CATEX Reports
Issue 25 June 2013
In This Issue
Charman, ILS and Plug and Play Underwriting
Prices down in Florida but active season expected
Data Vera ends Spreadsheet data isolation
CATEX will be in Monte Carlo
Roger writes of encounters with John Charman and what his return really means
Here come the Chinese insurers; Lawsky after life insurer cells and Alex Rodriguez's contract

 

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Dear Colleague,

.

 

I am pleased to send you the June, 2013 edition of CATEX Reports. 

The big news in the industry this month is the return of John Charman. The Axis Capital founder is back now as the CEO of Endurance and he has been talking about his plans for the company and his view of what is going on in the industry. If you're a regular reader of CATEX Reports you know that we track what Mr. Charman says and this month is no exception.
  
Roger Crombie, too, has taken note of Charman's return and has an interesting article including anecdotes about the Axis founder from his days in Bermuda.
  
The CATEX Pivot Point System has a new tool that may change the way the industry looks at spreadsheets. It's called Data Vera (if your Latin is rusty it means "true data") and in one swoop can take spreadsheet-based data to a structured, data rich environment for modeling, reporting and analytics.
  
Finally, we will be at the Rendez-Vous in Monte Carlo in September and want to see you if you are attending. If we get a chance to meet, we will keep the meeting to its allotted schedule. After the meeting, if you are interested in being interviewed for CATEX TV, we will record it and announce it to our database of over 8,000 insurance and reinsurance professionals.
  
As always, if you have any questions about CATEX, our product suite, or any comments on CATEX Reports, please feel free to contact us. We always enjoy hearing from our readers.

 

Thank you very much.

 

Sincerely,

 

Stephanie Fucetola

Senior Vice President/CATEX

 

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   As The World Turns.......

 

as worlkd

 

 

Ongoing Reinsurance Saga 

 

For many years there was (54 years in fact!) a daytime "soap opera" called "As the World Turns" on the CBS Network in the US. You could sometimes go for years without watching it but then happen to see it and in a few minutes you'd find yourself up to speed on the current plot. The characters and story line were so familiar that if you had ever spent some serious time watching it you could easily pick it up again. What's going on in reinsurance these days is anything but familiar.

 

To an outside observer what's going on seems more like a bitter war of ideologies between so called "traditional underwriting markets" and ILS markets. In the meantime the stakes just keep getting higher and higher and the risks seem to be becoming more pronounced.

 

Happily for some coverage purchasers premium rates remain largely flat or are actually decreasing. Unlike normal markets where many people would view increased competition between suppliers to be a healthy signal some observers view this competition as simply the last step before an industry-wide collapse of a number of markets. Such a collapse could leave buyers facing claim payment problems and sky-high premiums in the future --should only a few healthy reinsurers survive it.

 

We feel as if we're writing the narrative for a movie trailer designed to entice the viewer to see the film. Don't blame us. We'll outline what we saw this month and you decide if we're overreacting.

 

John Charman

Charman

 

The biggest news was the return of John Charman as the new CEO of Endurance. Charman has plunked down a considerable sum of his own money (approximately $30 million) buying stock in Endurance. He has made no secret of his desire to get back into the reinsurance business after his tense exit from Axis.

 

So, David Cash is out (with some $23 million earned by selling stock options) and John Charman is in.

 

Charman says that he is "hell-bent on making sure that Endurance becomes a great global insurance and reinsurance franchise over the next three years." Endurance, he is sure, will be one of those survivors.

 

Survivors? Is the entire industry stumbling through a hot desert on the brink of dying of thirst? Aren't natural catastrophe claims relatively light right now? Didn't we just see a press release from Hannover Re, the third largest reinsurer, stating that their profit guidance of $800 m Euros for 2013 remains spot on? Aren't big reinsurers lining up to participate in newly formed London broker facilities to write even more business?

