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February 2007 Archives

February 26, 2007

More soft market stuff

Dear friend,

So XL are going to authorise a billion dollars of share buybacks.

Okay it’s only a drop in the ocean – but we’ve already had Munich Re go for this, but since then we've had the Scorverium move. Soon we’ll be looking at a major trend (just as we predicted).

And look at the timing – XL’s last facility is coming up for its seventh birthday — talk about blowing off the cobwebs!

In fact it’s like the beginning of 2005 all over again. If my guessometer is working correctly we should be looking for a big slug of equity to be returned from one of the more profitable class of 2005 before long.

Ah, that heady first half of 2005 —when the class of 2001 gave back big bucks.

Hang on a minute — remember what happened in the second half?

Let’s not go there!

February 23, 2007

WOW - a little sting in the tail

Dear friend,

Here’s an ironic twist that shows just how much of a good sport our industry really is.

RenRe is one of the companies with most to lose from the extraction of approximately $2bn worth of reinsurance business because of the planned expansion of the Florida Hurricane Catastrophe Fund.

But do they throw their toys out of the pram? No way.

In fact they’ve just announced the continuation of their support for lab testing of wind damage down at the International Hurricane Research Centre.

Its going to be called the RenaissanceRe wall of wind – or WOW, to its friends.

And its in Florida!

Hardly the unacceptable face of capitalism, is it?

RenRe will be clearly be back when Florida is good and ready

Sidewalk analysis

Dear friend,

Here we sit, professional observers of the global reinsurance industry.

Like cheap tourists in a Parisian café, we repose, tenderly eking out our coffee and anisette and watching the world go by.

Like aging uncles, we occasionally tut, tut at the foolishly optimistic exuberance of youth on display, but smile benevolently as we are reminded of our own long-spent passions and follies.

And like quack doctors, we trap a vein and listen to the industry’s lifeblood coursing below, hoping the sound will tell a story to aid our diagnosis.

What a colourful and happy world it is we inhabit — we know we are privileged and humbly serve.

Here’s this week’s diagnosis and prescription:

The life-affirming tip of the week has to be German-speaking run-off. There’s gold in them there defunkten policies — according to KPMG it turns out the Germans, Swiss and Austrians have been harbouring €66bn in non-life run-off business. Apparently their non-life liabilities in run-off make up about 19% of the market – the same proportion as found in the UK.

Now I had always thought that the UK, and the London Market in particular, had earned its reputation as run-off capital of the world because we were global experts in the sort of insane underwriting that lead to run-off in the first place!

It is therefore heart-warming to find that venerable old Europe is just as doted in this area. Although we are tinged we sadness as we see yet another of London’s perceived unique selling points eroded.

At the moment these guys keep the lion’s share of business in-house to protect relationships, but apparently all that is set to change with the onset of solvency II. Time to get on the plane.

I’m sure Bermuda and the US will all present similar opportunities for UK teams to export their expertise — and how about France, Holland and Italy for that matter?

Mark Geoghegan

PS. By the way, the consensus is that SCOR will win the Converium battle and that no other bidders will emerge. Of course, bitter experience suggests such thoughts are usually the signal for a frenzied bidding war!

But there is plenty of logic involved here — no old Europeans are in the mood and the classes of 2001 and 2005 are too small (sorry I got a bit excited earlier in the week). That leaves the big Bermudians — but since SCOR has already got almost a third in the bag and can easily up its offer, no-one is likely to have a go just to make Mr Kessler overpay.

But then, soft market takeovers are hardly ever about logic, are they?

Garçon, du vin!

February 19, 2007

On the plane to Zurich

Dear friend,

All the equity analysis I have read about Converium in the last six months keep saying that the shares are a bitty ‘toppy’ – and that this is due to a bid premium in the price.

Well, here’s proof that the market usually gets things right — Scor has made its move and as far as investors are concerned, Converium is in play.

The shares opened a little above Scor’s bid price on the move — which means that the money thinks that either another bidder will enter the race, or Scor will be forced to up its offer.

Whenever I gossip in the market the most touted ‘good fits’ for a tie up with Converium the names that always come up are Bermudian class of 2001 players, Arch and Axis.

They have the US business and the long-tail expertise and would get instant diversification of the type that would take an extremely long time to grow organically.

