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Dear Colleague,

Welcome to the September edition of CATEX Reports. It has been a busy time. Last week we returned from the annual reinsurance Rendezvous meeting in Monte Carlo, and as you will see, CATEX was in fact named Best Technology Provider at the Intelligent Insurer Global Awards dinner on Sunday, September 8th. We had arrived earlier that morning in Nice and it was a great start to our week in Monaco.

It was our first Rendezvous and the pace was frantic. We held dozens of 30 minute meetings with clients (our Data Vera tool, which accurately and quickly converts Excel input to structured data, was very popular) and prospects at tables in the Caf� de Paris. Surrounding us were fortress like tables (complete with company flags) held by Cooper Gay, JLT, Miller and others where the client meetings were fast and furious.

Next door Aon Benfield had converted an entire roof garden (complete with nearly wall-to-wall umbrellas which quickly became an oasis in the hot sun) for their own client meetings. Willis and Guy Carpenter had similar set-ups nearby.

Since we were the "newbies" on the scene we picked the tables without umbrellas. When we took our table at 9 am the sun was nowhere to be seen but as the day progressed the table became very warm. Our apologies to our clients who were forced to meet with us wearing lunettes de soleil!

Several of the stories in this edition bear out what we sensed over there. First, there is no doubt that the new influx of capital into the market has brokers scrambling to obtain the best deals for their clients - they seemed to have a lot of alternatives as they moved around.

Next, it did seem certain that markets were prepared to hold off - you could see tables with reinsurer company flags where the meeting would be brief and the market rep would have time unoccupied until his or her next meeting.

Finally there was an acknowledgement, from the top as they say, from Lloyd's John Nelson that the new capital is here to stay and that the industry should seize on it as an opportunity to expand its penetration in currently underserved areas. Only a week before Monte Carlo, as you will see, there had been different signals about the effect of the influx.

We have our usual Roger Crombie column of course. Roger seized on the theme of ILS and the traditional markets and he, as you will read, has a very long memory.

We hope you enjoy this month's newsletter and as always if we may ever be of assistance to you please do not hesitate to contact us.

Thank you very much.

Sincerely,

Stephanie Fucetola

Senior Vice President/CATEX

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The week prior to the Monte Carlo meetings saw some interesting developments. New Lloyd's Chairman John Nelson warned that the unrestricted flow of capital into the reinsurance industry could lead to a repeat of the 2007 banking crisis. Ace's Evan Greenberg warned that a "thirsty Wall Street" could drain the capacity out of the global reinsurance markets. Reinsurance brokers, now possessed with a surplus of available CAT capacity were said to be in the best position since Hurricane Andrew to service their clients -and of course that development raised concerns that the Big Three brokers had put themselves in a position where they ask for increased commission or fees.

If anything the Rendezvous was shaping up to be a little bit of a donnybrook with regulators and traditional reinsurers on one side and ILS markets and brokers on the other side. In the middle, presumably waiting for the best deals to emerge were the reinsurance buyers.

So what happened? Frankly something amazing may have happened. It may turn out to be--as Berthold Brecht once observed that "peace had broken out" among the 3,000 participants.

Instead of "competition" between ILS and traditional reinsurers the much less threatening term "convergence" was resurrected.

Instead of speculating that unbridled, unregulated inflows of cash could put the reinsurance industry into a nuclear winter similar to that faced by the banking sector in 2007 those same cash flows now represented the only viable opportunity for the reinsurance industry to reach the vast untapped markets of China, India and beyond.

And remember those buyers, waiting for the dust to settle, to get the best deals? Not so fast. Because of the vast new complexity of the reinsurance market those same buyers will need increasing help navigating new regulatory schemes, and deploying greater use of analytics to look at their own exposures, and to model new risks in current areas that have been ignored by modelers.

Translation? The intermediary is more important than ever.

You could feel the shift in tone beginning on Monday morning when during a speech at a breakfast at the Hotel de Paris hosted by PwC John Nelson began to talk about ILS as having proved their worth to investors as reliable sources of return and for their ability to pay out claims.

 

                                                             Nelson 

You may recall that at a New York conference hosted by Insurance Insider we reported that a fear expressed by traditional reinsurers was that these ILS mechanisms had no claims paying record and that purchasers of coverage needed to be aware that a claim might not necessarily be paid.

Of course most of the attendees present at the PwC breakfast were aware of Nelson's comments the previous week when he warned that the flood of money coming into the reinsurance market could, unless properly managed and regulated, end up replicating the 2007 banking crisis.  Let's just say that people began to pay close attention after the Chairman's remark about the ability of insurance linked securities to pay claims.

What Nelson said next set the tone for the week and caused people, at least those sitting at one table, to look at each other and compare notes about what was just said.

The Chairman of Lloyd's said "I see the influx of this sort of capital as a real opportunity for the Lloyd's market, particularly as this type of investor is likely to be far from passive -- and seek an understanding of the nature of insurance and reinsurance and the nature of risk".

To be honest, perhaps many in the audience were hoping for a bit of a repeat of Nelson's stern admonition about the potential perils of ILS capital that made the headlines a week earlier after his London speech. After all everyone likes to be able to say they were at a "news-making" event.

The Lloyd's chairman's comments were at minimum a "softening" of his earlier remarks but, upon closer examination, signaled how Lloyd's has decided to respond to the wave of new capital.

The backdrop against which Nelson's comments came was a detailed recitation he offered as to how the commercial market can grow from $600 billion in annual premium to $2 trillion in annual premium in twelve years.

