Dear friend,

Forgive the upbeat but kitsch title of this communiqué, inspired by the long-running hit West End ABBA musical, Mamma Mia, opposite which we hammer out our daily toil here in London.

We’re also right next to a famous London stand-up comedy venue — the Comedy Store.

And at times sitting here, observing the reinsurance world swagger by, we do sometimes feel sandwiched between something slightly in poor taste and something funny.

We usually don’t know whether to laugh or cry.

Here at Reinsurance towers we observe that all great tragedies begin first as drama, and slowly descend into comedy and farce.

What’s brought all this on?

Well it seems slightly kitsch and farcical that, when after almost six years of arguing only now is a final settlement being reached for the World Trade Center loss of 9/11 2001.

And that comes with the personal intervention of the Governor of New York.

Only, just like the Charman divorce settlement, it isn’t over, is it? No sooner had the deal been announced than Scor said it was going to put its reinsurance of Allianz into arbitration. Still no rest.

They key argument is whether 9/11 was one event or many events?

But surely it would seem obvious to any right-thinking person that it was more than one?

After all, a different aeroplane crashed into each building separately — how much more independent an event can you get? One tower didn’t knock the other over, or burn the other down, did it?

And the aviation hull losses had to be paid as separate events, didn’t they? No-one in their right mind is going to contradict that.

But good old Money, Money, Money steps in and muddies the waters.

But I put this to you — what if on that fateful day, Mr Silverstein was also the proud new owner of the Pentagon, a couple of hundred miles to the south?

Could you seriously argue that this third plane crash was part of the same event, even though it occurred in another city entirely?

Our industry, so often content to sit around congratulating itself on how wonderful it is in times of crisis, needs to look at this and then look hard at itself in the mirror.

There should never be anything wrong with buying an event limit for the top location on a global property insurance programme.

Mamma Mia!

Dear friend,

It was over a year ago that I appropriated a phrase I had read in a Benfield report describing the state of the market in terms of a crème brûlée dessert. The general idea was that the market was hard in loss-affected US coastal and Caribbean areas, but was pretty soft underneath.

Well, that was then and this is now.

Fifteen months later and the latest piece of literature to come out of Benfield demonstrates a culinary metamorphosis worthy of the finest celebrity chef. It seems our crème brûlée caterpillar has pupated and emerged as a fully-formed crème caramel.

Now a crème caramel might contain a similar vanilla and dairy theme to a crème brûlée, and it will certainly be topped with a hint of caramelised syrup reminiscent of its culinary cousin, but its consistency is another matter entirely. Crème caramel is soft right through, from top to bottom.

So, crème caramel it is — where do we go from here?

Traditionally our industry does one of three things — it either goes on a mergers and acquisitions splurge, a headlong land-grab for market share, or it gives money back to shareholders in the form of special dividends or share buybacks. Collectively it does a combination of all three.

The problem is that the first two have a chequered history. Take the first: taking out your opponents by buying them is potentially a good thing, especially if you don’t overlap so much that you end up losing many of your most enterprising staff to the competition in the process.

These moves always look like a good idea at the time (usually in a soft market) but rarely make any sense in the cold harsh light of a hard market. The problem is that the buyer usually has to overpay for his quarry — witness the top-dollar valuation put on Converium by Scor (and this was without a rival bid emerging) or the heady price generated by the unseemly bidding war for medium-sized Lloyd’s player, Talbot Underwriting for recent examples.

Logically these richly-valued deals often fail to work financially for many years, and can perhaps only be justified if they are strategically ‘transformational’ enough to justify the capital destroyed by the tie-up.

No-one can deny that the Ace could not have got where it is today without the strategic Cigna, Cat Ltd, Tempest Re and three Lloyd’s buys. Similarly the XL of today is unimaginable without the Brockbank/Mid-Ocean, Le Mans and Winterthur International deals. Partner Re or QBE’s successes are built on the foundations of a similar acquisition trail.

But you only have to look into Munich Re’s 2006 annual report — ten full years after its acquisition of American Re, Berkshire Hathaway’s 1998 swoop for of General Re or GE’s purchase of ERC Frankona for details of how things can go badly wrong.

So what about alternative number two? Putting your opponents out of business by being consistently cheaper than they are and taking away their best accounts is often deployed but rarely admitted to. But rather like option number one, this one can only work in practice if you are big enough to withstand the subsequent pain of repeated years of significant underwriting losses. And when the upturn comes, you have the frustration of see nimble start-ups sharking in on all the best business and taking all the gain with none of your pain. So this one is strictly for the deluded or suicidally optimistic.

