from the publisher of reinsurance and fac magazines

« December 2007 | Main |February 2008 »

January 2008 Archives

January 11, 2008

Warranted no losses

Dear friend,

I’m back and I’m fighting fit.

And what a world we find ourselves in today. What a state of perturbation — such ebb and flow and flux. We see takeovers, rescues, staff-poaching, gossip, intrigue and skulduggery in various forms — but mostly we just see human frailty and folly.

Doing my job is a bit like throwing yourself into the wild rapids of a mountain stream and paddling like hell — it’s hard to keep up, but it’s invigorating.

Lets’ look at what the world has dashed onto our rocks this week:

Check this out for evidence of a softening market — a vastly respected and eminent multi-national insurer sent me news of a new commercial insurance product yesterday — yeah, big deal, I know.

But a couple of bullet points on the list of coverages jumped out at me like Pamela Anderson’s top on a Baywatch re-run.

• No warranties
• No condition of average
• No business description

No kidding?! What is the world coming to? I was half expecting the next one to be ‘No premium payment until you make your first claim’!

Don’t misunderstand me — I hate warranties.

What has to be the least funny jape of any underwriter has to be the one where he or she writes ‘warranted no losses’ on a wording you are in the middle of agreeing. Oh how our brokers’ sides nearly split when our underwriter friends wheeled that one out of the crummy old jokes retirement home!

But whilst warranties may very often the last refuge of the non-paying scoundrel, even I would have to concede that they are usually there for a good reason.

The same goes for average and non-disclosure — never mind that they are blunt instruments that can sometimes applied unscrupulously, these legal concepts evolved to stop insurers being ripped off — and to preserve precious assets for legitimate claims.

It appears that the customer really is right in these ultra-competitive days.

I just hope this new-fangled policy is seriously expensive — it looks like its going to need to be!

But just as one market softens and melts like a camp-fire marshmallow, so another chars and cracks like a roast chestnut.

The bond default insurance market is roasting, and our old friend Warren Buffett is turning the spit with relish. He’s just licensed a new bond insurer. A few weeks ago incumbents were saying they might get some quota share help from the big man. But this move makes it look like he’d rather be a shark than man the lifeboats.

Or maybe he’ll do a bit of both? Good for him, whatever he chooses.

How obvious the whole debacle seems with hindsight — risk premiums don’t stay low forever — they never do — but they often stay low long enough for people to forget themselves for a while.

In the same way that a triple-A CDO might theoretically the same quality paper as a government bond, but can never quite claim to be the real deal, so a BBB municipal bond wrapped by an AAA bond insurer is never quite going to cut the mustard, despite its pristine label.

In fact we now realise that a monoline bond insurer looks an awful lot like a walking, talking, incorporated CDO – it’s a whole pile of risks all bundled together, and a few stinkers can infect the whole thing.

We live and learn and try to keep our heads above water — and luckily Mr Buffett is here with his AAA-rated double-hulled battleship to either pull survivors out of the water or put them swiftly out of their misery with a quick competitive salvo.

We even hear delicious rumours that the Bank of England and Goldman Sachs want Buffett’s help wrapping a rescue debt package for a failing UK mortgage lender it is currently propping up with the help of the UK taxpayer (to the tune of over $100bn).

What’s a reinsurer to make of this?

Well, it’s a great reminder that capital is sometimes extremely hard to come by and can suddenly and unexpectedly become highly prized (and priced). This means it’s always a good idea to have a little more on hand than you thought you needed, just for a rainy day.

And let’s face it, we never know when it’s going to start raining in our market — take your pick of any number of dark clouds all capable of giving us a soaking.

January 4, 2008

Cold sweat and delirium

Dear Friend,

I'm writing this from home, struck down with one of those colds that make you hot, cold, shiver and sweat all at the same time.

One minute I'm like a demented rag doll on a pogo stick, the next I'm doing a passable impersonation of a tree trunk.

A strange sort of cotton wool seems to have found its way through my ears and is clogging up my brain. Even my thoughts don't seem to be able to get through. The keys on my keyboard seem strange to my touch as I write - it's like someone else is writing this.