But hang on a minute, maybe they don’t need to bid?

If Scor eventually takes Converium out and treaties where Scor and Converium both have shares are redistributed in the sake of diversity, our Bermudian friends might find themselves being offered shares on grand old European business that they wouldn’t have dreamt of being shown prior to the deal

I await ‘as if’ research on this.

But as Swiss Re research recently confirmed – merger and takeover activity usually has the net effect of taking capacity out of the marketplace — and creating opportunity for other players.

Whatever happens its time to get down to Zurich — it’s all up for grabs.

February 16, 2007

Great Minds think alike III

Dear friend,

Great minds certainly do think alike —don’t they?

The news that Carvill has teamed up with the Chicago Mercantile Exchange (CME) to market US Hurricane Cat futures and options is certainly evidence of that!

The move comes incredibly soon after the Gallagher Re-Nymex announcement , and the bonds will start trading only a week later on 12th March.

I’ve spoken to and met the people behind both of these developments in the last two weeks and am mightily impressed.

What is heartening is that the two sets of contracts are different from each other and should compliment each other rather than slit each other’s throats in the race to build market liquidity.

The key numbers the Gallagher Re contracts trade against are annual property losses from named perils in certain US territorial zones whilst the Carvill ones are based on the size, radius and intensity of the next landfalling hurricane to hit each zone.

The Carvill ones will settle 3 days after a hurricane makes landfall — how’s that for a speedy claims settlement?

So it’s a question of you pay your money and you take your choice — of course, both contracts will contain basis risk (which is the “oh darn” risk of buying a load of contracts, sustaining a heavy loss and the contracts not paying out).

But talking to the brains behind this, one thing that emerged was the impeccable chain of security involved in laying off risk through an exchange. If you buy through a broker, you get the broker’s security, plus the exchange’s — and these exchanges hold billions in cash in the form of margin calls. It’s pretty safe.

All we need to do is sell “wrap” covers to take the basis risk away and we’re really in business.

Anyone want to step into the breach on that one?

February 9, 2007

Andrea, Barry, Chantal, welcome to the party

Dear friend,

What a busy week for superlatives — bumper results, record results, cracking results, superb results, vintage results… exceptional results.

The poor old thesaurus got a real work out this week as the 2006 results season got underway — they are uniformly superb — just as we expected.

Or just as we feared.

With burly vigour, squadrons of pristine numbers bounded out and knocked analysts estimates for six, (or a home run, if you are so inclined). Our industry is basking in glory as an aura of invincibility descends. Our cup runneth over.

No wonder the guys in the shiny suits down Florida way have got it into their heads that reinsurance is one long swell profits party and have decided to take away the punch bowl before things get too crazy.

Hey, this reinsurance game looks so much fun that they might even lace the hooch with a bit of old Cuban rum and take a swig themselves. Why do the aliens have to hog the party? And what did they ever do for us anyway? They can party somewhere else.

But don’t get the cigars out just yet — there are some gatecrashers at the door — some good time girls for sure, but they can get wild if you cut them too much slack.

There names are, Andrea, Chantal, Erin, Gabrielle, Ingrid, Karen, Melissa, Olga, Rebekah, Tanya and Wendy.

It’s a crying shame, but they’ve brought some guys too – here’s the full uninvited guest-list.

Cut the music, turn up the lights, brew up some coffee!.

February 6, 2007

Spot the deliberate mistake

Dear friend,

The great Florida flim-flam rumbles on…

Check out this article in the St Petersburg Times by Christopher Kise who is a counsellor to Gov. Charlie Crist.

Reforms mean insurers compete

I don’t want to spoil the surprise for you, but it made my blood boil. Suffice to say it is a puff piece about how great the new Governor of Florida is and how brilliant he is at commanding the winds, the seas and homeowner insurance premiums to abate.

But spot the deliberate mistake in the following passage:

“Faced with mammoth rate increases and the realization that, like it or not, Florida was already in the insurance business, Gov. Crist chose wisely to lead the state in a new direction.

“Under the new law, government displaces to an extent and for a limited time the overpriced, highly profitable private reinsurance market. Far from an abandonment of the free market, this responsible solution both lowers rates and induces free-market competition…”

The overpriced, highly profitable private reinsurance market.

