CATEX Reports

We know that the flooding situation in the United Kingdom has been terrible this year. Some areas have been underwater since December and many, many people have suffered damage and hardship.

Several of us from CATEX US are headed to England in the first week of March and the weather, I guess like everything else, is relative. We just can't wait to get away from the brutal cold and the relentless snowstorms.

The capabilities of the CATEX Data Vera product continue to expand. We have a section on it below but already Data Vera has expanded to encompass multi-sheet and multi-file processing. We have been listening to our users and with our in-house development team hard at work we've been rolling out system enhancements.

There is an interesting assortment of news this month too. There have been several publicized incidents of markets walking away from risks when they believe they can't get the price and terms they want and now there are reports that the underwriters for the so-called ILS carriers may possess similar discipline.

The UK flooding has also had an effect on reinsurance treaties that renewed on January 1. You may recall that some brokers had pushed markets to expand the "hours clause" from 168 (one week) to 504 hours (three weeks).

Several markets flatly refused to expand the hours clause but some markets agreed. Expanding the time period from one week to three weeks, during which primary flood claims can be aggregated into a reinsurance claim, has had some serious implications as a result of the endless flooding.

We have our usual Roger Crombie column this month too. Roger, it seems, after reading last month's newsletter has decided to tell of his own encounter with Donald Rumsfeld which occurred in an elevator no less and should Rumsfeld remember it today it would be only because of Roger's sartorial flare.

As always please feel free to contact me if you are interested in more information about CATEX and our products.

Thank you very much.

Sincerely,

Stephanie Fucetola

Senior Vice President/CATEX

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ILS casualty drumbeat gets louder

One problem with writing a monthly newsletter is that the "news" simply doesn't stop as one is actually writing the piece. One after another, alerts, bulletins, and new stories keep popping up with each one potentially affecting what we're writing in the monthly CATEX Reports.

Eventually though one does have to just stop and recognize that if we "sat" on a monthly edition waiting for the news to stop we'd never be able to complete one because the news won't stop.

Here's what stymied us a bit this month and we actually missed it at first. We saw this article in Artemis saying Willis believed because of the increased ILS competition in property CAT reinsurance (and the resulting plummeting premium prices) that reinsurers would soon choose to deploy their capital in casualty reinsurance products which could lead to a softening of casualty reinsurance premiums as a result of stiffer competition.

At first this seemed an observation you frequently see and one not particularly earthshaking. In fact our first thought was that it really proved that all those mono-line property CAT reinsurers had all effectively branched out into full product reinsurers if Willis believed they would switch capital emphasis from property CAT to casualty.

Then we looked more closely at the story and in the 6th paragraph saw what we thought to be really big news. Willis Re said that Watford Re, the casualty focused sidecar backed by Arch Re, demonstrates the growing willingness of capital markets to support casualty capacity.

The article quoted Andrew Newman, Willis Re's head of specialty casualty, saying that Watford Re, launched in January 2014, "confirms that new capital, in search of non-correlating returns is willing and able to enter the casualty market and participate at risk level, just as it has in the property catastrophe market."

This is big news no matter how you slice it. One could forgive Newman, who we do not know, the head of casualty for one of the Big Three, if he was optimistically straining to see signs of an ILS-fuelled capacity wave that had benefitted his property CAT colleagues finally reaching the shores of his own sector.

However, taken in context with the other news of the month, we don't think Newman was "optimistically straining to see" anything. He may have been calling it like it is.

Here's what we mean and there were several tell-tale signs with the most obvious one being the news that the RMS-backed Praedicat launched the first casualty liability model which provides analytics for casualty risks to the financial services industry.

Hemant Shah, the RMS CEO and director of Praedicat framed the news this way: "Property insurance has been transformed by catastrophe risk modeling. The Praedicat model (CoMeta) represents a real breakthrough for the industry and the beginning of an exciting time for commercial casualty and related capital markets."

Shah

Now, Hemant Shah doesn't get to be the CEO of RMS without being able to be very good at reading tea leaves. (It does help that he is a co-founder of RMS). But as we've been saying for several months now it is only a matter of time until the ILS market looks very carefully at casualty reinsurance as an underwriting opportunity.

We've asked this question directly to two of the largest ILS fund managers --why not casualty --and the response includes two components. First, they answer that the casualty models are too complicated and by definition not predictive enough for capital market investors. Secondly, they note that capital investors would not stand for the inherently long tail associated with casualty cover.

Sometimes a third reason is thrown in, too, and that's the observation that there is still "plenty" of capacity remaining in both the property CAT market and the property market itself for ILS investors without needing to enter the more risky casualty arena.

