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February 2008 Archives

February 29, 2008

The curse of Reinsurance Magazine

Dear friend,

Drat! Bang goes another one.

The cup of knowledge is cruelly dashed from my lips, (just as I was getting a taste for it, too).

Is it better to have supped the nectar of the Gods and suffer the torment of its absence or to life in ignorance of its exquisite aroma and bouquet?

Is a grey and colourless life one less worth living than a shorter but more spectacular one lived with vigour and to the full?

What’s all this about?

Well, no sooner do I get to do a one-to-one TV interview with a senior exec, are they ousted or spirited away to pastures new. The first one I did was with Julian Samengo-Turner and Ron Whyte when they were running GCFac’s operations.

We did the whole thing in one take, creating our own peculiar Reinsurance homage to the opening scenes of A Touch of Evil by Orson Welles, or The Player by Robert Altman. Never mind No Country For Old Men, the stuff coming out of Reinsurance Towers was truly worthy of the award for Best Picture!

Didn’t last long, though — a few phone calls from the Mssrs Clements, a quick legal flurry and they were over at Integro. My hopes of glory were dashed.

Next came David Spiller of Guy Carpenter – an excellent interviewee with an exclusive rebuttal of the Connecticut Attorney General’s latest assault on the Guy Carp body corporate.

We didn’t know it at the time, but of course we were doomed — one Storms, a Cherkasky and a Duperreault later and David was out the door faster than you can say “Marsh and McLennan”. And Reinsurance TV was back to square one!

Who next dares brave the curse of Reinsurance Magazine?

We’re working on it, dear reader, we’re working on it

February 26, 2008

When the wind blows

Dear friend,

I had previously wondered whether the whole fuss about renewable energy was just a bit of marketing spin.

I wondered why on earth these risks needed to be underwritten by specialist teams with separate brands.

Why not just keep them in the energy teams? I mean, energy is energy and turbines are turbines, right?

Wrong. Check out what happens to this wind turbine when the wind blows too hard: (Note: you have to wait 17 seconds for the fun to start)

Now I understand what all the fuss is about - no wonder everyone wants to keep these things separate!

February 25, 2008

Substantially all

Dear friend,

Check this out for a bit of Orwellian English:

"Aon Corporation (NYSE: AOC), the leading provider of global risk management services, today announced that it has signed definitive agreements to acquire substantially all of Gallagher Re's US and UK reinsurance brokerage business"

What on earth does "substantially all" mean? This is a an oxymoron.

As I write, my new hotshot reporter, Alex Ferguson, is chasing around trying to find what this newly-acquired substance is. This is what he has so far

I bet everyone else at Gallagher Re is definitely maybe excited about moving to Devonshire Square!

A bridge too far?

Dear friend,

Check this out for a monster construction project and a super-duper underwriting challenge

A $70bn bridge across the entrance to the Red Sea linking East Africa and the Middle East.

In a quake zone too! And don't ask about political instability.

These things tend to be a fantasy in search of funding and this will probably be a bridge too far.

But if you want to get a handle on the underwriting challenges of the 21st century, it's time to dig out your Munich Re wallchart of natural hazards and have a peep at Djibouti!

February 22, 2008

Tasty morsels on the tide

Dear friend,

Some weeks we just let the news wash over us like seawater over an anemone’s tentacles.

We cling to our rock and wait for juicy morsels to flow past.

We dart out an arm and grab what’s on offer and bring it in for delectation and digestion.

Sometimes it’s a tasty meal that we dine in on for months, but other times it’s just an empty bit of flotsam that we spit out in disgust.

What did the warm tides drift our way in the last seven days?

Well, it seems that when the chips are down you call a (re)insurance exec to help you out of trouble.

Over here in the UK we have been having a very British banking crisis involving Northern Rock, a provincial mortgage lender that got in a cashflow muddle because of over reliance on borrowing short to lend long.

For reasons only known to politicians, instead of letting nature take its course, allowing the bank to fail, divvying up its considerable assets and moving on, our government first propped up the lender with billions in emergency loans and now has decided to nationalise the stricken bank.

So you’ve bought a failing bank. Who are you gonna call to head up your new-found state asset? Ron Sandler of Lloyd’s R&R fame of course! Come on down Ron!

And interestingly Ron has hired Ann Godbehere, formerly group CFO of Swiss Re to be his right-hand woman.

How delicious the irony. For the last few years we’ve had to endure endless lectures from bankers about how we reinsurance laggards just don’t get it with this harnessing the capital markets wheeze.

How they cajoled our wasteful use of capital and how they urged us to pack up our risk and ship it out the back door to the buoyant and benevolent world of the bond markets.

“Look at us!” They shouted, from their open-topped sports cars “We’re the future and you are slow and stupid! Why can’t you be more like us?”