He said that the majority of that growth will come from emerging economies such as China and India. He also noted that the creativity of brokers, in developing new products and educating both reinsurance buyers and markets would continue to be the engine of Lloyd's growth.

It was a phenomenal talk and, contrasted against Lloyd's 325 year old track record, not unexpected. The Lloyd's "Vision 2025" plan is clear that projected growth is hoped for in so called emerging regions. The plan is also clear that Lloyd's expects that brokers and MGA's will be able to respond most efficiently to the more local product needs of these new insurance purchasers.

The new wrinkle, if in fact it was a new wrinkle, was that so called "new" ILS money could well be deployed within the regulated and rated framework offered by Lloyd's itself to provide the capacity to reach these new markets and grow the overall Lloyd's market.

Perhaps most important, was the signal from Nelson about the solution to the problem he had identified a week earlier as capable of sparking a crisis similar to that faced by the banking industry in 2007. To be fair, in Nelson's London speech on September 4th he already had noted that ILS funds had allowed the industry to fund expansion and to keep pace with growing economies but it was his admonition against avoiding the "originate to distribute" banking model that gained headlines.

In Monte Carlo it became clear that Lloyd's believes that at least a significant amount of this new capital is best deployed under its regulatory scheme so that investors remain close to the risk. Nelson noted that this "new type of investor tends to be far from passive" and after all what has been cause of the vitality of Lloyd's for the past three centuries other than new "Names" (individual or corporate) putting their capital at risk, within a proper regulatory environment, to develop and sell new products to new customer and provide more capacity?

After the Chairman spoke he was kind enough to allow us to interview him for a few minutes which you can see here. As the week went on, and we had more discussions with senior Lloyd's personnel, it became clear that the Lloyd's official position was that it embraced "new capital" so long as it was deployed within the Lloyd's framework.

In an earlier newsletter we had a photo of Marlon Brando and Al Pacino as Vito and Michael Corleone, respectively, with Pacino saying "Keep your friends close but your enemies closer." We think now that our view was wrong.

Lloyd's apparently does not view anyone as friend or foe but if you play by their rules, submit your business plan and agree to semi-annual progress examinations and meet all their requirements, they will let you be part of their future. In fact, they seem to have encouraged it over the years.

After all it wasn't that long ago that the only "Names" were those of wealthy people. Corporate investors were still an anathema. Follow the money maybe is a better interpretation; even better -get out ahead of it and try to impose your own rules on it.

It seems to work and in any event Nelson's comments at the onset of the Monte Carlo week seemed to lower the threat level for all. Now it was time to do business.

                                 Montross                                    Greenberg

The Lloyd's view is a little bit of a contrast to the popular view held by so called "traditional" reinsurers. See Evan Greenberg commenting that "thirsty Wall Street" is drinking all the water in the pool and that Ace will not hesitate to decline writing business rather than go below their required underwriting rate to match a premium rate set by an ILS carrier.

Lloyd's is in a different position though than an individual reinsurer or insurer. Lloyd's is charged with ensuring that its own market (composed of 87 syndicates) remain competitive, relevant and a global hub for risk coverage innovation.

Things seem to be changing though for even "traditional" reinsurers. Despite the fact that concerns still remain about the supposed "quick exit strategy" of many ILS investors (Remember how Lloyd's would handle that one! Try spelling commutation and see how tough an early exit strategy is at Lloyd's.)

Even Gen Re's Tad Montross noted that in certain instances Gen Re "would consider buying protection if the pricing and terms are attractive."

Maybe taking Chairman Nelson's vision a bit further are the comments of Frank Nutter, President of the Reinsurance Association of America who said "Reinsurers will have to choose whether or not to assimilate these alternative capital models into their business, but buyers will come to expect that option."

                                                                  Nutter

The RAA has 25 underwriting members -reinsurers - so presumably Frank Nutter, who is a very savvy person, is not too far out in front of his membership on this issue.

A closer look at the RAA underwriting membership roster reveals the traditional US heavyweight reinsurers but surprisingly Nephila Capital and Third Point Re can be found too. Both exemplify the "assimilation" structure that Nelson, Nutter, Montross and just about everyone else sees as what could be the new normal.

A long time ago Neil Currie put Renaissance Re on the path for this by hiring out his underwriting team to act as essentially a reinsurance MGA for pools of interested non-traditional capital. He was ahead of his time.

CATEX Wins Technology Award 

 CATEX's Frank Fortunato and Wells Fargo's Robert Quinn 

(L-R, CATEX's Mazzeo, Fucetola, Fortunato & Robinson)

At least we had the modesty to hold off on this one until the third story!  On Sunday night, September 8th, at the Fairmont Hotel in Monte Carlo CATEX was named the Best Technology Provider 2013 at the Intelligent Insurer Global Awards dinner.

As you may know from our last newsletter we were aware that we had been named a finalist but to actually win the award was an immense surprise to us. We were thrilled, naturally, and thank all of our clients and friends for their support.

You can see the press release we issued as well as photos of the night at this link. The award put considerable wind behind our sails for the 50 or so meetings we had over the next three days. We met with reinsurers, syndicates, MGAs, brokers and modeling companies and our discussions exceeded our expectations.

Not surprisingly everyone with whom met (wth no exceptions) was interested in learning more about our Data Vera tool. DV converts unstructured data from spreadsheets into structured data and does it accurately, quickly --and with "learned behavior" programmed into it --can approach 90% automation of all Excel data conversion.

We distributed this brochure describing CATEX and its current products. Our systems are applicable for reinsurers, reinsurance brokers, MGA's delegated authority participants and anyone needing to accurately and quickly convert unstructured spreadsheet data to structured data management or export to modelers, legacy systems, etc.