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November 2007 Archives

November 30, 2007

Slap me once, get hit by a crowbar

Dear friend,

It’s a cliché I know, but a funny thing really did happen to me on the way into the office this morning.

Actually it wasn’t particularly funny.

I was riding my bicycle in London’s seething West End, where our offices are located and had to stop at a red light.

Leaning against the traffic light was a dodgy looking character watching shiftily from left to right.

I was stopped near the kerb, about two yards from him.

He stepped towards me — I expected the usual request for some spare change, or the story about being £5 short for his train fare home.

When — smack! He lands a left hook on the side of my head and is off.

“What the hell was that?” I thought and turned around to see the man striding down the street behind me, barging and pushing people out of his way.

Soon he was in a dispute with a far tougher customer than me.

A wiry delivery guy was squared up to him and they were shouting frenetically.

Suddenly the little delivery guy dashes off to his van and reappears with a crowbar.

I winced as the little wiry guy whacked my attacker hard in the midriff with the weapon.

He calmly went back to his van, got in and drove off. My attacker melted away into a Chinatown backstreet.

The cops arrived and started taking a statement from me.

We got to the part about the description of my attacker when my assailant made life easy for everyone and suddenly reappeared, having doubled back on himself and revisited the scene.

He was detained.

“Would you like to press charges sir?” asked the policewoman.

I thought for a minute. The guy only slapped me, and he was obviously a drug user or severely mentally disturbed, or both.

And the guy had also just been assailed in the midriff with an iron bar. I was starting to feel a little sorry for him. He’d probably had enough justice for one day.

But then I overheard him say:

“I never hit no-one” in that defiant tone so beloved of cockney criminals in cheap cop shows. It made up my mind – the dastardly lying cheek of the man!

“Yes, I’ll be happy to press charges, officer”.

Bizarrely, he started crying like a baby as they led him away, poor fool.

What to make of it?

It’s a risky world out there — and you never know where your next slap is coming from. When you assume risk, you can never be quite sure of the consequences.

Sometimes you probably deserve it, other times you don’t. Either way it still hurts

Moral of the story 1:
Make sure you know what you’re getting into when you randomly hit someone. You may have mean fists, but they might be a wizard with a crowbar!

Moral 2: Never lie to your editor!

November 23, 2007

The bear (market) necessities

Dear man cub,

It is one of the laws of nature that every moment of strange elation must be balanced by an equal and opposite feeling of crestfallen emptiness.

And as the world economy looks like it is starting to take on water, the big question this week is:

Are you feeling deflated yet?

Well, if you are a Swiss Re shareholder you might be feeling a little green around the gills.

The mighty’s shares fell 17% this week after its billon dollar sub-prime confession on Monday morning hit the market right in the chops.

It was quite an overreaction — but then that’s what markets do — they overreact on the upside and they overreact on the downside. It’s what makes investment so much fun!

There is a lot more emotion in markets than people, or models, give credit for (which is of course why we are in the middle of a mild credit-induced panic in the first place!)

Why should a Swiss Re share be worth 97 Swiss Francs last Friday evening and only 81 by last night?

The problem is one of image. In the last couple of years Swiss Re has increasingly sold itself as being the bridge between the capital markets and the boring and financially ultra-conservative traditional reinsurance marketplace.

Here’s the story:

It had become the king of the reinsurance swingers. It had hit the top and had to stop — so it started to develop new markets. Shareholders always need a bit of a growth story to give them a final reason to buy a stock – and here was a good story. This was (and probably still is), the firm’s future growth engine.

But in a break from the Jungle Book analogy, this most highly evolved primate even got as far as discovering man’s red fire but the trouble was that he hadn’t realised quite how fire burns!

I listened in to the end of the analysts’ conference call on Monday afternoon and it was not pretty. Wave after wave of difficult questions came and went — some of which couldn’t be answered immediately — and the tone was strained.

A note published the following morning spoke of a loss of confidence in senior management and how once lost, confidence can take a long time to be won back.

But let’s not dwell on Swiss Re — it wouldn’t be fair — just look at XL’s recent share price performance.

Just as any IPO in 1998 or 1999 with a dotcom in the name could guarantee an extra 50% spike in the first day’s trading, any third-quarter 10-K with the word ‘sub-prime’ in it can almost guarantee a percentage windfall for the plucky short-seller prepared to take a punt.

Strangely deflated is how we feel — but that is also the right way to be feeling.

As Baloo the bear would have put it:

“When you pick a pawpaw or a prickly pear, if you prick a raw paw, then next time beware”

Normal service will undoubtedly be resumed when everyone remembers to use ‘the claw’ (also know in reinsurance circles as a bargepole) next time!

Have I given you a clue? You better believe it!

November 16, 2007

Dodge a bullet, get hit by a bazooka

Dear friend,

I’m going to make a bet with you

I bet you that by the end of this you will be feeling a little foolish.

Why? Because you will undoubtedly have forgotten to vote in our Annual Reinsurance Readers’ Awards

So why not go and do it now before you forget?

I’m not looking for money off you, I’m not after your bank details, I’m not after your email address — I just want you to vote.