It's hard to argue with guys who have had success --phenomenal success at that! But two things may be changing this and if models like Praedicat get any traction you can add them in as a third factor.

Property CAT premium rates have plummeted and people have short memories. Read this article about a Florida lawmaker decrying as "simply insane" the Florida CAT Fund's proposal to buy up to $1.5 billion of traditional property CAT reinsurance.

Apparently even though Florida is sitting on 30% of the entire US coastal property value of $10 trillion, and is the state most prone to hurricanes, some people think the decreased premium rate party will go on forever.

But low premiums are low premiums and affect returns whether paid to a traditional reinsurer or to an ILS vehicle. This means that underwriters at some point will cry "uncle" and stop writing. Whether this restraint would extend to ILS companies was unknown. But the ILS underwriters, you will recall them as being described in this very space as so called "plug and play" underwriters, apparently have a bit more backbone than thought.

McGavick

XL Group CEO Michael McGavick was asked during an earnings call earlier this month how he would react to a continued influx of ILS capital, creating continued downward rate pressure, until rates became inadequate for traditional reinsurers.

McGavick said that what he'd seen at the 1/1 renewals had made him feel comfortable. He mentioned that the "frenzy" going on in the market "wasn't so much what the alternative capital guys were pricing at --it was the frenzy among the existing players not to lose share in reaction."

He elaborated saying "They (ILS underwriters) were more disciplined then I think some are thinking. Some are thinking that the alternative guys just came in and whacked the market. No, what happened was the traditional players were so focused on keeping those shares that they got engaged in their own little frenzy."

Summing up he said "I don't feel the alternative guys, and I certainly don't expect our alternative guys, are going to be somehow irrational. I think they have a different set of costs. They have different appetites and they'll play that card."

Discipline? From ILS underwriters? Who'd have thunk it? Think though about this --and this is our second point related to ILS entry into casualty -- if what we read is true, and pension funds are beginning to invest in ILS funds for the non-correlated safety of event-driven risk, what does that mean?

The first thing it means is that pension fund managers are serious when they say they're looking for risk not correlated to the stock, bond, commodity, real estate or currency markets. (Admittedly, an incomplete list!) If you are a pension fund manager you already have more than enough of that risk.

A pension fund manager who has an investment in uncorrelated risk can be relatively sure it's walled off from the vicissitudes of the economy and is dependent only upon the occurrence of a described risk event which to date has been pretty much relegated to a CAT event.

Here's the leap that, per Willis, people like Watford Re have made though. Of course the potential of a hurricane or earthquake event is uncorrelated to general economic conditions but how big a leap is it then to extend that non-correlation to liability causing events such as malpractice, workers comp, and professional liability?

Remember that for the pension fund manager perhaps the first goal is to preserve the asset by walling it off from any effects of market disruption. If the asset can make a nice return over time then so much the better. And it there's one thing pension managers understand it's the management of time. Everything they do is done with an eye toward the future projected payments of benefits. They can determine with actuarial accuracy how much they will need at any given date 10 or 20 or 25 years ahead.

Given the sophistication of the commutation market these days there is little doubt that brokers, like Willis Re's Newman, are hard at work structuring deals that; make use of the non-correlative appetite of pension funds; the already longer tail view they possess in comparison to most investors; and some sort of date-certain commutation backstop after which they can draw a line under the investment for good.

Just as even two or three years ago people couldn't have predicted the effect ILS have had in the property CAT market it's quite possible that in the very near future we will look back and see that 2014 was the ramp-up to large scale ILS participation in casualty reinsurance.

Reinsurers adapt to ILS

It was good to see Mike McGavick speak so candidly about the "ILS guys". But notice the comment he made about "our ILS guys". You can almost miss that but upon a tiny bit of research we can see how some traditional reinsurers have made the most of both the ILS and traditional reinsurance models.

We just happened to see a story (yes, again in Artemis --we DO read other publications though!) about Everest Re in which its CEO Dominic Addesso said he looks on Everest's fully collateralized reinsurance sidecar, Mt. Logan Re, as being "another form of capital that can be used to deliver well underwritten products."

Since third party capital from Mt. Logan investors is lower cost capital, compared to Everest shareholder equity and surplus Everest is using the capital markets investment in Mt. Logan on its property CAT reinsurance business which has seen substantial premium cuts. The higher cost capital is being deployed to more profitable areas and where it can still provide a good return despite the higher cost of that capital.

