O again.
You get my drift — you always get to cut out the dull day to day stuff and cut straight to the interesting bits.

So those able to work in the EU who can write well in English — please hit reply now.

You know you want to!

October 13, 2006

You just can't help some people

Dear Friend,

Here’s a strange story that happened to me yesterday.

I was on the London Underground on my way to a meeting and a tourist was looking particularly lost and bewildered.

No surprise there — with its many branch-lines, offshoots and an insistence on anachronistic idiosyncrasies such as “Northbound Northern line” and “City branch”, it is no wonder the average outsider is at best slightly confused by the UK’s capital’s mass transit railway.

And that is when everything works, which of course it rarely does.

Like driving on the left hand side of the road, or three-year accounting, it just seems another example of the British being different for the sake of it.

Anyway, the lady tourist in question was on the platform, listening to the disembodied voice that was coming out of the ironically-named “Help point”, trying to decipher the incomprehensible advice that it was spewing out of its tinny loudspeaker.

The crackling voice stopped as I passed and she turned to me for assistance with a plaintive gaze.

I just seem to have the sort of helpful face that acts as a magnet for lost souls.

There is rarely a day goes by that someone doesn’t ask me directions or even simple advice about what central London has to offer them in the way of eating, shopping or entertainment experiences.

I suppose people choose me because I look like I actually like helping.

Anyway, I asked very clearly where the lady needed to go, listened to her answer (she wanted to go the Barbican Arts centre) and explained slowly and clearly that she needed to get on the next train and stay on it for five stops.

I added that I’d show her where she needed to go when we got there because that happened to be my stop anyway.

The train came. We got on and she thanked me profusely.

I sat down and opened my paper, perhaps slightly smugly, but happy to have been a help.

The train stopped at the next station, the doors opened, she thanked me again, got straight off the train and wandered off down the platform.

I and other members of the carriage called out, but it was too late — the doors closed and we were off.

The old gentleman opposite me smiled — “some people just can’t be helped,” he said with a sage grin.

And he was right — this lady was destined to get lost in London whatever I did to help — I shrugged and smiled.

I smiled even more when I thought about the Barbican Arts centre. It is a hideous maze of some of modernist architecture’s worst practical jokes — in all their 1950-60s rampant post-war glory. Its six floors and various mezzanines somehow house art galleries, a library, a cinema, a concert hall and a theatre, amongst many other attractions.

Even in the unlikely event this hapless soul found her way to her intended destination, she would soon be lost again within the cavernous concrete bowels of what is effectively a multi-storey car park for culture vultures.

Sometimes I feel that the reinsurance market is a bit like this happy-go-lucky London visitor.

I mean we too often stumble around from event to event. We are not driving the train and rarely know quite where we are going or exactly how we are getting there.

It is also probably true that many of our numbers are also beyond help — forever condemned to repeat our mistakes, miss our stop and have some explaining to do when we eventually get home.

As the next soft market gathers steam, do make sure you enjoy the ride!

October 3, 2006

Make sure you're near the door

Financial analysts, especially those who are independent and who live or die by the perceived quality of their research, bring an enormous amount of value to our industry

With so many in-house researchers paid to toe the party line, attempting independent thought about the reinsurance sector can be a lonely occupation at the best of times. So, imagine my pleasure when a kindred spirit appears on the airwaves

The research firm in question is Keefe, Bruyette & Woods, and the analyst is William Hawkins. Here is the opening paragraph of Mr Hawkins’ postcard from Monte Carlo:

“This time last year, many hailed Katrina as a global pricing event and sought rate increases across the board. That has not happened, and while ‘soft market’ has rarely been uttered, few would argue that rates outside of US property/catastrophe are going anywhere other than down. This may prove pessimistic, but our conclusion is that this Monte Carlo is giving the first top-down sell signal for reinsurance shares.”

Luckily, Mr Hawkins has the luxury of having a job where he gets to tell it like it is. He is subject to the ultimate monetary discipline by which his success or failure can be measured: whether or not his readers outperform the market. Therefore, poor Mr Hawkins has a much tougher job than I do. But let’s get back to his wise words: “However, life is never that simple, and while competition is healthy, absolute returns — such as they can be judged — appear good. The kind of price competition discussed below can easily, in our view, be lost in the rounding of the large companies and still allow them to post positive earnings surprises

“At this stage in the cycle, reinsurance shares should be trading at peak multiples and hence are vulnerable to this kind of news flow. However, the multiples, in our view, remain depressed, meaning that the likely earnings evolution could still drive an out-performance of key global players over the next 12 months.” He’s absolutely right — reinsurance shares are on paltry ratings — these days even cigarette makers, ports and utilities are more beloved by the wider investment community. But that wider investment community has evolved beyond all recognition since the last peak in valuations for reinsurers back in late 2000. It is playing a much different game, with private equity and hedge funds having multiplied in size and influence since then

Now, instead of looking to buy the shares of a mono-line catastrophe writer as an investment play on increased catastrophe rates after the worst year for catastrophes on record, institutional investors are just as likely to entrust their money to a hedge fund that then goes and sets up a sidecar, or to a venture- capital fund that bankrolls a start-up

Perhaps it is this phenomenon that explains some of the lowly valuations we are seeing at this stage in the cycle — or maybe the investment community has just finally become more savvy to the reinsurance industry’s historically poor track record? Better still, some in the investment community may have gleaned a better understanding of the pricing cycle itself, and know that now is precisely not the time to bid up the industry’s stock

No less a figure than David Spiller of Guy Carpenter hinted as much when he explained how today’s breed of capital providers are much more knowledgeable about our industry than they were in the past

Either way, today’s investors seem as happy trying to beat reinsurers as they are joining them, and see no reason to give reinsurance shares a premium rating — hence Mr Hawkins’ view that for the best players, there could still be a bit of unexpected extra juice to come on the upside. I believe this is highly probable — after all, we are constantly being reminded that underlying terms and conditions are still holding up strongly, and we are starting from an excellent base

Reinsurers have also spent the last four years rebuilding their balance sheets — they have been so successful that that the reserving adequacy gap has now almost been closed. We may even soon be in a position some time next year where technical reserve adequacy is a reality for the industry

As such, the last factor underpinning overall price discipline will have been removed and competition will intensify. At the margins, savvy capital will exit, and naïve capital will overstay its welcome and make the soft market more intense than it perhaps might have been

I’ll leave you with another of Mr Hawkin’s words of advice: “The party is far from over, but make sure you can see the door.”

Editor's blog, photo of Mark Geoghegan

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