 

Yes to all of the above. But scratch the surface, press the "ground floor" button on the elevator, and the door will open to a melee reminiscent of the

Great Pie Fight in the Mel Brooks movie "Blazing Saddles".  

blazing saddles

 

Let's start with the now notorious Aon-Berkshire Hathaway broker underwriting facility that will see Berkshire receiving a 7.5% slice of Aon Re Solutions Lloyd's placement.

 

catlin

Catlin 

 

Charman is "horrified" by the Aon-Berkshire Hathaway broker facility quote share deal. Stephen Catlin "can't think of any broker facility lacking underwriting controls that has ever stood the test of time". Tom Bolt thinks that the Willis Global 360 broker underwriting facility, aiming to cover a fifth of its broker-led London book, would only "rearrange the deckchairs on the bottom 20%". The UK Financial Conduct Authority has begun an investigation of the broker underwriting facilities devised by Aon, Guy Carpenter and Willis for signs of conflicts of interest.

 

On the other side, despite warnings from Lloyd's that broker facilities will be scrutinized with the full power of the Lloyd's regulatory apparatus, both Guy Carpenter and Willis quickly followed Aon with announcements of their own facilities. Aon's Steve McGill says that the "take-up rate" for the new Berkshire facility is high, with 90% of buyers remaining on board. And, despite some mollifying public exchanges between Lloyd's and Aon, the big broker says it has no plans to change the facility. Aon says it was set up only in the best interests of its clients in the first place.

 

As if the war of words about broker facilities isn't enough to cause concern this battle is being played out against a much larger and more important backdrop. Sitting like the proverbial elephant in the room remains the very real fact that reinsurers are seeing more and more of their premium dollars headed away from them toward the new ILS markets.

 

Worse yet, is that the reinsurers are crying "foul" because, they claim, ILS markets are underpricing risk due to their exclusive reliance on modeled data to set premiums. (Hence the disapproving term of "plug and play" underwriters.) If reinsurers are to compete against ILS markets, they claim, they will need lower their own premiums below levels that are already the barest of minimums.

 

Since general economic conditions have flattened investment returns, and since some observers believe the reserve release sponge has been wrung dry, reinsurers believe they have little choice but to base premiums high enough to ensure an underwriting profit.

 

It's an ugly dynamic that requires the steeliest of nerves to not be tempted to lower premiums to take in cash -which is why small and medium-sized Lloyd's players really cried "foul" when Aon pulled back the curtain to reveal Berkshire sitting there with 7.5% of the quote share before it even hit the market. Essentially Lloyd's underwriters saw their GWP from the Aon Risk Services book cut 7.5% before they even received it in the market.

 

If the Willis 360 facility becomes operational press reports indicate that it will "dwarf" the Aon-Berkshire deal further reducing the size of the pie. How long will it be until we read that broker facilities will include specialty ILS sidecars set up to draw off Lloyd's business before it hits the market? Not too long, we think. After all Nephila Capital, which is at the vanguard of the ILS market, is already the fox inside the chicken coop at Lime Street and is writing excess insurance and CAT XOL through Syndicate 2357.

 

We need to be objective. What exactly is wrong with a fully escrowed ILS solution that offers a better price than a traditional reinsurer? Probably, on a deal by deal basis, there isn't anything "wrong" with it.

 

It would be hard to argue that buyers and sellers of reinsurance need to be protected against themselves (this is familiar, isn't it?) With reinsurance, and the level of sophistication involved with both the buyer and seller, (don't forget to add in to the mix the expertise and advice provided by brokers too) one would be hard pressed to argue that the doctrine of caveat emptor should not apply.

 

So what's the problem?

 

Several pretty rational people have made a case that can only be viewed as warning against that inevitable implosion of the reinsurance market if current trends continue.

 

Before being named as CEO of Endurance, Charman was warning of the "hot money" represented by third party capital providers providing the support to ILS reinsurers. Charman warned that the underwriting for the ILS markets was being driven purely on model results and the concept of "uncorrelated risk", or the idea that the chance of an earthquake or severe hurricane occurring are disconnected from financial market events, was providing a false sense of security to ILS investors.

