CATEX Reports
Issue 33 March 2014
In This Issue
New capital is intelligent and Berkshire's model is blueprint for ILS carriers
Underwriters sense outsized effect of ILL float returns
London input on Data Vera
Roger Crombie on Bitcoin:plus he actually knows who Kim Kardashian is!
Wrong airports, MH 370, Terrorism insurance, Kim Jong-un, Watford Re and elephants in the car park


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Dear Colleague,

   This has been an interesting month. The April 1 renewals are coming into focus and despite earlier hopes that the Japanese placements would come close to holding the pricing line it seems that decreases of 15% or so on XOL cover have been seen.

    Of course, too, as of this writing there is still no word about the fate of MH 370. In a community where many of us regularly board aircraft to traverse "the pond", or increasingly head to Asia, the disappearance of a Boeing 777 has become a bit unsettling.

    Warren Buffett released his annual letter to Berkshire shareholders too. The letter is normally scoured by analysts and insurers alike for any clues to Berkshire's success and this time the letter didn't disappoint. Mr. Buffett offered his most direct description of how Berkshire uses the $78 billion worth of "float" they obtain from insurance and reinsurance premiums.

    At a time when many reinsurers are returning capital to investors reading what Berkshire does with all that money that they don't return is revealing. Of course, in the end, Berkshire shareholders have been rewarded by the strategy as their stock value rises.

   We also will update you about developments in London gleaned by our team which visited there for a week. We talk with our associates and clients there every day but there is no substitute for seeing them in person --plus there was no snow there!

   We have our usual Roger Crombie column this month too. Roger has noticed the Bitcoin Mt. Gox news stories and has his own thoughts about that. We had an opportunity to share a meal with Roger in London earlier this month and he remains in as fine form in person as his writing signals him to be.

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


 Thank you very much.




Stephanie Fucetola

Senior Vice President/CATEX









           "Take Your Stinkin' Paws Off Me You Damn Dirty Ape!"



To say we've been waiting for a long time to use this headline would be an understatement. Really, how often does one see this headline in a monthly reinsurance newsletter that purports to be serious?


But we couldn't think of anything better. Of course it's Charlton Heston from the 1968 movie "Planet of the Apes" reacting to the efforts of his simian captors to restrain him. Heston's voice had been damaged during his earlier captivity and upon finally healing he was able to shout out this epithet.


His captors, who had thought him to be mute, stupid, cowed, inferior, etc. like all other humans, were stunned by this outburst. It simply wasn't possible that a human could talk. He was intelligent and it forced the apes to reevaluate their thinking.


It wasn't that long ago that it could be read in this very publication about so called "hot money" originating from ILS sources coming into the reinsurance market place.  This capital, popularly thought to have been "goosed up" by savvy investment bankers, based a premium price on the running of an inadequate loss prediction model and was able to undercut traditional reinsurers by offering cover at a reduced price. It was also referred to as "dumb money".


Prejudices die hard and perhaps this writer at least should have been able to look past a generation long effort by the capital markets to insert itself into the reinsurance industry. That effort, and its promise of virtually unlimited money available to back risk, came with subtle criticism of the reinsurance industry as being too conservative, too slow, too antiquated and too used to dealing with "clubby" regulators.


Maybe that perception of "criticism" wasn't even the result of statements or criticism (subtle or not) from capital markets players. Maybe, like those apes outside Heston's cage, admitting that the capital markets were even a tiny bit right could stem from a deep recognition that in your heart you knew that some of the criticism, imagined or not, was deserved.


Reacting to that fear that fear by approving massive IT investments helped for a while. Maybe the sale of Industry Loss Warranties, the industry's chess move against the binary CAT bond triggered products, helped for a while too. But in the end the capital markets didn't go away. They remained waiting not so patiently at the gates.


Finally, today, despite some lingering criticism, and possible embarrassment, we've seen the industry take major steps in the direction of welcoming the new capital through the gates. The access the new capital has demonstrated to the pension fund markets provides a hitherto undreamed of amount of capital and the ILS underwriters deploying that capital to underwrite risks are not as fast and loose as once portrayed (even, we must admit, in this newsletter).