Addesso

John Doucette, Everest chief underwriter noted that Everest uses Mt. Logan to help the reinsurer optimize returns from its reinsurance business by focusing on lower-cost, third party investor sourced capital where it can be most effective. Doucette said that Mt. Logan helped Everest secure larger signings and to increase its position in other lines by keeping key clients happy through the extra, lower-cost capacity.

This is pretty smart stuff actually and all the big reinsurers are doing it. By creating a fully collateralized sidecar like Mt. Logan, in which we believe Everest invests about 33% of its total amount, a reinsurer can use that lower cost capital to write reinsurance at the same lower rates that other ILS vehicles write but --with the combination of offerings provided by a big global player like Everest --gain some advantage with clients and brokers to increase its share of higher profit margin business.

Of course keeping track of the lower cost and higher cost capital and ensuring that each is respectively earmarked to either the less profitable or more profitable lines could be an issue but our accounting friends tell us that the fungible nature of money lends itself easily to that challenge.

Leopards can't completely change their spots though. Doucette noted that there would always be a number of factors that will keep traditional reinsurers relevant no matter what inroads may be made by ILS markets. He said "Unlike the non-traditional markets Everest's promises to pay do not expire. Nor do we force a collateral release mechanism into products earlier than the natural expiry of the liabilities being reinsured.".

Spoken like the Chief Underwriting Officer for a reinsurer that has a 40+ year pedigree (remember Prudential Re?) and highly rated balance sheet!

CATEX's Data Vera continues functionality rollout

Data Vera is on a roll right now. Our last trip to London provided great feedback for Data Vera.

Data Vera is an Excel conversion and data verification system that learns on its own. Instead of focusing on just the imports, it manages imports, analysis and exports. Instead of focusing on only single purpose driven imports and exports, a single imported file can be exported in many formats including the London market standards.

First we show our prospects a "generic" Data Vera demo. Then they provide us with specific data examples and we show them how Data Vera manages each of those challenges efficiently and simply. We walk them through with their real life examples and show how Data Vera helps them process these files with ease.

The purpose of the March trip to London is to showcase more advanced capabilities of Data Vera -as impressive the initial demo may have been, this is where we respond to skeptics who ask:

How does Data Vera learn Coverholder / product specific variations? For example, the column "amount" in one file may mean "Premium Amount" while it may mean "Claim Amount" in another file.

How does Data Vera manage multi-row headers?

Can Data Vera work across multiple sheets and multiple files when managing data analysis and corrections?

Can Data Vera combine columns to derive information or, for that matter, split a column into multiple fields?

Can Data Vera identify/recognize a risk or location to determine whether it has been "seen" before or is currently in-force?

If you've already seen Data Vera, let us show you the more advanced capabilities. If you've not seen Data Vera, give us 30 minutes and we promise you that you won't leave without wanting to see it again.

Why?

Our approach is different in that it does not require setting up of data mapping templates and the work required to maintain such templates. Our approach is different in that instead of teaching the system how to process a particular file, the system learns on its own as it processes a file. Our approach is different in that greater emphasis is placed on data analysis than on simple data import. Our approach is different in that instead of data usage being specific to each import, each import supports multiple data export requirements, including London Market standard reports.

This is a different way of thinking and, based on the feedback we received from the people that saw it, it's quite unique and effective. Everyone understands the problems mapping files create. Data Vera solves those problem and an even more difficult one - how to import data efficiently and ensure the result meets your enterprise data standards.

If you would like to see a 30 minute demo in London or via the web at another time please contact us.

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

Roger Crombie

Donald Rumsfeld Meets a Young Roger Crombie

A "Known Unknown" or an "Unknown Unknown"?

Mention of Donald Rumsfeld in last month's CATEX Reports reminded me of the time I spent with the man.

I was working in Chicago for a pharmaceuticals company. I had been told at the interview that I couldn't possibly be a good accountant with a moustache. This was to be the start of my career in the Fortune 100, so I shaved it off and suffered a crushing loss of confidence; though British, I have a limp upper lip.

On my very first morning at work, I wore the sharpest Italian suit money could buy, with a silk polka-dot tie to die for. The department manager took me to one side, gripped me by the arm and whispered: "You look like you belong in a circus. Haven't you got any proper clothes?" He smelled of breath freshener.

That evening, I stood outside a local menswear store and studied the clothes in their window. They were the vilest garments I have ever seen for sale. You could camp in the suit jackets. The waistbands were up around the armpits. The colours were mud and off-black. Perfect, I thought.

"Show me your ugliest suits," I said brightly to the sales dude. "We don't have any ugly suits, my friend," he replied, lying twice in one sentence. The next day, I went to work in a three-piece catastrophe. No one noticed. I went back to that awful retail hellhole and bought three more suits. My weird accent replaced my weird clothes as a topic of conversation.