 

Charman went so far as to warn traditional reinsurance underwriters that they should not dare to match the depressed premium prices offered by ILS markets because when a severe loss event did occur they would run a real chance of insolvency.

 

Figuring both that capital market investors would have long since headed to the exits after a severe loss event, and certain-over eager reinsurers would have been shattered, he was concerned was that there would not be enough reinsurers left in the game to provide the total amount of global coverage needed. He viewed such a result to be the end of reinsurance as we know it.

 

Should events unfold in what would admittedly be a very worst case scenario we may not recognize what comes next.  Hopefully, Charman's entrance with Endurance means that his view has modified slightly, or it could just mean that if and when the worst case does arise, he will be sure that Endurance will be one of the reinsurers left picking up the pieces. (Now that would be a seller's market!).

 

                                                                                 Bolt

 

Next, and we sometimes use this example to remind ourselves how obtuse we are, we remember Tom Bolt's warning back at the CATEX London Reception earlier this year. He warned that underwriters had better be comparing model results with their own actual historical loss records for the same peril and the same location. He indicated he would have little sympathy for Lloyd's underwriters beseeching him for relief from a filed business plan if they hadn't bothered to do this bit of homework.

 

Sure, he was talking about the syndicates, but was he only talking about the syndicates? Tom Bolt has become adept at talking to specific audiences about specific problems but in his position he is aware that there is always a broader audience listening to him.

 

Bolt's remarks began to come into focus last month when Kean Driscoll was talking about "plug and play underwriters" but his remarks really came into focus when we read what Gen Re's Tad Montross said.

 

  Montross

                                                                          Montross

 

We've known Montross for a long time and can say he's a pretty straight shooter. He's cordial, direct, and you will always know where he stands on an issue. So when Montross was quoted by Bloomberg as saying that the new ILS funds are relying too heavily on catastrophe models in making their pricing decisions we took note.

 

Then we read the next paragraph. The models have "lent an aura of credibility" to pricing, Montross said. "Anyone who's in the industry knows that the models are always wrong. Directionally, they're helpful, but we are trying to price a risk today that we do not know the cost of".

 

Tad also did not overlook the "uncorrelated risk" bromide invoked by so many ILS investors. He noted that investors who lose their principal in a catastrophe may have an "emotional reaction" and head for the exits. "What happens after the $150 billion earthquake, when Nevada is basically the coastline to the Pacific?" Montross asked. "This whole issue that it's a non-correlated asset class, which makes it so attractive as people look at their risk-return profiles, is one that needs to be thought through very, very carefully."

 

map

US With New Pacific Coastline 

 

Wow. If Nevada becomes the new California that sure would seem to be a candidate for a Charman-styled worst case scenario, right? Someone would have to pay claims for everything destroyed in the "old California" wouldn't they? Montross' point, presumably, is that if God forbid such an event occurred the idea that there would not be correlated events throughout all the global financial and equity markets is na´ve.

 

Unfortunately, to Montross' point, much of the ILS money is underwriting very big loss event risk. If claims are ever triggered, because such a very big loss event actually occurred, then losing your principal might be the least of your concerns. Financial indicators globally would presumably be taking a nosedive and, of course, if you did happen to be in what would then be "old California" you could face even bigger problems.

 

On the whole though there seems a sense of inevitability in the industry. It's as if even the most severe critics of the so called "hot money" know that it will ultimately have to run its course on its own. Industry veterans know that sooner or later there will be a large loss event and they know what Charman says is right.

 

As this newsletter goes to press we've noted the drop in share price for many of the large CAT reinsurers. The combination of flat to lower premiums (see Florida) ,and the fear of analysts that ILS competition will steal future premiums, seem to be causing revisions to recommendations from stock market gurus.

 

Any reinsurer that went and underpriced their own underwriting profit margin to simply take in premium is going to be put through the wringer. Past reserve releases, poor investment returns and generally flat to declining premiums mean reinsurers will face a challenge.

