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April 2007 Archives

April 27, 2007

The Switzerland of Europe

Dear friend,

The Scorverium battle rumbles on and descends into an increasingly bitter struggle.

Scor’s element of surprise has gone, the precision-guided missiles have been used and heavy armour has become bogged down. So it has been left to the troops to fix bayonets and wade into bloody hand-to-hand combat — it’s not pretty.

Suing your potential future employer is probably not the best way to endear yourself to them, and hinting at a mass exodus if the deal does go through is probably also not such a great idea either. But that’s brinkmanship for you.

A few years ago a threat of a mass Zurich exodus might have been met with howls of derision — after all, where would they all go to except Swiss Re? But these days Zurich airport arrivals lounges are crammed with Bermudians and Londoners on the make —— and why not?

What a fantastic domicile! If Bermuda is the Switzerland of the Americas, and Singapore is the Switzerland of Asia, Switzerland must surely be the Switzerland of Europe!

A pool of talented experienced people on your doorstep, solid regulatory structures, sound government, stable currency and great tax regimes. It’s in the EEA but is unhampered by the EU and is located right in the middle of western Europe, with good transport links in all directions, including by air — what more do you want?

So this threat is real and tangible — all the recent transatlantic Swiss arrivals must be licking their lips at the prospect of poaching whole teams, as the uncertainty ascends and is compounded exponentially by a protracted battle.

Analysts have often opined that Scor is in the driving seat on this deal because its shares are as richly valued as its target’s.

So what about this for a final speculative twist?

The final poison pill that Converium hasn’t yet tried is a takeover of someone else. If Converium’s shares are so richly valued that a class of 2001 player can’t come to the Alps then why shouldn’t the Alps make the round-trip themselves?

That would be the ultimate defence, wouldn’t it? Buy something else to make you too big to be bought. Aspen, Axis, Arch, AWAC — or take your pick of many others that don’t begin with the letter ‘A’— none of these guys would be a bad fit, would they?

Many have told me in private that Scor is only trying to pull the same trick anyway!

(Enough silly, feverish speculation!)

April 25, 2007

The kings of R/I TBA

Back in the old days, I was an anything-and-everything odd-job man working in the London office of the largest broker in Spain.

We participated fully in our parent’s profit-and-loss and had a remit simply to provide the best possible quality of service to our customers. No risk was too big or too small; if we were asked to do something, we did it, and we didn’t ask questions about minimum brokerage.

If someone wanted a rain cover for a tiny fiesta in Southern Spain, worth two rows of beans and a chorizo, we were quoting — no matter how much it ended up costing us to service the business.
The customer was always right (and, of course, if you dug deep enough, he was usually the 2nd cousin of the risk manager for Iberdrola, or Cepsa, or the Banco Santander!)

We did have a few decent big liability, professional indemnity, personal accident and bankers’ blanket bond accounts, and always made money somehow. But strangely enough, by our customers, we almost never meant the Spanish insurance companies that we purported to serve.

Our true fac client (and often own worst enemy) was almost always our retail arm. We were the kings of the ‘Reinsured TBA’ slip — after all, the well-run local markets that could quote (and whose treaties we salivated over) were usually in competition with us. Our fac ‘clients’ tended to be smaller outfits keen to semi-front deals for us.

They would retain an amount that appeared respectable (and hopefully avoided anything too punitive on the claims-control front), and took a healthy 7.5% ceding commission into the bargain.

We would do the rest. Okay, we stitched them up good and proper — but then it was our original business, not theirs. For instance, if someone in Seville had an inkling that a piece of business would be quoted in London, he didn’t waste his time with the locals, who would only go and put 10 different competing reinsurance brokers in the market to muddy the waters — he sent it straight in to us, probably via Madrid or Barcelona.

The ultimate client got the same price and no time was wasted — naturally, we also handled claims quicker and better this way, as we got the info right from the horse’s mouth.

Nowadays when I hear that this ‘tying’ of business is largely frowned upon, if not prohibited altogether, a small part of me wonders that, provided we have the right controls in place, we won’t go back to working in this way again at some point in the future?

I know we need to know our customer and avoid conflicts of interest, but after all, what’s wrong with a bit of joined-up thinking every now and again?

April 20, 2007

Take the tea-bag test

Dear friend,

Here’s a bit of educational fun — a little English Test for you

Read the following passage, inwardly digest and then decide whether it comes from a ratings upgrade or a ratings downgrade.

(Quiet at the back, and no cheating) – you have two minutes:

The ratings on XXXX reflect its established competitive position, seasoned management team, very strong capitalization, track record of resilience to major loss events, and historically strong operating performance in absolute terms.

….XXXX's strong overall competitive position stems from its underwriting expertise, particularly within the property catastrophe arena, and the relative longevity of the relationships it enjoys both with its clients and intermediaries.

