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May 29, 2008

One of the best subprime quotes ever

Alex Ferguson wrote:

As you may have been aware (if you haven't, then where have you been? Lapland?), there seems to have been a small subprime mortgage disaster in the UK and US, causing hurricanesque damage to companies' share prices.

We met up with Jim Bryce, IPCRe's CEO in Bermuda, and he didn't mince his words on where the fault lay...

"Everyone should have known better across the board. All those involved had so many gates and gate keepers where the problems should have been identified and stopped, but instead were continuously shown through. This was from mortgage brokers, to the bankers, to the rating agencies, to the regulators, and ultimately to the investors.

"In the insurance industry we’re in the business of risk and with proper enterprise risk management, it’s crazy to take major risks in investment income. Every investment manager involved in a big way in sub prime and the like, should get an ‘A’ for being an idiot, if not an ‘A+’."

Frankly, we at Reinsurance are pretty proud if we get an A+, but under the Bryce-ometer of stupidity, we'd be happy with a 'F', thank you.

May 28, 2008

Setting yourself up for a fall

Dear friend,

Suddenly it's a busy day for reports.

In the morning a new Sigma and now a mid-year reinsurance report from S&P.

It's like being the father of five at the end of the school term.

Anyway - to S&P. Here's a worrying preface for anyone to read:

... current ratings are based on our expectation that reinsurers will be able to achieve better cross-cycle earnings this time around, and that future soft pricing cycles will be shorter and shallower than they have been in previous decades.

Wow - did I read that right?

Current ratings are based on an assumption that future soft markets aren't going to be as bad as in the past.

But given its track record, why would anyone assume that our industry is capable of meaningful change simply by taking its word for it? I meana the last hard marke twas pretty hard, right?

And that mini-dislocation in property Cat and offshore energy after 2005 was pretty sharp wasn't it?

I'm not buying any of this cycle shallowness theory.

If I were an anlyst I'd only give credit where credit is due but never, ever before I saw the results.

This industry should be on strict probation until proven to be a reformed character, never given the benefit of the doubt.

Here's a little test:-

Scroll down and look at the chart I have just cut and paste from the Sigma report.

Do you see the curves of the various reserve cycles getting any flatter?

Neither did I!

The other worrying thing is that our current ratings are hardly brilliant compared with the peak of the last hard market, are they?

This is not going to be pretty.

Hell hath no fury like a ratings analyst scorned!

Reserving cycle found alive!

Dear friend,

We've all known it exists for years, but now a fabulous Sigma study from Swiss Re has proven it beyond all reasonable doubt.

(Re)insurers underreserve when markets are soft and money is tight.

Then (presuming they survive) they rebuild reserves in harder markets when more cash is available.

Read this from the blurb accompanying the study:

“Insurers are increasingly recognising that they have to pay more attention to reserving” explains Rudolf Enz, the author of the study. “Shareholders are becoming more reluctant to accept that blocks of business originally identified as being reasonably profitable could instead trigger substantial losses. At the very least, they want to understand when and why such revisions take place.”

Too right Rudolf!

(Go shareholders!)

Now for the picture that illustrates the whole sordid spectacle in all its glory (I've had to squash it a bit):


May 23, 2008

Sell integrity

Dear friend,

What a week for E&O producers — did you see that sensational story broken by some intrepid journalists at the Financial Times?

Our beloved FT said that Moody’s had uncovered IT troubles in 2007 last year that had allowed some ultra complicated bonds to be assigned a triple-A rating when they were actually four notches lower down the Moody’s food chain. Only about four billion dollars’ worth!

So far so predictable.

If you have a dull and repetitive task to do, by all means get a computer to do it — just for goodness sake make sure that you know what you are doing.

Computers are great at following instructions using a pristine, ultra-orthodox logic. The problem is that if you ask the machine to do the wrong thing it will replicate your error a million fold, until it proliferates across the earth, like a bad Eurovision song entry from one of the younger Balkan Republics.

Just try using the ‘Find and replace’ feature on your Microsoft Word one day if you want to know what I’m talking about. Any illogicality on your part is slapped very hard back in your face like so many 25 peseta coins from an indignant (pre euro) Madrid waiter who you have failed to tip sufficiently.