 

As for the ILS markets who can say how effectively the claims will be paid? What uproar will be generated by investors as "claim-creep" first wipes out profit and then begins to eat away at principal? We may see new levels of vigor in contesting claims and, when finally forced to pay them, doing so very slowly and reluctantly.

 

What will the "blowback" be against the modeling companies, who despite their repeated warnings, have to be aware that some markets are relying exclusively on their model results to set premiums?

 

No wonder people like Charman, Montross and Bolt are nervous about what's unfolding.

                            

               

Florida Wind Prices Drop; Headlines Predict Active Season

 

  

When Messrs. Charman, Bolt and Montross saw the two next stories most likely they pointed to them as proof of their concerns.

 

On May 28th we saw the headline in Insurance Insider, "Buyers' Market for Florida CAT Reinsurance as Rates fall 15%-20%. The article focused on the June 1 Florida windstorm renewals and noted that rate reductions were more significant that initially forecast. "Traditional and non-traditional markets are offering buyers a broader range of coverage options than ever before."

 

Two days later, May 30th, this was the headline in the Miami Herald: Florida Braces for Another Active Hurricane Season. The article observed that the 2013 hurricane season is expected to produce a higher than average number of names storms. NOAA predicts 13 to 20 named storms compared to the average of 12. Seven to 11 could become hurricanes and six might become major hurricanes with wind speeds exceeding 111 mph.

 

But, of course, the article noted that Florida has been riding a seven year quiet streak which, to his credit, didn't stop Miami Mayor Carlos Gimenez from urging residents to stockpile enough food, water and supplies to last at least 72 hours.

 

As of this writing no word yet from Las Vegas about any plans for their possible new beachfront casinos....

 

 

  
                                                                   
                                
 Introducing Data Vera
 
 
Future proof  
 

 

The suite of products included in our Pivot Point Insurance and Reinsurance Transaction Software has a powerful new addition. Data Vera, Latin for "true data", is an easy-to-use software solution that can automatically intake unstructured data from multi-formatted Excel spreadsheets; verify that data and then automatically match that data to structured data fields within a database.

 

By using Data Vera, Pivot Point licensees can convert the thousands of spreadsheets that seem to populate the industry into structured data quickly and accurately. Once the data is secure in the structured database any form of reporting, analysis and or export to a third party or another internal system can be done nearly instantly.

 

We've learned the hard way about Excel spreadsheets and their popularity. They're great, we agree. However when hundreds of underwriters or brokers or coverholders are maintaining spreadsheets on their own desktops, people like us, who operate insurance/reinsurance software systems that rely on structured data, have to be certain that our systems are seeing all that data and that all the data is accurate.

 

Once the data is in our system database a user is free to use either our own Mosaic Reporting Suite to analyze it or they can conveniently export it directly to a template used by any third party.

 

The validation checks, and the ability afforded the user to "teach" Data Vera how to react to a particular class of spreadsheet or a specific spreadsheet sender, are groundbreaking.

 

It is of course the exact opposite of Verum Mendacio, which after reading the first article, could be what some view the "plug and play" underwriters are working with.

 

Don't know what Verum Mendacio is? You will when you see the photo below.

 

  true lies

 

If you want to learn more about Data Vera please contact us. The system is deployed currently and we will be demonstrating it in London soon and at the Rendez-Vous in Monte Carlo in September.                                

  
  
  
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CATEX Will See You in Monte Carlo  
  

 

 

 

MC  

 

 

 

 

 CATEX will have a presence at the Rendez-Vous in Monte Carlo from September 7th through the 10th.

 

We will have four personnel attending and are scheduling meetings right now. We are contacting a number of participants seeking 30 minute sessions that will include a 20 minute discussion of our products and a quick demo on a laptop of any solution that prompts interest.

 

We are bringing a CATEX TV crew too and the last 10 minutes of the meeting, assuming the participant is amenable, will include an interview that we will post to our CATEX TV system that day from France.

 

If you want to see us while in Monaco please let us know. We will be staying at the Hotel Villa Boeri the location of which, our friends tell us, will provide us plenty of exercise up and down the hill!