….The company has enjoyed a stable senior management team since inception

XYZ agency believes the broad experience of the company's management and underwriting staff are a positive ratings factor

XXXX's capital adequacy ratio, based on XYZ agency's risk-adjusted model, was extremely strong for the financial year ended Dec. 31, 2006

Capital was bolstered by the very strong earnings reported by the group during the year. Quality of capital is high, with minimal reliance placed on the so-called soft components of capital. The overall assessment of capitalization also benefits from the minimal tail risk attributable to the group's loss reserves

Easy wasn’t it? Except that these comments come from a downgrade, not an upgrade!

Of course I have cheated a good deal with a bit of sneaky editing, but it does seem a rather astonishing use of language. “Damning with faint praise” is an expression that springs immediately to mind.

No prizes for guessing here that the quotes I have used come from today’s downgrade of IPCRe by S&P, a move that leaves the veteran property cat player languishing on the unloved A- shelf.

But having read all the above it just doesn’t seem fair, does it?

I know S&P don’t rate start-ups, but presumably if one day they did decide to follow AM Best down this road, the A- rating would be the one it would award the fresh-faced newbies with the serviced offices and the big cash deposit in the Bank of Bermuda.

Why should a company that has succeeded for so long and is so well run and so well capitalised that has an improving capital position share a notional rating with a company with no track record and no customers?

After Dennis Emily Katrina Ophelia and others had done their stuff in 2005 and IPCRe peers Montpelier Re and PXRE had posted some massive loss numbers, I remember scanning through an issue of the magazine and my eyes rested on an IPCRe advert.

The ad was a picture of a tea-bag with the slogan “You don’t know how strong it is until you put it in hot water”. I though to myself “We’ll soon see, won’t we, IPC?”

Well, the industry got a right old scalding in 2005 and IPCRe came through with flying colours.

The firm made such a strong cup of Rosie Lee, you could stand a spoon up in the stuff!

I thought there was a move in the ratings community to put more emphasis on less tangible company bits and pieces, like management, ERM, client base and competitive position. And Fitch wrote a great paper a while back on why diversifying for the sake of it shouldn’t necessarily be given automatic credit.

The ratings community really is sometimes its own worst enemy. Much more work is needed to explain the rationale here — and the timing is weird too, don't you think?

April 5, 2007

No more Integro jokes

Dear friend,

“Whether the subject is reinsurance or insurance, wholesale or direct, we’ve created a collaborative, flexible yet robust platform freeing our brokers to focus on serving clients without the organizational constraints and interference that are commonplace in today’s broking business.”

These are the words of Peter Garvey, Integro president and COO — quite a quote, and something I’m sure many entrepreneurial brokers feel the same way about in today’s box-ticking corporate world.

He was speaking after confirming that he had managed to lure the dynamic duo of Ron Whyte and Julian Samengo-Turner away from Guy Carp’s GC Fac division to head up a London-based international/Fac operation.

The funny thing is that I know Ron from a million years ago when he was boss of the Johnson & Higgins London property team and I was a (very) junior broker working at Gil y Carvajal, J&H’s Spanish partner in the now defunct Unison network.

And as editor of Fac I have interviewed the Ron and Julian show on numerous occasions — (including a short-lived web-streamed interview) — they were always disarmingly frank — with hindsight perhaps a little too frank for a global multinational like Marsh!

Well, they’ll certainly be given a free rein to do what they want now — you can’t get a freer corporate environment than a start-up. Good luck Ron and Julian — free at last.

Check out the interview from our inaugural issue of Fac a year ago.

It’s quite a souvenir issue these days — Ron, Julian and Elliot Richardson — none of them are in the same place any more!

Hiring these two and other members of the global GC Fac team will give Integro a leg-up into high-margin reinsurance business at a time when everyone I speak to in the market is saying that they think they are struggling to make an impact in a highly competitive area.

And everyone knows the uphill struggles of Benfield’s corporate risks division are written in red all over its results

Until today Integro was a bit of a multi-million dollar market joke.

Now nobody is laughing any more.

Happy Easter

PS. I’m on holiday with my family next week — but I’ve convinced Mairi MacDonald to keep you company while I’m away.

April 4, 2007

Dynamic duo?

Dear friend,

I hate management presentations, with all their stupid organo-grams and pie-charts. Give me straight talking any day.

So I had fun reading through Scor’s “dynamic lift” project. There are enough circular flow charts in there to make even a blind man dizzy.

You too can have the same fun checking through it all — but in case you start to feel a little light-headed, here is what analysts at Keefe Bruyette and Woods had to say about SCOR’s projections.

“SCOR has indicated that the 13% return should be achieved without capital repatriations beyond ordinary dividends. It has also stated that Converium's own standalone target of 14% is too ambitious … we believe SCOR would have to achieve a 15-16% RoE on a standalone basis to get to 13% pro forma if Converium hits its own targets. If Converium is weaker, SCOR must implicitly have a standalone return that is even higher.”

Now for the coup de grace:

“We find the numbers very difficult to square without assuming returns in SCOR that are out of line with the wider reinsurance sector.”

Well now that a formal tender offer has been tabled and the clock is properly ticking, it’s up to you to decide who's right.

Personally, both targets look ambitious to me, but then what do I know?

After all, I’ve already admitted that management-speak charts give me a headache!

Editor's blog, photo of Mark Geoghegan

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