This leaves the already well-established prudent reinsurer, with only one option — give money back to shareholders, batten down the hatches and be prepared to put whole departments in mothballs if need be.

The trouble is that even this strategy is not as easy to follow as it sounds. It is very difficult to keep staff motivated if there is no business to write. Underwriters are natural optimists, after all, they have to be. They don’t generally put down lines on business expecting to lose money. If you instruct a natural optimist to scale down a $50m book down to $5m in two years, you’re liable to lose that person to a more aggressive rival offering the prospect of a growing book. Okay, you’ll live to fight another day, but the stockmarket may not like what they hear when you outline your cautious approach and award your more aggressive rivals with a premium growth rating.

Your more aggressive rivals might use that higher rating to buy you out and you’re out of the game again.

So it turns out his game of pass the hot capital potato, is more like a round of scissors, paper, stone. The rock of M&A can sometimes be wrapped by the paper of aggressive pricing but it can sure blunt those who return capital a little too aggressively and voluntarily retire from the game. You get the picture.

Being a reinsurance CEO in a rapidly softening market is the hardest job going — don’t let anyone tell you otherwise.

Dear friend,

I was interviewing the CEO of a big Bermuda/US/London specialty (re)insurer the other day and what he had to say about the trend towards securitisation in our industry gave me plenty to think about.

Here was a man who had bought a chunky Cat bond or two in his time and was fresh from a dabble with an ultra-sophisticated, non-standard risk transfer deal. No grizzled old Luddite he — no chips on shoulder about new-fangled ideas — this man was a veritable duffer-free zone.

So what this progressive had to say about the dawn of the age of securitisation was a little shocking. Here’s what he said:

The issue is that hedge funds view their obligations in a very legalistic way, whereas the equivalent product bought from a reinsurer will be viewed not only in a legalistic way, but also on a relationship basis.

So working with this lot is a bit like trying to get a reinsurer in run-off to follow your (adverse) fortunes. Check out that Wasa vs Lexington case over a contamination claim by Alcoa for the latest (by the way, we’ve got an article on that in the next issue). There’s more…

For example, many of the casualty claims arising from the asbestos and pollution issues of the 1980s were not settled within strict policy terms and conditions…. Why did people settle? Because they had other business and they held the prospect of future revenues. If you move to the capital markets approach you’re likely to be governed entirely by the contract.

So what is a fellow to do? Nail down the windows, hide the silver and send in the legal eagles…

…that means you need lawyers – you need to spend possibly $100,000 just getting the legal work in place. If the people on the other side of the trade are saying “let’s test the wording, lets see if we have to pay,” and if there is a way out I’d expect them to take it. In fact they would have a fiduciary duty to their investors to take a way out were it to exist.

That is not the case with an insurance or reinsurance company which can say “yes, we can take a way out, but our shareholder interest points us in a different direction.” That is the risk as I see it.

The moral of the story here is before you get into bed with these guys, make sure you get them to sign a pre-nup. They might be seductive young sirens when you first hook up and say ‘I do’, but once the ink is dried on the marriage licence, the metamorphosis to bunny-boiling psycho might be all too swift and painful.

They might end up with half of everything — and the dog!

It’s all a little depressing, but that’s the way of the world. There’s no point being nostalgic for more civil and gentlemanly times gone by — and anyway fragmenting risk and punting it round the four corners of the global capital markets is undoubtedly a good thing for our industry.

The trouble is – once you’ve atomised your business, you lose touch completely with who your risk carrier is. I’ve written something like this before

It looks like we’re just going to have to get used to the legal equivalent of open heart surgery every time we want to get something placed.

Hey check this article out - from the Cape Cod Times.

It looks like the guys in suits Massachusetts have seen how popular the moves down in Florida have been with the voters and feel like getting themselves a piece of the action.

I love the quote "People's insurance rates are exploding upwards... " we're trying to do something about it."

So, what is 'being done'?

Build better sea defences? Do something about global warming? Invest in hurricane shelters and early warning systems? Tighten up on building codes?

Nah - just ignore the reason why premiums are rocketing in the first place - and subsidise!

Prediction: If this gets through, FAIR will be the biggest insurer in Massachusetts within five years!

Keep on keeping on...

Dear friend,

That Converium remuneration story has been a turn-up for the books.