 

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Martin Robinson Joins CATEX London 
martin   
Robinson

 

 

 

CATEX's London office has a new addition as well.  Martin Robinson has joined as Managing Director to work with our existing London-based team at 10 Fenchurch Avenue.

 

Martin has had extensive experience in the London Market having worked on critical initiatives at both Xchanging and Lloyd's. We've known Martin for twenty years and are very pleased to have him on board. He will be charged with overseeing CATEX System implementations in the UK and US.

 

Read the news story here in Insurance Day. He's classified as a "Market Heavyweight" which we think has caused some puns from his friends.

 

 

 

 

 

Roger Crombie writing for CATEX Reports takes an off-beat view of the world of insurance
  roger 
Roger Crombie

HEE-EE-EEERE'S JOHNNY!

 

John Charman returns to the top table.

 

He's back. John Charman's period in the wilderness came to an end on May 28 with his appointment as chairman and CEO of Endurance Specialty Holdings. A. M. Best noted that Charman, one of the most complex characters in insurance, is expected to be "an agent of change at Endurance." You bet he will be.

 

Deposed as president and CEO of AXIS Capital Holdings on May 3 last year, he was on that date appointed chairman of the company, but lasted just 53 days in that position before being removed from the company entirely (other than as a shareholder). "The change in board leadership," the company formally announced at the time, "came after the board endeavored to resolve differences with Mr. Charman over his understanding of the role and responsibilities of the chairman position."

 

Having been elected to the board by the company's shareholders, he remained a director of AXIS until he was removed from that position too, just three months later. The company he had founded and driven to extraordinary success had no further use for him. It was not an unfamiliar story where Charman is concerned.

 

He grew up wanting to be a geologist, "to go and drill holes in the North Sea," he recalled. But as the eldest son of a family that didn't have much money, he could not attend university. Instead, in 1971 he started as a junior at Lloyd's, where, as he put it, "I was the only person who didn't have a butler or a valet to lay their clothes out the night before. In fact, I was wearing my grandfather's jacket."

 

By the mid-1990s, Charman was managing the largest Lloyd's business, Tarquin. He acted as a catalyst for changing Lloyd's, as the first person to establish corporate investment there, late in 1993. "I was the individual that stood up at the EGM in Lloyd's - a sacrificial lamb, if you like - in front of all of the individual members of Lloyd's, the 'private shareholders', and asked them to vote for their own demise by introducing corporate capital," Charman said. "Rather like gamblers, members of Lloyd's didn't really understand the risk/reward ratio that they were investing in, and I felt it was inappropriate that they wanted to continue to roll the dice."

 

As deputy chairman of the Council of Lloyd's, Charman was one of a five-man team that went through the reconstruction and renewal of the venerable London institution, but "instead of rapidly moving towards modernisation, Lloyd's retrenched," he explained. "I found myself in a minority of one, and so I decided to get out. I was determined to find a way of taking my business out of Lloyd's at a time when everybody else was thinking 'Great, it's all over and done with, we can get back to business as usual'. Fortunately, ACE bought my company."

 

Charman's employment at ACE lasted three years. Although no formal statement was ever issued explaining the causes of his departure, the words 'turf war' have relevance.

 

"Then, for whatever reasons, I found myself available at a most appalling moment in history," he said. The events of September 11, 2001 were "a terrible tragedy, but presented one of the greatest opportunities in the industry that had ever occurred," he recalled. "And I was lucky enough to be the first person - along with my shareholders - to be able to react."

 

He had been talking to MMC Capital for a year about starting a company, but was waiting for the soft market to turn. 9/11 jump-started the formation of AXIS; it was formed on 9/28, with more than $1 billion of fresh capital and Charman at the helm.

 

"My very heart lies in AXIS," Charman said. "It's something that I had always dreamt of establishing. Michael (Butt) and I are absolutely caught up in making sure that AXIS becomes something that has never been seen before in the business world."