One day, my spirit numbed by continually committing fashion atrocities without a moustache, I ventured back to the store to see if they had anything a little more ... modern. The salesman responded magnificently, returning from the depths of his storerooms with a Mississippi gambler's three-piece suit, in an unusual lighter brown. A genuine American look, he said. This was the heartland, so I bought it and wore it to work. By now, I was old news in the office and no one said a word.

I was wearing the gambler's suit one February afternoon, with an electric green tie. My office was on the 34th floor. I was on the way up from the ground floor, alone, when the elevator stopped at the 2nd floor, executive offices. A guy got in, the doors closed and off we went. The guy was the CEO of the company for which I worked. Before taking the job, he had distinguished himself as the youngest Secretary of Defense in US history. His name was Donald H. Rumsfeld.

Rumsfeld

The great man stared dead ahead at the door, as one does in the uncomfortable confines of an elevator. Then he turned to look at me, his gaze starting at my winkle-pickered feet and working its way north. It probably only took a second, but it felt like a lifetime to me, because I knew that sooner or later, our eyes would meet. Suddenly, the suit I had been so proud of became, in my mind's eye, an utter liability. Did I mention it was orange? It was a desperado gambler's outfit, for God's sake, and this was the most conservative company in the most conservative corner of the most conservative country in the history of conservative behaviour.

Talk about your unknown knowns. Our eyes met. "How are you?" asked the Secretary of Defense, deliberately and evenly, stressing the last word. A lot was riding on my response. I was on the brink of a management position; here was my chance to catapult to the heights of the second floor. Unbuttoned by my loss of sartorial confidence, however, I said: "Uhhhh." I see now that the correct answer was "Fine, thank you. And how are you?" I was trying to think of something infinitely more clever, but all I could do was burble.

"Uh, er, uhhh," I said and then a horrible silence descended, which lasted all the way to the 34th floor, where I retreated in defeat. Needless to say, I never did get off that elevator on the second floor.

As the years have gone by, my business career and the suit have both vanished without trace. I miss the latter more than the former.

* * *

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 [email protected].

February 21, 2014

Quick "Bytes"

Earlier this month, after years of complaining to officials about black soot and fumes from the Jiangnan Iron and Alloy factory (what's worse --insuring against prop damage or environmental liability?) in Baha, China

100 villagers attacked it and then attacked a local police station after arrests had been made on the factory attack.....Willis is still trying to enlist markets in addition to Berkshire Hathaway for their Global 360 Lloyd's sidecar. No deals yet on either Hiscox or People's Insurance Company of China but Willis says they are "inches away from having a number of non-Berkshire carriers and it would be inappropriate to report (360) as a second Aon-Berkshire type sidecar. Only Berkshire has bound any business to date...By the time you read this the Olympics will be close to concluding.

Reports are that the International Olympic Committee has $500 million in coverage for the Sochi games spread amongst various insurers. Swiss Re is reported to have more than $100 million in exposure and Munich Re reportedly has $300 million in exposure. The largest buyers of event cancellation cover are the global television networks...Prudential Financial, the NJ based insurance giant, gave 44,000 of its employees a $1,300

Prudential HQ in Newark, NJ

bonus each for their role in helping Pru reach a ROE north of 13%. The bonuses hit Q4 earnings by about 9 cents a share and analysts grumbled that the insurer announced the payouts the day after they reported Q4 numbers that missed estimates by 3 cents a share. So if they hadn't made the payout they'd have exceeded estimates by 6 cents a share...Denis Kessler at SCOR seems to have a bit of a bone to pick with outgoing Federal Reserve chief Ben Bernanke. Kessler said that his

Bernanke Kessler

loose monetary policy (very low interest rates) had eroded insurer's investment income while simultaneously exposing them to intense competition from ILS funds. Kessler said "I don't thank Mr. Bernanke for all the things he's done for my industry". Kessler also questioned whether the ILS market provided a viable long-term alternative to traditional reinsurance. "It's the difference between a wife and a mistress," he said noting that SCOR manages its own $266 million ILS fund. He said "We are agnostic about ILS. We don't like them, we don't hate them --we use them."....Finally the Taliban confirmed that they have captured a military service dog from

Taliban hostage (Vest is NATO video-cam and not suicide vest)

NATO during a battle near Kabul. The Taliban, strict Muslims who regard dogs as unclean, did say that the dog is being "well treated and fed". No word yet on any negotiations to return the dog but who knows where this could lead...