The audacity and outrageousness of the statement takes a while to sink in, I say again;

The overpriced, highly profitable private reinsurance market?

Which highly-profitable reinsurance market is that?

Is that the same reinsurance industry that overall has struggled to return more than cash over a 20-year period? Or the same reinsurance industry that will have shouldered a large chunk of Florida’s $36bn in losses of the last 3 years? Or the same business that has shares of its leading incumbents trading on lowly single-digit PE ratios?

So Florida realised it was in the insurance business — well low and behold, now it is in the reinsurance business too!

Good luck to Florida — it looks like it is going to need all it can get!

February 2, 2007

Madman solves Florida problem in 3 minutes

In the grand tradition of mad dogs and Englishmen, after yesterday's blog I decided to solve “the Florida problem”.

I went to the office kitchen, made myself a cup of tea and sat down.

Three minutes later I cooked up a plan.

Here’s the problem:

Those pesky hurricanes are spoilin’ the party down in Florida.

(To the tune of about $36bn in the last 3 years).

There is a “crisis”. Governor Crist says so, so it must be true.

The problem from Crist’s point of view is that those nasty reinsurer types seem to be charging an awful lot for their service and are forcing the few remaining insurers who still haven’t already high-tailed it out of the state to file for hefty price increases to consumers.

These consumers have votes — and they don’t like it.

His solution is to double the Florida Cat fund and halve its deductible and effectively knock the nasty reinsurers out of the game. Insurers can now charge less and the voters get cheaper insurance — yippeeyayay!

The only flaws in this plan are that the Florida Cat fund doesn’t actually have the money to pay a loss (it will somehow fund the loss ‘after the event’) and the move is temporary — it will all expire in a couple of years anyway.

When the deal expires, the reinsurance market is supposed to come waltzing back into town, sweep Floridian insurers off their feet and ride off into the sunset.

This is of course a great fantasy. Reinsurers have borne massive losses, just like the insurers, but they are being made out to be the villains of the piece — the unacceptable face of nakedly greedy capitalism.

Here’s my half-baked idea:

If the problem has been identified as a reinsurance one, why not subsidise and incentivise reinsurers to come to Florida?

Instead of subsidised reinsurance, how about cheap retro?

How about the biggest sidecar in reinsurance history, offering quota share capacity to all and sundry? Better still, how about only giving the deal to reinsurers who come and domicile in Florida? (maybe as a tax-exempt vehicle?).

This should have the same effect on the voters’ premiums, and at least when the Cat Fund deal ends, reinsurers will still be around!

I’m not saying this is the solution — after all I only spent 3 minutes thinking it up.

But surely it makes a lot more sense than demonising an industry that you are going to end up calling upon for business in a couple of years time?

February 1, 2007

Pyongyang, Fla

Dear Friend,

Check out Governor Grist’s open letter to his insurance commissioner Kevin McCarty explaining why he is invoking emergency powers to impose an insurance rating freeze and a moratorium on non-renewals.

The rating freeze is one thing, and I’m no contract lawyer, but surely forcing fixed-term contracts to be renewed is illegal?

It takes two to tango. An insurance contract needs two willing parties, a consideration, a promise to indemnify, as well as an agreed timeframe.

The contracts that the Floridian insurers entered into had expiry dates and these must be honoured. The ultimate sanction for any (re)insurer is the ability to walk away from a disadvantageous deal. The same goes for the client – they can walk away if they find a better deal next year.

Such a right cannot be removed at the stroke of a pen, however it is dressed up.

“Come to sunny Florida! The land where you can’t set your own prices and you can’t even walk away from last year’s deal!”

What’s next? Price controls for gasoline, or bread?

How about medical costs or college fees? They’re always going up by more than inflaton.

All industries use contracts — if you stop honouring them, you’re on the way to becoming a basket case.

Our new reporter, Mairi Macdonald has just walked in from a political risk seminar. It was about Nigeria Russia, India, China, Venezuela — all the usual emerging market suspects.

I asked her if anyone asked anything about Florida?

I’m cooking up my own solutions to the Florida crisis. I’ll let you know when I have them clearer in my head.

Editor's blog, photo of Mark Geoghegan

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