 

In a 2008 article aptly entitled "Best of Class", I wrote about the inexorable rise of AXIS since its formation late in 2001. Both Charman and then-chairman Butt credited their partnership as the main driver of the company's uninterrupted growth. "Both are capable of enormous charm," I wrote, "although Butt has the lanky elegance of the Afghan hound, compared to what one suspects is Charman's inner pit bull terrier."

 

(During the interview, I could be said to have "moved the market" for the only time in my career. Charman had less than a year left on his contract at that point. I asked what he planned to do when his contract was up.

 

"Naughty boy," said Butt, in the softest of ways, since I had phrased the question along the lines of 'Have you stopped beating your wife yet?'

 

The following day, AXIS reported that it had extended Charman's contract by two years.)

 

At the end of the main interview for that article, I realised I had left my wallet at home. Charman asked if I'd like to borrow some money, adding with humour that such a request "usually comes before the interview."

 

There can be little doubt that he will ignite Endurance, which has been reporting steady, if unspectacular, growth under the presidency of David Cash. I have only ever had the highest regard for Cash - notwithstanding his dislike of French cuffs - but he is a serene fellow, comfortable in his own skin, and a team player. Charman is only ever the captain of his team, as Endurance employees must be finding out.

 

Oh, and he has his own jacket now.

 

  

* * *

 

Roger Crombie is an American Society of Business Publication Editors national award winner. An English chartered accountant who lives in London, he writes and broadcasts news and opinion in the US, UK, Bermuda and the Caribbean, in print and online. His main beat is insurance and financial services, with 30-year sidelines in music and humour. All views expressed in Roger's columns are exclusively his own. Contact Roger at roger.crombie@catex.com.

Copyright CATEX Reports

June 24, 2013

 

 

 

 

Quick "Bytes"
 
 
 
 
 
                                   
  

Chinese insurers are "making a concerted push to write US business". According to Business Insurance Beijing-based People's Insurance Co. of China and Shanghai-based China Pacific Property Insurance are taking up to 10% lines on property placements up to $1 billion.

 

china pacific people ins co

 

With ILS competition and depressed premium prices this development can't be welcomed by traditional western (re)insurers.......Ren Re, as we've reported in the past, continues to see opportunities in the "third party game." CFO Jeff Kelly 

 

kelly ren re

Kelly

 

told investors that Ren Re's optimal position is to deploy both shareholder and third-party capital. He noted that Ren Re can earn more on underwriting with their own capital but that could mean a lower ROE because it requires more capital to support that book of business....Berkshire Hathaway's taste of US commercial business via the Aon Risk Solutions London underwriting platform must be satisfying to them. Warren Buffett announced the launch of its new specialty insurance unit by saying "It's official: We are moving into commercial insurance in a substantial way and we are here to stay.".....The news has been that Berkshire has been moving into the Australian reinsurance market in a big way as premiums have jumped after natural catastrophes "Down Under".

 

RACQ

The Royal Automobile Club of Queensland (RACQ) reportedly declined a Berkshire offer to write a 100% share of its CAT program. Berkshire reportedly ended up with a 50% share after RACQ offered the program to its current reinsurers which many accepted....NY Financial Services chief Benjamin Lawsky has launched an investigation into some $48 billion in "shadow insurance"  (Lawsky's term) in which life insurers are said to shift risk into cell companies that may be backed only by a contractual obligation by the parent company to make good on claims. Lawsky claims that such use of captives allows insurers to divert reserves they normally would have had to carry had the risks remained directly on their balance sheet....Finally, the New York Yankees still owe Alex Rodriguez $114 million over the rest of his contract. (The Yankees have, at times this season, had players on the disabled list representing over $100 million in annual salary.)

 

a rod

                                                                          Rodriguez

 

Front page stories earlier this month speculated that Rodriguez could be suspended for as many as 100 games by Major League Baseball because of alleged performance enhancing drug use. Unfortunately for the Yankees they would need to continue paying Rodriguez during any suspension. Somewhere, some syndicate contract writer deserves a tip of the hat.....

 

 

Copyright MMXIII  CATEX