And while you’re at it, forward it on to your contacts and work colleagues — this year I want the biggest turnout ever.

Right, now that’s off my chest, let’s get down to business.

This week the global financial bubble deflated a notch further but the reinsurance industry congratulated itself on having dodged the bullet of D&O losses from shareholder class actions against big US financials.

Guy Carp put out a great report on this — so far the big number is a sneeze when set against any self-respecting US Hurricane landfall.

I suppose we all knew that D&O was not a big reinsurer exposure since everyone got cold feet post Enron and Worldcom and the big direct US guys have been slugging it out for market share since 2004.

But with all this, maybe it’s a case of dodging a bullet to run slap into a bazooka round.

It’s sometimes easy to forget that the proximate cause of the credit crunch is the default by mortgagees on their home loans and that this is the trigger for a global economic slowdown.

It’s a beauty isn’t it? People at the bottom can’t pay back some loans, triggering defaults right up the food chain and forcing up inter-bank lending rates. Whoops! Higher bank rates end up causing more defaults — lending is again dented and risk premiums rise further and trigger further waves of default — and round we go again.

Bung in falling house prices and the prospect of a stockmarket slump as earnings top out, led down first by financials and construction, then retail, and followed by pretty much everything else, except perhaps defence and resource stocks and anyone who still thinks this doesn’t affect the wider economy is losing the plot.

What reinsurers should be worried about are more traditional lines, not a bunch of shareholders suing a load of directors for frittering their money away on ropey experimental paper instruments.

Does anyone who worked in the UK market in the early 1990s remember private mortgage insurance? Well start looking at your Mortgage Guaranty numbers, guys, and start worrying.

How about mortgage payment protection business? The outlook for employment is hardly rosy, is it? How many more US construction workers, mortgage brokers and real estate agents are going to get laid off in the next 12 months?

And what about bonding and surety, or just plain old ‘credit’? The leg bone of credit is connected to the thigh bone around about here and we know that credit is crunching. Bones do not tend to crunch in isolation. It is only a matter of time now before a big property developer files for chapter 11.

CAR/EAR — bit of a no-brainer here, but big government infrastructure projects may take up the slack — so we won’t worry too much.

But we also know that empty, in arrears or repossessed buildings have a dreadful habit of burning down — one for the property guys to worry about.

I reckon before this downturn is done it will bring a little bit of misery for everyone.

We often boast about working in a non-correlating industry that has its own independent business cycle, but we ignore our relationship with the wider economy at our peril.

PS. Forgot to vote? Bet you’re feeling silly now!

Redemption is still possible at:

November 15, 2007

Spare a thought for Bangladesh

Dear friend,

I don't know if you've been keeping an eye on Tropical Storm Risk this week, but there's an extremely nasty Category-4 storm about to make landfall on Bangladesh - Sidr is its name

Given the low-lying nature of the river deltas around that area and the extreme poverty of many of its residents, the effect of the storm is likely to be heavy.

And unlike the parts of the Yucatan that got whacked by Dean earlier this year, this is a highly densely populated area, with a terrible propensity to flood.

The storm is large and straddles to India on the left and Burma to the right

This is not a reinsurance storm of any significance, but a human one with a high potential for loss of life.

Spare a thought


November 9, 2007

Old reinsurance proverb say...

Dear friend,

I remember an old colleague — a great share tipper and an even better investment writer — coining a phrase that developed into an excellent humorous definition of what a penny stock gold mine is in investment terms:

“A gold mine is a hole in the ground with a liar standing next to it”

It made me wonder if I couldn’t come up with an equivalent irreverent definition for a reinsurance company. Let’s see:

All purpose version:

“A reinsurance company is a pile of paper with a deluded optimist standing next to it”

Or the soft market version:

“A reinsurance company is a pile of paper with a deluded optimist hiding underneath it”

The hard market version might be:

“A reinsurance company is a pile of paper with a queue of investment bankers offering to take it out for lunch”

This is fun — let’s have a go at some more old reinsurance proverbs:

“Don’t count your… true asbestos reserves until a hard market”

“A stitch in time is… now known as ERM”

“Many hands make… for great golf days”

“Fool me once, shame on you… fool me twice, don’t pay the claim”

“A Rolling Stone… world tour contingency cover gathers many excess layers”

“Lightning never strikes twice… unless your sideways retro cover still isn’t placed”

“Hell hath no fury like a… broker who’s lost an account”

“He who fails to study the past is doomed to… become business development manager for emerging markets”

“Red sky at night: shepherd's delight. Red sky in the morning… a refinery’s on fire”

“The CFO is willing but the underwriter is weak”

“Rome wasn’t built… sprinklered to ISO 9001 standards”

Hey this beats working!

How about you add some more?

November 6, 2007

Solid, solid, solid as the rock

Dear friend,

Just read this - the Bermudian premier firing the opening salvo in the election campaign he has just started

You can also see it on YouTube

Bermuda politics is like no other. No wonder us outsiders should steer well clear.