And how dumb they look now their markets are dry and some have been found swimming without a bathing costume.

Sometimes you just can’t beat good old cash.

And when the chips are down it also seems you can’t beat a bit of (re)insurance expertise to help your bank out of multi-billion trouble!

Enough gloating.

Yesterday another tasty morsel floated our way in the nether reaches of Montpelier’s results.

It seems the international property market is chewing on about $1.5-2bn in big-ticket mining, energy and steel industry losses so far this year (see below for the full details).

Not bad for 53 days on risk is it? Only another 313 to go.

It never rains but it pours. The international property market has been death-defyingly soft of late with rates tumbling and a conditions bonfire in full swing.

One market friend of Fac magazine told me that it always seems to be the way with markets — you never get the big, big losses when the market is hardening — only when everyone is slashing prices.

He even thinks this little tickle might be enough to stop the rate cutting in its tracks and turn the market around.

I disagree with him – I think you only get rate rises when meaningful capacity is retired, impaired or withdrawn. And we haven’t seen anything of the sort yet.

At this stage in the cycle, just after reporting record results, people tend to see big losses as new underwriting opportunities, rather than home wreakers.

Later on they’ll get depressed and despondent — but give it at least another three years.

But what do I know?

February 15, 2008

The grumpy old farmer

Dear friend,

Another week and another pristine run of numbers comes in.

And as they roll in we bundle them up and stack them up like sheaves of wheat at harvest time.

IPC even managed a negative combined ratio for the fourth quarter — (just a trick of the light though, the premium attributable to their last quarter of the year is insignificant).

In 2007 we sowed our reinsurance seed and just like 2006 it has multiplied — the sun shone, it rained just enough, and the harvest has been excellent.

We’ve got more than enough we tell ourselves, and the grain store is nearly full. We can give the surplus away and put our feet up.

But us wizened old financial farmers know that bad years follow good and droughts follow rain.

In fact maybe we should be building bigger grainstores instead of handing out valuable seed? Old farmer Buffett never seems to give it away – he hoardes the stuff so much everyone wonders why he does it.

But the farmers down the valley in the credit markets aren’t having such a great time – and it looks like old Buffett is ready to make them an offer they can’t refuse. So that’s why he keeps spare stock handy!

Maybe one day we’ll be in their shoes? If that day comes I’ll bet we wish we’d made more of what we had when times were good.

But tell that to the youngsters of today, and they ain’t interested. To them it’s all RoE and other new fangled nonsense.

February 14, 2008

Sackcloth and ashes in Rio

Dear friend,

I know I shouldn't, but I couldn't resist.

We all know the top brass at Lloyd's are expected to keep a stiff upper lip, but I always thought the Cariocas of Rio were supposed to be party-loving gaily adorned creatures of the night, and the world champions at joie de vivre and celebrating.

But then I saw this publicity shot of the grand occasion of Lloyd's formal solicitation of a Brazilian licence:


Why so glum? After all Brazil has been the holy grail since longer than I can remember.

Then I remembered that the carnival was over last week and Lent has now begun.

So maybe that explains it - sackcloth and ashes down Rio way, even though history is in the making.

As the winter persists up here in the northern hemisphere we might envy our colleagues a tropical junket.

It's clear from this that glamorous foreign travel is not always all it's cracked up to be!

February 12, 2008

Two cents' worth

Dear Friend,

Here’s a quick quiz.

Who said this in his 2006 annual report? (I have changed the company name to XYZ so as not to give it away):

Dear shareholder,

For XYZ, 2006 was a pivotal year. It was a year of transformation—one in which we built a strong foundation to grow XYZ’s preeminent brands. We began to increase operating efficiencies, strengthen and leverage our market-leading knowledge and resources, and evolve our business model to increase revenues and profitability. We migrated toward greater standardization of business processes, better client-profitability metrics, and more effective compensation systems. We focused on improving the operations and financial performance of each operating company, simultaneously seizing opportunities to leverage XYZ as a whole

There remains a great deal of work to be done, but today we are more client-centric, efficient, and profitable.”

And here’s another clue, today that same company posted fourth-quarter earnings that were less than half of those a year earlier?

Give up? It’s Marsh’s former CEO Mr Cherkasky of course!

And guess what? Today’s filing also revealed that Cherkasky’s departure has cost Marsh $27m ($14m in the fourth quarter and $13m in the third quarter).

$14m is two cents a share, hence the title above.

So how about this for a re-write?

“Dear Shareholder, in less than a year’s time my personal departure is going to cost you just under 4 cents for every share you own in MMC. So long, and thanks!”

Signed M.C.

February 11, 2008

Round'em up

Dear friend.