(I am suddenly reminded of something I wrote the other day about Fitch miraculously downgrading over a hundred thousand ratings at the flick of a switch.)

Anyway, you get the idea.

Back to the story.

The venerable New York Times had Moody’s saying that it recognised the seriousness of the questions raised by the report and that it had asked its law firm to investigate. “The integrity of our ratings and rating methodologies is extremely important,” the company apparently said.

Too damn right!

What else does a ratings agency have to sell other than its ratings’ integrity?

Exactly what tangible assets does it have on the shelf?

Nada, zilch, zip, rien.

A few telephones, some desks, nice ergonomic office chairs and a computer or two — oh and maybe a bit of proprietary financial modelling software, (but maybe let’s forget that for now!).

The ratings agency business model is too perfect in so many ways.

You sell one main rating and you’re made. Soon one rating begets another — and clients are so sold on the whole deal that they start obliging their suppliers to have a rating, lest the lack of one dilute their own.

This is a viral sell on a vast scale. Pretty soon everyone and everything has a rating, right down to the birds and the bees.

The trouble is that if a rating agency is compromised, thousands of ratings all disappear in a puff of logic.

Looks like its time for the ratings fraternity to buy a bit of fun and funky E&O coverage, and not just fifty or a hundred million — I’m talking a couple of billion at the absolute minimum.

And it’s up to you to put it all together, and get out and sell it to all four of them.

You lucky, lucky people!

May 20, 2008

Introducing the world capital of moral hazard

This is really interesting.

As the seas warm up for what is predicted to be another above average Hurricane season (aren't they all?) check out this for a bit of extra moral hazard to spice things up.

Thanks AM Best - for giving us one more thing to worry about!

It's a simple fact of life that people with foreclosed houses have much less of an incentive to look after them in the same way as those who have 100% equity in their own beachfront pile.

More than 100,000 properties are in some stage of foreclosure in the state of Florida..

Good old Florida - world capital of wind hazard, then world capital of political hazard, and now world capital of moral hazard too - nice going!


The report is full of plenty of other Credit crunch related insight the Cat funds can't raise the cash they used to because the credit markets are up the creek.

In fact, it gives me no pleasure to say this, but it looks like my predictions of early 2006 are coming true.

They've only got themselves to blame.

They shouldn't have trusted one market and not another

May 19, 2008

Why everyone should have a Hothouse Tuesday

Dear friend,

As I was saying last Friday, I was wandering around the fabulous new Willis building in London last week as a guest of the firm.

It’s nice being given a guided tour — you don’t have to do anything for yourself — people have planned everything out for you. So provided you’re not the sort of person who is unable to abrogate any control under any circumstances, it is quite a pleasurable and relaxing experience

It’s also a bit like being back at school because it gives you the ability to misbehave.

Whilst on the tour, we were shown all the funky parts of the building — the roof terraces, the gym, the client dining rooms, the auditorium and the staff cafeteria. Halfway through the tour we finally got a glimpse of where the workers hang out, and this was where the law of unintended consequences finally and rather amusingly kicked in.

One of my colleagues had heard a rumour about a sales initiative that Willis was planning in its UK operations — codename “Hothouse Tuesday”. And until we meandered onto that trading floor it was just that — a rumour.

(People tell journalists all sorts of things all of the time, assuming that we’ll just print the story without checking it out first.)

But as we were shown into a post room/coffee area a poster gave my colleague all the confirmation he needed.

“ARE YOU READY FOR HOTHOUSE TUESDAY?” challenged the headline, (or at least I think that’s what I remember the words were).

My colleague did a great job of keeping a straight face whilst pretending to be interested in the building’s highly efficient services pod or whatever it was we were being shown.

When he told me (I had been dawdling and gawping out of the window at the fantastic view of London) I had to rush back to have a look, sneaking away from the group, using my mobile phone as cover. And there it was – rumours confirmed and stories straightened – all at Willis’ invitation.

So what’s it all about?

Well, tomorrow ‘Hothouse Tuesday’ begins as UK firm’s client facing employees get forced to cold-call prospective and existing clients. Yuck!

