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July 2007 Archives

July 27, 2007

Crank the sausage handle

Dear friend,

What a privileged position I hold!

You might not get to talk to them much, but as your noble editor I’m constantly invited in to powwow with all of your bosses and board members. Cooler water, tea, coffee and, on occasion, chocolate biscuits are provided in displays of such wanton extravagance that they could make even the most hardened libertine blush.

I was having one such cosseted encounter courtesy of a head honcho at a major international broker the other day when I learned something quite surprising. This broker was talking to me all about expansion strategies and mentioned an interesting opportunity to break into reinsurance on the back of his broking house’s direct book in the United States.

He spoke earnestly of leverage and influence being brought to bear by his firm to extract lucrative reinsurance business out of markets for whom it produces significant inward premium volumes.

The bar-room conversation might go something like this:

Broker CEO: Hey Bill I wanted to talk to you we’ve been analysing our key relationships and we’ve identified you as a key preferred partner.

Insurer CEO: That’s great.

Broker CEO: You betcha, did you know we gave you $100m on your construction account last year?

Insurer CEO: You don’t say?

Broker CEO: Yeah — and you write a book of about $250m right?

Insurer CEO: Something like that, yeah.

Broker CEO: And it’s good stuff too. Your loss ratio averages 83% for construction, yet our business only costs you 60%. [Pause] And it’s growing at 15% a year. Compound.

Insurer CEO: Hmm, thanks!

Broker CEO: Anyway – we’ve just hired this hotshot reinsurance team and they’re in town next week. I was hoping they could come and buy you lunch…

Insurer CEO: [sighs] Hmm, for you Bob, I’m sure I could make a window in my schedule.

We may be in a post-Spitzer world, but leverage doesn’t have to be used explicitly in the black and white of over-riders and service agreements.

You don’t have to send round the heavy mob — just an introduction here and a helpful suggestion there.

Like mince going into a sausage machine — it’s only natural physics that some of what goes in one end comes out the other.

But this makes me wonder for intrepid Fac brokers from large global outfits effectively starting out on their own. It will only be when they are wholly without the support of the mother ship that they find out the true value of their own skills and contacts. The invisible hand of the powerful parent will not be around any more.

Only then will we see what they might be missing and answer the big question — will they let you crank the sausage handle if you don’t help load any mince into the machine?

July 20, 2007

In Lloyd's we trust

Dear friend,

Love is in the air!

Atrium is the latest in a long line of Lloyd’s GI brides to be carried off by a dashing young buck from across the Atlantic.

When I was last over in Bermuda I interviewed Don Kramer of Ariel Re and naturally we got talking about his open secret of wanting to either buy into or break into the Lloyd’s market sometime soon.

Don’s original background is as an equity analyst and he was a little shocked at some of rich premium prices potential buyers were expected to pay for Lloyd’s players on the back of an excellent year.

His argument was that it was daft to pay on the basis of 2006’s brilliant one-off earnings, because they were unlikely to be repeatable. He would rather use the long-terms earnings potential of the companies instead.

You see over the other side of the pond, they like to look at insurance company’s price to book ratio as a method of valuation, as opposed to the price/earnings ratio we tend to look at over here.

Actually I think that they’re right — insurance is so cyclical and volatile that there is very little point trying to value a company based on what it earned last year or what you expect it to earn this — best to stick to how much more it is worth than the sum of its parts.

Well, a quick glance at my computer at my screen and I can see Atrium’s net asset value is estimated by analysts at around 260p a share — and Ariel is stumping up 365p — a multiple of 1.4 times.

Okay it’s not cheap, but cheaper than many Lloyd’s rivals — and since Atrium isn’t that big anyway, what’s a few more dollars here or there? And by all accounts Atrium is a classy outfit.

And when the gearing element available to Ariel is taken into account it's probably worth the extra money. Lloyd’s players look expensive, but the unique capital benefits mean your money goes almost twice as far.

You also get to be a licensed surplus lines player in the US (and either a direct or reinsurance player almost anywhere else on the planet) overnight without having to stump up for a shell company (see what Montpelier did the minute it got into Lloyd’s).

So this move ticks all the boxes for Ariel.

As Chris Hitchings, an analyst with Keefe Bruyette and Woods said in an excellent note the other week:

“There is a good economic case for a Bermudan monoline buying a Lloyd's insurer but, with a US focus on price/book as the value metric, the relative capital efficiency of Lloyd's makes them look expensive. Their alternative of building their own may be slow so we do not rule out renewed interest in future.”

Don explains how it all works in the interview in the August magazine.

So you’ll just have to wait until then, won’t you?

July 13, 2007

Chatham van man

Dear friend,

“So it’s come to this has it? 30 years and thrown on the scrapheap.

Tossed in the bin like a used anky.

‘Surplus to requirements’, so they say.

What am I going to do now? I can’t very well retrain at my age, it’s like what my missus always says ‘you can’t teach an old dog new tricks’.

And I’m an old dog alright.

Fair dos, everyfing’s on computers now innit?

That Mr Ward says it’s gonna appen so it will appen, won’t it?

He’s not like them other ones wot they ad before — all mouth and no trousers.

I remember that EPS malarkey back in the 90s — proper Mariah Carey that was?

Come again? Mariah Carey — scary. Cockney rhyming slang, that is.

Well, I’ve still got me pride. I’ll go out with dignity — down the A2 one last time, then I’ll do the knowledge… At least I won’t have to work in one of those poncey wine bars in Leadenhall market!”

Dear friend, pity the poor Chatham Van man, deliverer of premium advice notes and slips to the LPSO, then Xchanging.

His battered old van is getting emptier by the minute. And by next year he will be no more.