But do you find this form of rhetoric frightening? I'm really not sure what to make of it, but then that's the point - I'm just not a Bermudian.

Whatever you think it is the sort of thing that can help foster lingering doubts.

It's hardly panic-inducing, but it's the sort of speech that makes the CEO have a quiet word with the COO and the CFO just to double check on contingency plans.

It's a bit like the incredible hulk:

"You wouldn't like me when I'm angry"

I don't think I'd ever like to risk invoking Dr Brown's wrath.

November 2, 2007

Do the hokey cokey

Why isn’t it like 2005 any more?

I suppose the obvious answer to that question is that it is 2007!

But back in the pre-Katrina 2005 everyone was discarding excess capital like togas at one of Emperor Nero’s wilder parties.

This time not so much capital seems to be finding its way into shareholders current accounts, despite the fact that the last bits of balance sheet repair are now finished.

Except for a rapidly cooling property Cat market, rates are much worse than they were then. But in 2007, instead of not knowing what to do with their spare cash everyone seems to have a strategic diversification plan that needs executing.

Such is demand for diversity that one hears of US conglomerates hastily rooting around in their basements to see if there are any excess and surplus shell companies they have forgotten about and can dust down and flog off to eager buyers.

It’s like a dazed global reinsurance hokey cokey. Lloyd’s comes to Bermuda, Bermuda comes to Lloyd’s, Lloyd’s goes to mainland US, as does Bermuda. Old Europe is already everywhere — only more so now. Bermuda goes to Switzerland. Everyone goes to Dubai, Dublin and Singapore.

When everyone is doing everything the same how can everyone be doing the right thing? Everyone must be ever so slightly wrong.

And I think here and now is where it all starts going wrong ever so slowly. Absent any big Cats these are my gut feelings for 2008:

At least one mega-merger in the broking sphere — the weak dollar is a killer — and if any Asian currencies start seriously revaluing it is going to turn into a rout.

At least two hasty mega mergers between top-25 reinsurers as business dries up. The key difference here will be that the merger details don’t mention ‘perfect strategic fits’ any more — just obvious synergies and cost cutting.

The unseemly dash for US specialty business reveals its first victim. Not blood on the floor yet, just a few cuts and bruises that take the edge off otherwise still very good results.

People stop worrying about silly systemic D&O exposure to subprime and start remembering the more mundane but much more terrifying exposure they have to books of private mortgage insurance, consumer credit and credit guarantee business. Some start looking at case studies of the UK market in the early nineties and start worrying a lot more.

I could go on, but my keyboard has run out of ink!

November 1, 2007

Like candy from a baby

Dear friend,

Oh, how a broker’s ear becomes tuned during a soft market! As an example, here are the words of a CEO at a top 10 reinsurer ahead of renewals:

“Look, you already know where we’re coming from and you know we’re going to have to walk away if pricing comes below our minimum target levels…”

Yeah, yeah, but wait for it, wait for it, my broker’s ear senses that this is the point where he is about to say ‘but’…


Ha! — I knew he’d say ‘but’! (But it’s rude to interrupt, so I’ll let him carry on):

“But we don’t want to let that spoil the excellent relationships that we have had with you over many years and decades. Come and talk to us — we might have to back off your main programs but there are other things we can be doing to keep the relationship going.”

Oh sweet music to a broker’s tired ears!

The seductive melodies sung by a chorus of sub-layers, new top layers, deductible buybacks, sideways protections, write-backs and top and drops begin to waft past my ear.

Suddenly I am like a little boy on his first trip to a candy store, staring up at the heavenly rainbow of gobstopppers, gumdrops, liquorice allsorts and sticky humbugs on display. The only sensible thing to do is drop one’s jaw in shear awe as the jewels of endless possibility sparkle above one’s head.

The trouble is of course that humbug is exactly what it all is.

Just as too many sweets rot your teeth and spoil your appetite, so reinsurance exotica have a tendency to induce bouts of painful and expensive indigestion if taken on too regular a basis.

There is no long-term substitute for bread and butter business and the only known cure for a bout of candy overload is a prolonged diet of bread and water, (and not without the attendant condiments of fire and brimstone and sackcloth and ashes).

But where is all the healthy wholegrain business to be had these days? It sure as hell isn’t coming looking for reinsurers. Walk-away pricing works both ways – you walk away and they do too. The logical conclusion? Simple — don’t walk away!

The hurricane season has only a few weeks left to run and with only a minor tickle from the UK’s summer flooding to keep us honest, the obscenely obese 3Q profit numbers are literally rolling in.

Meanwhile the dollar is plummeting to multi-decade lows and anyone with a euro burning a hole in his pocket is looking to make the most of a chance to buy US assets at a historical discount (although the up-front dollar prices are rich, to say the least).

Brokers all over the world are crying into their beer – all that shiny new soft market business on offer is never any real substitute for a perky dollar and across the board rate rises. Major broker consolidation is the only outcome I see from all of this.

Back to our top 10 reinsurance CEO:

“…I just want to reiterate that we value our best client relationships extremely highly”.

Here we go again.

Editor's blog, photo of Mark Geoghegan

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