Our weekly UK sister title Post understands the move has not been met with universal approval internally, and instead has upset some staff members who claim it belittles their skills and experience.

I can see how this would be annoying! I tried telesales once and lasted about half a day.

But on closer analysis it sounds like a bit of culture-shifting psychology — and a clever move to boot.

If you make everyone in a company painfully aware of how hard it can be to win new customers, then they’ll probably make sure they do their best to look after existing customers when you release them from their Hothouse duties and they get back to their day job.

It may antagonise some (or, come to think of it, all), but it’s always good to let everyone in a company know where the money comes from!

May 16, 2008

Florida fantasies

Dear friend,

They've got some great journalists down in Florida.

The Cat fund is a difficult subject to get your head around - let alone explain to the man in the street.

So this article is particularly commendable

Killer fact: If the 2004 storm season happened all over again this year it would burden the state of Florida's Fund with (at least) $11bn in losses.

- and how much has it got in the bond fund? A paltry $1.35bn.

Why is it so hard to explain that in life you always get what you pay for?

I suppose we get the leaders we deserve...

Get your blue whale-o-meters out

Dear friend,

Here’s a teaser for you:

At what address in London can you find 650 blue whales, 11 football pitches, four and a half London buses, and six Olympic-sized swimming pools?

The answer of course is 51 Lime Street, otherwise known as the new Willis building, which was opened with great fanfare to the press this week.

Of course, we don’t mean it literally.

That would be silly, wouldn’t it?

I mean can you imagine hordes of pinstriped LMX brokers running in and out of Lloyd’s, precariously avoiding the flailing fins of legions of the world’s largest mammals, whilst being simultaneously tackled by jocks of all persuasions?

That would never do!

No, you must understand that we are reliably informed that the new Willis building weighs the equivalent of 650 blue whales, has foundations that are the length of four and a half London buses and contains enough concrete to fill six Olympic-sized swimming pools. (I can’t remember what the football fields are supposed to measure).

I’m glad we have got that straight.

These animals, automobiles, pitches and pools are the currency we journalists and the marketing fraternity that feeds us use when discover numbers and sizes of things that are deemed too big for ordinary people to be able imagine.

Hence we translate them into multiples of the everyday, like buses, swimming pools, football fields and…

Ah that staple of humdrum quotidian life — BLUE WHALES!!!

Oh well, don’t expect everything in life to make sense!

By the way, the Willis building is absolutely stunning and has everyone else in London green with envy.

It’s not that flashy to look at from the outside (say, compared to the Lloyd’s or Swiss Re buildings) but inside it is wonderful.

It has two amazing west-facing roof terraces – (perfect for sundowners) and has a gym, a great cafeteria and tons of space for the brokers to roam around. The views are stunning in all directions and the location is the epitome of perfection, right outside Lloyd’s.

So maybe they were justified in getting a little carried away?

And one more thing, did you know the Willis building has 3,771 windows?

Dear friend, I’m ashamed to admit that I did not count them all — so I will just have to take their word for it.

The building is designed to hold 2,700 people, so I make that 1.4 windows per employee.

Perhaps one could venture that this is a highly advantageous and desirable window to employee ratio and likely to be best in class when benchmarked against its peer group?

Or maybe too much light will wilt otherwise willing Willis workers?

Irony alert

Is it just me or do some people not have quite such a devleoped sense of irony?

Check this course marketing spam I have just received from Moody's!

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May 9, 2008

Reality check for reinsurance groupies

Dear friend,

Jumbo salaries, stock options, golden parachutes, power, limos and private jets — I’m sure even the most generous-spirited amongst us sometimes envy our top CEOs, don’t we?

But on a day like today — for example when the firm has just lost $7.8bn in a single quarter — we probably don’t envy them one little bit.

Such is the nature of the beast — it really is a tough and lonely job — and someone really does have to do it.

It’s amazing how a jumbo salary can swiftly mutate into a jumbo liability, stock options can become worthless, golden parachutes sometimes fail to open, power turns out to be an illusion, limos break down and private jets fall out of the sky, killing all occupants!

It really depends on your point of view, doesn’t it?


And from one Alt-A woe to another — here’s a funny little sub-prime story for you.

