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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 Café 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.
Senior Vice President/CATEX
Monte Carlo Report
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.
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.
Look at the facts. The largest and arguably the most aggressive of the "new capital" vanguard is Bermuda's Nephila Capital. Where are they now? Among other places firmly lodged within the Lloyd's framework providing the funding for a new Lloyd's syndicate 2357 managed by Asta.
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.
| Other Views
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."
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.
Roger Crombie writing for CATEX Reports takes an off-beat view of the world of insurance
Monte Carlo Perspectives
The chat at Monte Carlo appears to have been about the inroads being made by outsiders (a.k.a. 'alternative capital') into the reinsurance world. I didn't attend the Rendezvous, not wanting to be carried through the streets of MC by merry-making insurers as part of the triumphant CATEX award-winning team (Editors Note: CATEX was not carried anywhere but would have gladly accepted a ride up the hill to our hotel in Beausoleil), but I did read sufficient reports to suggest that reinsurers are unhappy at incursions into their turf by members of the capital markets.
Time for a little perspective? Let's start with some numbers, with which it's hard to argue, before we move on to opinion, where views may diverge.
Aon Benfield (AB) reported this summer that global reinsurance capital totalled $510 billion at June 30, 2013. That figure had increased by $5 billion since December 31, 2012, AB said.
Separately, Aon Benfield Securities (ABS), the global reinsurance intermediary and capital advisor's investment banking division, revealed that annual catastrophe bonds issued in the first half of 2013 totalled $6.7 billion. At that time, the total capacity of all cat bonds active in the market had reached a record $17.5 billion. According to Paul Schultz, CEO of ABS, in the first half of 2013 an estimated $3 billion in new capital has flowed into the ILS market.
(Capital invested in ILS instruments is called 'on risk', which might make a good name for this column. Why is it not called 'at risk' may have something to do with marketing; it certainly has nothing to do with the English language.)
Separately and confusingly, PwC has estimated that 'alternative ' ILS capacity now makes up 15 percent of the property catastrophe market, although I find that figure difficult to understand. It makes no difference to my thesis: cat bonds cannot be said to be "threatening" the reinsurance market. Wouldn't you like to have 85 percent of the market, any market? And let us not forget that reinsurers are often intimately involved, one way or another, in the ILS sector.
More than 15 years ago, a Cayman Islands official famously referred to cat bonds as a "dog that wouldn't hunt". The ILS market may have started sniffing other markets' bottoms, but cannot yet, in truth, be said to be hunting. Each of the three largest global reinsurers (Munich Re, Swiss Re and Hannover Re) has much more than $17.5 billion at risk, and two more (Lloyds and Berkshire Hathaway) are not far shy of that figure.
One other point before we leave the statistical division. Aon Benfield's ILS indices, calculated by Thomson Reuters, all posted hefty gains during the year to June 30, 2013. The All Bond and BB-rated Bond indices posted returns of 12.14 percent and 8.16 percent, respectively; and the US Hurricane and US Earthquake Bond indices returned 13.19 percent and 6.89 percent, respectively.
Cat bonds are (relatively) new and shiny, and their loss experience has been less painful than that of the broader market. What is on risk in the ILS market is, however, at a greater risk than that which the broader reinsurance market assumes. Certain losses can wipe out a cat bond; in similar circumstances, the broader market would only be dented.
So the "threat" that reinsurers say they are experiencing is as much existential as actual.
Now we enter the wild, wild world of opinion.
Isn't reinsurance one of the capital markets? Isn't complaining about pressure from one's peers somewhat redundant? There, I've said it.
My guess is that the 'pressure' comes from a couple of numbers buried above. New capital generated by the reinsurance industry in the first half of 2013: $5 billion. Ditto, by the ILS market: $3 billion. Reinsurance has to generate and retain profit to grow; cat bonds attract profits already made elsewhere. The former is harder to do than the latter, when yields and ILS losses are historically low.
Financial people have the money and therefore the power. It is not seemly for them to boast and swagger. They might end up in the pages of such well-known financial journals as Rolling Stone being described as some sort of blood-sucking sea monster wrapped around the face of humanity. Better, in the age of the victim as hero, to portray oneself as suffering the slings and arrows.