On the northeast corner of the National Archives building in Washington, DC is this inscription:  "What is past is prologue". (Our UK friends will recognize it as a Shakespeare quote from The Tempest). The point is that we have seen this all before.


It's not so much that new money is coming into the market --new money has always come into the market. What's happening though is that the nature of reinsurance itself is transforming. We can debate the reasons behind it all we want but it's happening right now in front of us.



You will recognize why we thought of the Charlton Heston quote. Chris O'Kane, CEO of Aspen Insurance Holdings, Ltd. said in a February 13th speech that the new reinsurance capital is "actually quite intelligent."


Kane is now at least the third senior industry figure to suggest that the "new" underwriters are not so na´ve as we once thought. Both AXIS CEO Albert Benchimol and XL Group CEO Michael McGavick recently said the same thing.


This publication, like others, admit to having obtained some mileage from classifying these underwriters as simply "plug and play underwriters". In fact O'Kane suggested that the new capital is "more quantitatively driven, more numerate and more dictated on getting right returns than the traditional capital is".


O'Kane did note however that not all the new capital is quite so intelligent and that "Soon there will be another major loss, some of the naive capital will be destroyed, some people would make mistakes, we'll find out the mistake they've made and they'll be cutting back or eliminating it from business."


It's probably a fair point but, really, is there a traditional underwriter who doesn't lie awake sometimes wondering if such a critique could also apply to them too?


We noted the continuing return of capital to shareholders via stock buybacks by reinsurers --this time by Munich Re. While returning money to shareholders is always a good thing in principle we found ourselves scratching our head a bit at this move. If Munich Re is giving back money to shareholders it means that it's decided they see little chance of maintaining an adequate return by deploying that excess capacity.


We've all been on diets before --some of us have been on more diets than others -- and are probably familiar with throwing away cookies or chocolate to avoid eating it!  We couldn't help think about that watching Munich Re return that capital. By returning the over $1 billion Euros, it will be certain, they will never deploy that capital to support business at an inadequate premium. They won't have it any more even if tempted --not that Munich Re ever would be of course.


But we were surprised that in a company as vast and as diverse as Munich Re there were no mergers, acquisitions, initiatives, etc that that capital could be put to work supporting. Then we read Warren Buffett's annual letter.


Before we get to his letter remember that one reason insurers are struggling with the low interest rates is that they need to keep their reserves in very highly rated securities which are unfortunately the most affected by the low rates. Bigger companies have flexibility and can move that money around a bit compared to smaller less diversified insurers. Money is after all fungible--cash is cash --which is why we were a little surprised to see a company as diversified as Munich Re planning to return over $1 billion Euros this year.


One company which will not be returning capital is Berkshire Hathaway. Buffett's letter makes clear that one of the main engines driving the success of his conglomerate is the return he derives on the $77 billion of "float" represented by the premiums paid to all of Berkshire's insurance and reinsurance business.


Let's be clear on this. Here is what he said "Our float, money that doesn't belong to us but that we can invest for Berkshire's benefit, has grown to $77 billion." If it doesn't belong to Berkshire then who does it belong to? 


Here is the answer --again from the Oracle of Omaha. "P&C insurers receive premiums upfront and pay claims later. In extreme cases, such as those arising from certain workers' compensation accidents, payments can stretch over decades. This collect-now, pay-later model leaves P&C companies holding large sums --money we call "float" --that will eventually go to others. Meanwhile, insurers get to invest this float for their benefit."


You can be sure that Warren Buffett is earning returns on that $77 billion of float far north of the prevailing 4 or 5 percent returns normally earned on safe, conservative investments. Berkshire's goal is always to keep the amount of float at a number higher than the total liabilities that his insurers have to pay but because Berkshire is so diversified they can meet any A.M Best review examining the sufficiency of claims paying ability with flying colors.


Oh and underwriting profit?  Here is his answer. "If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit that adds to the investment income our float produces. When such a profit is earned, we enjoy the use of free money --and, better yet, get paid for holding it. 