Here’s a shaggy blog story to make you start your Monday morning with a headache so bad you’ll swear never to read an SEC filing again.

Reinsurance has found something intriguing in the annals of the SEC regarding executive remuneration at US brokers Arthur J. Gallagher.

On August 21st 2007 the SEC asked Gallagher this question (amongst others) about its proxy statement of April 2007 :

“You disclose that the performance level of J. Patrick Gallagher, Jr., your CEO, made him eligible to receive an award of up to 150% of his base salary. According to your table on page 16 and related disclosure, it appears that in order for your CEO to achieve a maximum of 150% of base salary, 2006 revenue would have had to increase by 10% or more from 2005. Based on the information filed in your annual report on Form 10-K for the relevant periods, it does not appear that such revenue target was achieved. As such, please clarify how it was determined that your CEO was eligible for an award of up to 150% of his base salary.”

To summarise – the question was – why did they say he was due a 150% bonus when it looked like he wasn’t?

Gallagher replied in a letter dated September 21st 2007:

“In setting the revenue target and in calculating the actual results, the Compensation Committee made two adjustments to revenue as reported in the Company’s 10-K:

“In May 2005, as a result of certain legal and regulatory proceedings, the Company agreed to stop accepting a form of payment known as contingent commissions. This change went into effect at the end of 2005 and was deemed by the Compensation Committee to be outside the control of management. In calculating revenue for purposes of the performance target, the Committee subtracted revenue attributable to contingent commissions from 2005 and 2006 results.

“In 2003, the Company began to wind down its Financial Services Segment. The Compensation Committee determined that it would be appropriate to exclude the impact of these operations from the performance target. As a result, the Committee subtracted revenue attributable to the Financial Services Segment from 2005 and 2006 results.”

But stripping out contingent commissions and the wound-down financial services segment, the increase was still only 9.66%.

So what happened? Back to Gallaghers’ reply:

“Adjusted Revenue increased by 9.66% from 2005 to 2006, which the Compensation Committee rounded to ten percent in determining that J. Patrick Gallagher was eligible to receive an award of up to 150% of his base salary.

“In future filings, the Company will, as appropriate, expand its disclosure of performance targets to clearly indicate when the targets are intended to be measured on an “as adjusted” basis."

Here are the numbers:

Before adjustments the total revenues were $1,484m in 2005 then $1,534m in 2006, an increase of 3.3%.

But stripping out contingents and financial services they were $1,336 in 2005 and $1,465m in 2006, an increase of 9.66%. This was then rounded up to 10%.

What did the SEC think of this?

The SEC wrote back again in November 27th 2007:

“We note your response to prior comment 7 [the Pat Gallagher remuneration question]. In your future filings, as applicable, please provide discussion and analysis of why the Compensation Committee made adjustments to revenues or to other financial metrics for purposes of making compensation awards that are tied to those metrics.”

So, please show your working. No mention of the rounding up, though.

Gallagher replied on December 11th :

“In future filings, the Company will, as applicable, provide discussion and analysis of any adjustments to the financial metrics used to determine compensation awards, including discussion of the rationale for any such adjustments.”

In December the SEC wrote back to say it had no further comment

Very nice work if you can get it. We all wish our own target numbers could be rounded to the nearest whole number too!

But then it all gets a little crazy.

We called AJ Gallagher for comment. The company didn't wish to say anything but referred us back to its proxy statement.

Please take a deep breath!

This is what it says about executive goals and targets for 2006 — (we have tried to make it easy for you with a medals system).

1. “Gold medal”

If in 2006 the Company revenue increases 10% or more from 2005 revenue and 2006 pre-tax income increases 10% or more from 2005 pre-tax income a bonus of a maximum of 150% of base salary is payable.

2. “Silver medal”

If a business unit for which the participant is responsible achieves at least 75% but less than 100% of budget plan revenue and pre-tax income levels, a bonus of a maximum of 100% of base salary

3. “Bronze medal”

If a business unit for which the participant is responsible achieves less than 75% of budget plan revenue and pre-tax income levels, bonus is a maximum of 50% of base salary

It went on to say that in 2006, “the threshold for the paying of awards under the SMIP was met [our underlining, not theirs]. The performance level of J Patrick Gallagher, Jr. made him eligible to receive an award up to 150% of his base salary”.

Just to recap, after adjustments, revenue grew by 9.66% looks like a silver medal deal.

So how much was Mr Gallagher actually paid?

Well, the proxy says his salary was $925,000, but his bonus was $1,000,000.

Now that’s 108%, a bit more than a ‘silver medal’ bonus, but a bit short of a full ‘gold medal’ award. (well the 150% is the maximum bonus, after all).

Truth is always a lot stranger than fiction.

We wonder what was the point of confusing everyone and risking the wrath of the SEC over $75,000? Who knows?