Perspective is all I'm talking about. A little of it goes a long way. I control fewer than 50 percent of the words in the Catex newsletter market, but you don't hear me complaining, do you?
* * *
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 firstname.lastname@example.org.
Copyright CATEX Reports
September 23, 2013
Our Own Rendezvous Perspectives
Paul Hewson (a.k.a. Bono) and his Monaco house (or so we were told!)
One of our taxi drivers confirmed that indeed Bono does live in Monte Carlo. Unfortunately we were told that his home can only be viewed from the sea. Thus Bono was spared us dropping in to show him our award....The automobile enthusiasts in our team spotted the following vehicles in MC: Lamborghini Aventador, Ferrari 458, Ferrari California, Mercedes SLS AMG, Rolls Royce Phantom Drophead Coupe, Bentley Continental GT, Aston Martin ~ DB9S, Vanquish and Rapide, Bentley ~ Azure, Arnage, Rolls Royce ~ Ghost and Tesla:...We had a very pleasant chat with outgoing Lloyd's CEO Richard Ward
who was kind enough to indicate to Lloyd's Chairman Nelson that we were known to him when we requested a few minutes on camera with Nelson....John Charman is indeed a locomotive. We spotted him striding purposefully through the lobby of the Hotel de Paris wearing a double breasted blue blazer. We would have needed to jog to keep up with him....Michel Lies of Swiss Re is a very cordial person and took a few minutes to talk to us despite being one of the busiest people at the Rendezvous.
Meetings in MC are limited strictly to 30 minutes and we had meetings in hotel lobbies, concierge desks, corridors with pulled up chairs, and in one instance even in an elevator (!) and of course the Café de Paris. By the end of the second day even the highly efficient waiters at the Café de Paris had given
Café de Paris: On a Rendezvous day it's cheek to jowl
up demanding that table occupants order something (for reference a dish of ice cream, with no toppings, is 12 Euros ($16.20) but the tip is included!) in exchange for sitting there --it was like a well oiled game of musical chairs with 3,000 players...We would encounter people passing by in hallways and receptions and managed to say hello to Tom Bolt, Mike O'Halleran, Konrad Rentrup, Jan Onselius, Ajit Jain, Rod Fox, Farid Chedid, John Berger, Bryon Ehrhart, Gavin Phillips, Jim Wrynn, Enda McDonnell, Kaj Alhmann, Henry Klecan, Irina Postnikova and more people than we can list (our apologies)...
Kudos to the salvage team that pulled off the operation that righted the capsized Costa Concordia near Giglio Island off the Tuscan coast. The operation cost $800 million and the insurance industry footed the bill but the alternative,
cutting the ship up in place and risking environmental damage, was deemed even more expensive. Next year the ship will be towed in for scrap...In another example of the fragility of the global supply chain a fire on September 4th
SK Hynix fire, Wuhan, China
during installation at a "clean room" at a factory in China belonging to Apple supplier SK Hynix has increased the price of memory chips for mobile phones and computers by 19%. Hynix is the world's second largest chip maker...The terror attack at the upscale Nairobi Westgate shopping mall on September 21st
owned by the Kenyan company Sony Holdings apparently will reach the Lloyd's market. The total sum insured is $76 million and Chaucer leads the placement with QBE, Liberty Syndicates, Hiscox, Novae and Canopius following. AJG is reported to have brokered the risk....No one is immune from traffic accidents, especially in Africa it seems. The Russian Supreme Court Chairman was brought home to Moscow from the Ghanian capital of Accra in a Russian military medical plane after his car was struck by a truck (who's driver fled the scene of the accident) that suddenly veered into his lane. Vyacheslav Lebedev's heavily armed convoy was on its way from a meeting of the Ghana Bar Assn. in the city of Ho about 100 miles from Accra. Wire service reports of the accident concluded with "Traffic accidents are common in Ghana due to the poor condition of its roads and bad driving." The Russian top jurist doesn't rate a helicopter for a 200 mile round trip? With those roads?...Maybe next time...