I’m sure it’s disappointing to be made redundant when you were just getting started on a big project, but check this out:

Inga Beale. Joined 1st Feb 2006, takeover agreed May 2007. Deal completes, July/August 2007. ‘Handover’ for the next four months — $3.5m payoff!

Not bad, is it? And what of CFO Paolo de Martin? He hasn't been a year in his post yet!

I predict cracking New Year Parties in the Beale and de Martin households.

(Providing the cheques don’t bounce)

Dear friend,

Just a quicky. Check out our new best friend, Charlie Grist of Florida.

You have to hand it to this guy! Ever the populist, he is welcoming tropical storm Andrea to Florida.

Why? Surely with his new improved Cat fund right in the firing line, the state is cowering at the prospect of one of the earliest storms on record?

Nah - Andrea's rain might help put out bush fires!

http://www.cnn.com/2007/US/05/10/fla.wildfires.ap/index.html

A case of out of the fire and into the frying pan?

Please be careful what you wish for, Goverrnor!

Dear friend,

“Just show me something that’s not just a glorified email and I’ll buy it”

That’s what one old market player told me the other day when I asked him what he thought about all the various electronic placing solutions now available to practitioners of the London market and beyond.

I remember way back when faxes came in — they were so cool. It was like magic — when our office got its first one we stood around open-mouthed like primitive tribesman gawking at an anthropologist’s camera.

What was this ju-ju, this metal squawk box that ate paper and send it around the world? What kind of sorcery was this?

Surely once everyone got one of these the days of the broker and perhaps, the London Market itself were well and truly numbered?

The telex machine grew dusty and unloved. A year later it was tossed in a skip.

Then we got connected to Limnet – then we got Windows networked computing and eventually email. The London Market still exists.

Now it’s the fax machine that is hovering close to oblivion.

The fax machine was really just glorified letter writing, but it was a darn sight better than writing a letter, finding an envelope, addressing it correctly and then guessing how the franking machine worked, eventually posting it and finally hoping that a fragile piece of paper would find its way to the other side of the world without getting lost or stolen.

So my point is — so what if all these new placing systems really are just glorified email?

Glorying email is good – let’s get on and do it — now.

the great London Market technology debate has been holding our attention in the office this month, and refining the issues with our cover piece’s author has forced me to reappraise my view on this extremely old market chestnut

Let me put my own standpoint in context here: I’ve known of London Market reforms since 1995, when I was asked to be a guinea-pig user on a Beta version of a placing system that was going to launch on the ultimately ill-fated Electronic Placing Support (EPS) platform. Suffice to say, the system was almost useless, and it never made it to market

But even back then, we understood the value of technology — we were all fond of the instant-messaging capabilities the fax machine offered. We just loved the fact it was physically possible to fax a slip over to Paris and get a line down on a file within half an hour (if you didn’t run out of paper!)

We also had the Limnet claims system — which was basic, but it worked, and saved lots of time advising the market of claims

Anyway, fast-forward to today, and now we have a unified bureau. We also have a unified claims system, a unified wordings repository (although the LMA has another one, too), and we are well on the way to a unified accounting and settlement system

“One system — many different ways of plugging into it” seems to be the model that works. Look at stock exchanges around the world for confirmation of this: the brokers plug into unified centralised systems that match buyers and sellers.

So what is so different about placing risks? Turn to the feature on page 18 to see that the market is still smarting from the costly failure of the Lloyd’s Kinnect initiative well over a year ago. The horrendous experience of EPS, and then Kinnect, has made the market extremely wary of tossing further cash into the seemingly bottomless pit of IT budgets on this one

We also have many competing placing systems out there — but as far as I understand them, they are all-or-nothing, winner-takes-all solutions, because if you send someone a risk through XYZ system, they need that same XYZ system on their machine to write you a line

I think all the players in that space say that there should be no ‘one size fits all’ solution because they’re scared that they won’t end up making the one size that is eventually taken up. They protest rather too much

So on to the Holy Grail of placing, we’re probably going to have to wait — either a genuine winner will emerge to take it all, or we’ll be left with something of a hodgepodge of bits and bobs and peer to peer

But given the track record, and the Luddite attitude of a significant band of 50-something placing brokers, perhaps we’re better off where we are for the time being. After all, the really juicy cost savings are probably to be had on all the unglamorous back-office stuff — the Holy Grail might turn out to be just a cheap pewter tankard after all!