I'm one of those people who likes to think that they are 'never' ill, so it's frustrating.

It's certainly not fatal, but I also know that if I don't get some proper rest it's just not going to go away

Happy New Year indeed.

PS. Looks like the market's looking a trifle queasy too.

January 25, 2008

Four for me, one for Buffett

Dear Friend,

I’ve got to dash because I’m sending February’s magazine down to the printers today.

But what keeps humming around my head is this massive 20% Berkshire Hathaway quota-share deal with Swiss Re.

Why? Why? Why?

Okay, maybe it’s smart for Swiss Re to downsize and offload capacity into a softening market, but why on earth is Berkshire ramping up exposure into that same softening market?

I suppose it also just goes to show that it takes two opposing views to make a market.

Berkshire is the smartest outfit in the business, the architect and epitome of the ‘get rich slow’ philosophy. They are also ultra contrarians, knowing that it is usually best to buy when everyone else is selling and sell when everyone else is buying – but a $3.2bn quota share just seems a little rich.

Were it a company in its own right this single slip would be the 12th largest reinsurer in the world. (And if you still got 2.5 points, the brokerage would be $80m a year!).

The underwriting information that Swiss Re must have to pass to BH to maintain such a deal must also be of extreme strategic value to BH, so that is another consideration.

I mean, you need to have pretty good disclosure to get a handle on all the aggregates and potential clashes with existing BH business — we are talking colossal numbers here.

Wow — I bet that placing file is a mile thick — (so maybe the notional fantasy-league $80m brokerage would be well earned after all?!)

So I’ve got it — let’s hazard a cheeky guess that this move is a prelude to an eventual takeover move from the sage of Omaha for the reinsurance gnome of Zurich and the timing of such a possible future transformational deal is almost immaterial.

Eureka! That must be it!

Hey, soft market, you’ve already got a lot to answer for!

January 18, 2008

Everyone is for sale, but who's buying?

Dear friend,

Today we awake to rain and another pile of rumour, half truth and not-so-idle conjecture.

Is Willis really going to buy Marsh Mac?

Is Gallagher Re up for sale?

I honestly don’t know the answer to either of these questions — in fact nobody knows except Mr Glaser, Mr Plumeri and Mr Gallagher.

And while we’re at it let’s toss Benfield, JLT and Heath Lambert into the permanently simmering pot marked ‘merger rumours’.

One thing’s for sure — if Willis were to mount a bid for Marsh it would have to grub around for an awful lot of cash — and we all know that money’s tight right now.

If they were to put up the money, lenders and investors would have to believe that Mr Plumeri would make a much better job of running MMC than current management. But anyone who has ever worked in a large people business knows that when an organisation hits a certain size, it starts to get extremely difficult to control.

You suddenly move from focusing on your clients and their business to organising corporate structures and settling arguments about how brokerage is shared out.

That has been the challenge at Marsh and Aon for almost a decade, and it has been one that has clipped the managerial wings of many of the brightest inside and outside of our business — that is until Mr Case came in and started knocking Aon into shape.

Marsh’s share price has gone nowhere in three years. But guess what? Willis’ has also gone nowhere in 3 years.

But hang on a mo — which peer group broker’s share price has almost doubled over the same period? You guessed it, Aon.

Aon’s sustained improvement and a Willis bid (should it materialise) proves that there is extremely deep value buried somewhere in MMC. It just needs the right catalyst to go in and extract it.

But here’s what I find funny — we love boasting about our system of competitive western capitalism, don’t we?

We bang on about how it drives the weak to the wall and allows the strong to prosper.

So why isn’t it Aon bidding for MMC?

We know the answer is that Aon is already enormous and that any such move would probably be blocked by the competition authorities in a number of different locations worldwide.

But is it really such a silly idea?

Editor's blog, photo of Mark Geoghegan

"Welcome to the reinsurance industry’s first dedicated blog!
This is your chance to tell me exactly
what you think of my opinions and voice your thoughts on the issues driving our industry. Make sure you bookmark my blog today!"
Katherine Blackler