Despite the ongoing credit crunch, which has been particularly virulent of late in the previously bubble-ridden UK mortgage market, my lender still seems keen for me to indebt myself still further.

Hardly a month goes by when my mortgage provider doesn’t try to entice me still deeper into monetary peonage with the promise of ready cash (or ‘equity withdrawal’ as they love to call it) for “a holiday of a lifetime, or a dream kitchen” or whatever other nonsense I may want to fritter their money away on and take 25 years to pay back.

This month was no different. How many world cruises and new kitchens have I now declined? I really have lost count.

The funny thing is that the letter is always signed off by a jovial character whose job title is ‘Head of lending quality’

And this fellow’s name?

Richard Lax !!!!

Truth is always, always, stranger than fiction.

May 2, 2008

Two years to live

Dear friend,

With only one or two exceptions, this quarter has been pretty ugly for results hasn’t it?

Well, get used to it. You knew it was going to happen sometime and that time has now come.

It’s only going to start getting worse from here.

I expect we’ve got one last year of genuine profitability, perhaps followed by one with profits of the more cosmetically-enhanced and surgically-altered variety before the red numbers start making their presence really felt.

First the reserve releases start drying up.
Then the reserves themselves start drying up.
Then the suits at the ratings agencies start notching up.
And then the run-off guys start mopping up
and the liquidators start adding up.

Only then can the market turn properly and reserve additions start flowering like desert cacti after rain.

Then we can all get down to business again.

Brokers are more cost-sensitive and always feel the pinch and show the pain first. I feel that the tough but necessary decisions we have seen taken this quarter by some of the big players are a presage of things to come for everyone else.

What can you do?

Keep you head down and your mouth shut, don’t leave where you are for some hair-brained start-up and whatever you do, don’t to talk yourself out of a job by declining too much, or blow yourself out of a job by underwriting too much.

Got all that?

May 1, 2008

Get your jump suit on

Sometimes we spend so much time knocking
something that we forget how good it is, or
how far it has come. Nowhere do we do this
more than in London.

As a broker starting out 15 years ago I
remembered our small team feeling particularly
pleased with ourselves because we had
been able to place a piece of very difficult, but
very lucrative Spanish Armoured Car business
into London.

Flushed with our success at completing a tricky order after
a hard slog round the emaciated market of 1993, we burst back into
the office and flung the slip over to one of our technicians with a triumphant
swagger. We were on top of the world.

Armoured Car is a funny class of business. Because it moves, marine
cargo specie people write it.

The leader was a marine underwriter in
Lloyd’s — no problem there, we were Lloyd’s brokers after all. Then we
had a bit of following action from some of the more adventurous types at
the company market’s marine and aviation bourse, the ILU. Armoured car
is also about money and so Bankers’ Blanket Bond (BBB) underwriters
might be persuaded to have a go at it. Most of the BBB guys were in the
company market, which cleared through LIRMA.

We then got the customary line from Generali’s London branch to
finish the placement off. Little had we known when we embarked on
our placement that we were creating a nightmare for ourselves.
one policy had to be signed by three separate bureaux.

This little slip was going on a grand tour of the South of England
— with trips to the LPSO in Chatham, LIRMA in Folkestone, wherever
the ILU had its back office (this fact escapes me 15 years on — but some
things are best forgotten).

It was also going to be accounted for especially
with Generali, which wasn’t in any London bureau (despite being
probably the most active underwriter in the company market).

Thank goodness we didn’t get a claim — I suspect our Spanish customers
would have been waiting for their money for rather a long time!

Now look at today’s unified outsourced bureau with gleaming
electronic claims files, accounting and settlement, market repositories,
wordings databases, extremely high contract certainty and quality,
and throw in secure electronic placing systems and communications
hubs, and compare it to what we used to have.

To paraphrase the unforgettable opening credits of the hit seventies
TV show The Six Million Dollar Man;

“London, insurance market. A market
barely alive. Gentlemen, we can rebuild it. We have the technology.
We have the capability to build the world’s first bionic market. London
will be that market. Better than it was before. Better, stronger, faster.”

You had better believe it — I used to be sceptical, even cynical
about the prospect of meaningful London reform — but I’m not now.

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