If seventeen percent of all Lloyd’s business can be accounted for and settled electronically today, then there is no earthly reason for 100% of it to be settled that way tomorrow. Especially when the van is withdrawn. That will focus any Luddite’s mind.

I remember the plaintiff cries from technicians on cold winter days as I prepared to go out to the market…

“Mark, please, please, please would you drop this off to the Lloyd’s post room? There’s a premium payment warranty and it has to make the 5 o’clock van.”

“Can’t you take it yourself?”

“It’s freezing outside — please Mark”

Oh, the joys of working at a small broker.

And so is the writing on the wall for all non-added value people — claims brokers just there to shift duplicate files around, not negotiate. Placing brokers sent out merely to block the market.

Magazine editors?

This is progress, but it is sometimes a little sad.

We’re a nostalgic lot in London. It’s one of our greatest vices, but in many ways it is also a great virtue.

PS. I already wrote about Friday the thirteenth last year.

July 6, 2007

Have yourself a wild soft market party

Dear friend,

The soft market party has begun in earnest.

There’s plenty of capital in the punchbowl — and what are those juicy, fruity bits floating on top, partly skewered by pungent twigs of clove?

They look like Cat bonds, or maybe they’re CDOs, or hang on, are they swaps? Who can tell?

But who cares — they pump you up like a vodka and Red Bull on steroids!

The guys are all there, dressed to the nines and dripping gold like west coast rappers.

The music is loud. Everyone’s a little light-headed.

And who are those attractive ladies swaying provocatively by the buffet? They look fine — they’ve got class — a hushed and reverential whisper goes round that they’re the Lloyd’s of London posse.

But the boys had better make sure their chains are chunky enough and their diamonds glitzy enough — we hear these girls have very expensive tastes.

They are not cheap dates. But they look like they are worth it — the kind of sophisticated, experienced, ladies that every twenty-something red-blooded, rocket-fuelled Bermudian fantasises about hooking up with.

A couple of the younger reinsurers are getting a little woozy and a little smoochy — they have the hungry look of someone who has no intention leaving the party unaccompanied.

But what’s this? Some older couples are making their excuses — surely they’re not leaving early?

They protest that the music’s a bit too loud for them and they should be hitting the hay.

“We’ve had fun”, they say, “But you kids carry on — don’t let us spoil the party”

And then they’re out of the door.

The kids crank up the volume — it’s their first big night out and they’re going to make sure they don’t miss any of the fun — none of them want to be the first to break the mood and go home.

One gets the feeling that soon there will be spillages, tears, broken glass and jealous fights.

In the cold harsh light of day youngsters will wake up in strange bedrooms and wonder how they got there. And who is that malodorous slob in bed next to them? They looked so becoming the night before.

They will marvel at how they could have had thought it such a good idea to start ordering $300 bottles of champagne for everyone at 3am. They will hope there are no more nasty surprises that slipped their minds in the drunken frenzy of the night before.

What were they thinking? Were they thinking at all?

They will have a headache. They will feel poorer. They will regret. They will learn.

July 4, 2007

Take it or leave it

Dear friend,

Here’s a run-through of the order history of the excess layer of fairly unpleasant but well run-waste disposal firm’s public liability cover, reinsured facultatively into London in the 1990s.

1993 Order 100%, placed 78%
1994 Order 100%, placed 95.6%
1995 Order 100% placed 100%
1996 Order 95% placed 105%
1997 Order 90% placed 120%

By 1998 I could have placed an almost unlimited amount, except my client had just got some chump to remove a major treaty exclusion and was apparently only interested in income. And this account certainly had plenty of income.

– order 48%.

Ouch — the premium was half and now so was the order — a quarter the brokerage. Bang goes the bonus!

Here comes the other dynamic of the reinsurance market coming into play at last after a long absence — demand.

Willis Re mentioned the dreaded D word for the first time in today’s 1st July renewal report.

The ultimate sanction for any buyer of any product is to walk away.

And there is nothing like chopping an order down to size to get reinsurers’ attention and sharpen their pencils:

Underwriter: “Take it or leave it!”

Reinsured: “Okay, I’ll leave it”

Pause of a couple of weeks
Underwriter: “There seems to be a bit of a misunderstanding — when I said ‘take it or leave it’ I really meant – ‘we really value our mutual long-term relationship and have appraised the account and would be pleased to offer you a one-off discount of 25% this year”

Reinsured: “40% discount”

Underwriter: “What?”

Reinsured: “40% discount ‘take it or leave it’

One or two of those and even the underwriter who has spent five or six years getting everything his or her own way soon learns that the boot is now firmly on the other foot.

Welcome to a proper soft market — where shrinking demand meets increased capacity.

The punchbowl is loaded with hooch – let the party begin!

July 2, 2007

London Bomb II

Dear friend,

Well, it’s good to be alive — that’s all I can say.

It turned out last week’s car bomb was parked right slap bang outside our offices — and there was a second device parked round the corner, but it got towed away by central London’s over efficient parking attendants before it could go off.

So it was a case of the messianic zeal of terrorists partially thwarted by the equally extreme and deranged obsessions of the Westminster parking squad — at 2am on a Thursday night.

You’d think it was safe to park anywhere at that time of night without getting a ticket, but apparently not!

All very wryly amusing I suppose — but then two other lunatics decided to ram their way into Glasgow airport, north of the border.

Somehow I don’t think these guys are put of by the prospect of being towed.

But maybe if our security services deployed anything like the vim and vigour of our crack parking forces, less ‘cleanskins’ would get this close to killing innocent bystanders

Editor's blog, photo of Mark Geoghegan

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