We’ve come to the end of this little tale, and there is no further comment.

The trouble is, we just don’t understand anything any more!

A Van Gogh, a Monet, a Degas and a Cezanne

Dear friend,

I know it sounds like the opening line of a bad joke

But here's a nasty loss for specie underwriters out there.

$160m is gonna hurt.

The die have been cast.

I just hope you're not on this one.

Good luck!

February 9, 2008

The magic eye effect

Dear friend,

The numbers keep rolling in and the cash keeps stacking up.

Reinsurance numbers are slippery, wriggly little things.

This time of year my job is a bit like being forced to stare at one of those magic eye pictures – you gawp and gaze until you go cross-eyed and then suddenly it all comes into place.

The sea of dots and blobs becomes a merry splashing dolphin or a cheeky chimp.

And then you get distracted and the hidden picture submerges itself back into a blurred and smudged ocean of colour never to re-emerge!

So what numbers have wriggled out of the morass of wriggly maggots, pupated, hatched and flown around my office this week?

Here’s a good one:

How about the casualty reinsurance combined ratio that without a 12-point boost from back year releases would have been nearly 107%?

Worse losses and lower premiums were blamed! No kidding!

Why not see if you can squint and spot this one in the maelstrom of digits?

Oh the fun and games of it all.

A million here and a million there, and pretty soon you’re talking real money

February 1, 2008

114,577 reasons to be fearful

Dear friend,

It seems the more closely you look at something the less you understand it.

With each passing day we look out of our electronic window on the world and find more and more that we fail to comprehend.

Take numbers; I can’t make head nor tail of them anymore.

When my 6-year-old son gets stuck on his maths homework I can still help him, but I am beginning to feel something of a fraud.

This is because I am starting to feel that in teaching him ‘correct’ logical maths I am failing to prepare him for life in the real world.

In the happy universe confined by his textbook, two and two still make four and if you have apples sold in packets of four and you want to know how many apples would be in 72 packets, you multiply 72 by four and come up with 288.

You get your gold star and go to the top of the class.

But in Munich Re’s renewal presentation you start with an €8.5bn book, you increase exposure by 12% and your overall premium drops 4% to €8.1bn, but somehow you say this means that your ‘pure’ pricing is only 2.8% lower!

I’m glad my son doesn’t have to read Munich Re’s renewals statements; he would look to me to explain their maths and I would fail hopelessly. And thus his slow process of disillusionment would begin!

(Note to Munich Re — please don’t write in —I’m sure your numbers are correct — it’s my fault for failing to understand them!)

Now on to the next number – 114,577 — this one is quite a biggy isn’t it?

Well, this is number of bonds whose ratings Fitch downgraded yesterday.

All at once, at a stroke.

What gives? Well, all of the bonds (114,560 municipal and 17 non-municipal) have the misfortune to be insured by Financial Guaranty Insurance Company (FGIC) which has also just been downgraded.

What amazing productivity! One hundred and fourteen thousand five hundred and seventy-seven bonds analysed and downgraded in a few hours.

It would take me a week just to write down the names of 114,577 bonds (114,560 municipal and 17 non-municipal), let alone begin to look at their creditworthiness.

When a call for rating comes in do these Fitch guys rush into the nearest phone box and change into red and blue capes, by any chance? Or do they have have a squadron of magical oopah lumpahs on their team?

I should get these guys to come round and fix my roof!

But has the underlying credit quality of all 114,577 IOUs really changed for the worse simultaneously? Of course not, no two bonds are quite the same.

And there is the point. Ratings agencies exist because of our need for simplification and categorisation of a complex world. If we didn’t have them it would be hard work having to analyse everything for ourselves, one by one — we’d probably give up and some US municipalities would be unable to raise debt finance on the markets (probably no bad thing, but that’s another matter).

It’s always far easier to get someone else to do the hard work and rely on their judgement. The trouble is that over time what starts as simplification always ends up as over-simplification.

And how else can the simultaneous downgrading of 114,577 individual deals be described if not as monumental ‘over-simplification’?

No wonder the politicians have the ratings agencies in their sights – none of this is their fault but they are an easy and obvious target — and an absolute Godsend for any populist faced with the prospect of fighting an election during a recession!

In many ways we have it easy in the reinsurance world. After all, we have only one AAA-rated reinsurer. For us it’s easy to see who to turn to in a crisis — dial Omaha 911 and ask for Buffett!

But what the unfolding monoline massacre is showing is that even the coveted AAA rating is inadequate.

It turns out there are triple-As and triple-As.

We need more shades, of grey and more complexity.

It turns out we need AAAA, and AAAAA!

Come on Fitch, S&P, AM Best and Moodys, get to work!

Editor's blog, photo of Mark Geoghegan

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