It seems that Buffett's main goal is to get as much investable float as possible as compared to the goal of most other insurers which is to produce an underwriting profit.  He seems to think that the results of intense competition amongst insurers and reinsurers is lower premium prices which inevitably lead to underwriting losses which when coupled with traditional, paltry returns (today's market) on the float combine for a double whammy on most traditional risk bearers.


What does he do when he thinks an underwriting profit is not possible? Well, he doesn't return the money to shareholders. In fact he simply walks away and deploys the money elsewhere.


In a US television interview earlier this month he said Berkshire has pulled back on its US catastrophe business because premiums are no longer adequate to match the risks. He said "We actually in the United States have almost eliminated our catastrophe insurance business."


Instead Berkshire has "written quite a bit over in Asia" and with the launch last year of Berkshire Hathaway Specialty Insurance is after the US commercial P&C space.


The key to the whole success though, and he is very clear about this, are the proceeds Berkshire makes from the float. Let's think about this. A traditional insurer or reinsurer that is not well diversified and concentrates on only several lines of business effectively is at the mercy of that market for two reasons.


Because that firm is a traditional reinsurer its reserves are monitored to ensure they remain liquid enough that they are available in the event of claim. If this firm's sole function, is to underwrite risk (and worse yet, a single class of risk) it means that all its float comes from a single source --and one that requires very safe investing.


That insurer does not have the flexibility of a broad base of assets and investments, as does Berkshire or a fund manager, that would allow credit for its float to be marked against "safe, available" investments within the overall portfolio while earning higher returns in other slightly less safe and less liquid investments held by the portfolio. Remember, money is fungible.


The second reason such a traditional carrier is at a disadvantage is the old rule of supply and demand. If there is too little demand or too much supply the price of the good will decrease. If the investments of a traditional carrier are already at a disadvantage because of the need to keep liquidity and security what happens when those poor returns are compounded by falling premium prices further reducing the float amount as well as decreasing underwriting profit?


In a funny way the Berkshire model is a little bit of the model emulated by the ILS reinsurers. A number of the new ILS carriers are coupled with large hedge funds with a very wide diversification of asset classes. The float amount earned from the underwriting can be placed notionally within the asset portfolio of the hedge fund in as liquid an investment as needed, while higher returns can be generated by the hedge fund as a whole by freeing up the float amount for less liquid higher returning investments.


We admit we didn't quite get this at first when hedge funds began to back ILS writers. We should have discerned it though as these ILS risks are fully collateralized anyway. That full amount, or the ILS float, can then be earmarked within the expanding overall investment fund (usually a hedge fund) as a specific portion of its cash or US securities investments. The money is available as stipulated in the ILS contract but the hedge fund itself just increased in size by the size of the float amount and increases the overall return amount of the entire fund.


If you are Berkshire, and are wholly owned from top to bottom, assigning a percent investment profit to the exact amount invested into the overall entire Berkshire pool means that Geico, National Indemnity, Gen Re, etc. are going to enjoy the same high rates of return as does Berkshire.


We'll close this with one final observation. We've always thought that the popular understanding that once interest rates increase, and risk bearers can again earn better investment returns, the interest of the ILS carriers will wane. Now, we see that that understanding may not be right.


The interest rates will increase for everyone including the hedge funds backing the ILS carriers. If a traditional carrier is still not diversified, and bound to only specific LOB's, then they will still be in trouble. Their ROI will increase marginally, and they may be able to better withstand >100% loss ratios, but they will remain at a disadvantage to the model used by Buffett and the ILS carriers.




Underwriter unease?





We thought we detected a sense the frustration on the part of the underwriters in London. There seems to be an understanding that they are swept up now in something far larger than them or for that matter anything they've experienced before.


We met with numerous traditional underwriters whom we've known for many years. After each meeting we would note that if anything the confidence they had in their own ability to perform (underwrite for profit)  successfully has never been higher. They have tools available to them now they've never had before and know how to use them. Don't believe for one minute that stereotype of the underwriter with his dust-laden computer behind him.


But there was another sense coming through too, and it was only when we met with several of the London-based ILS funds that we recognized it. The ILS funds have access to underwriters every bit as good as the underwriters from the traditional companies and syndicates but they have something else too.


That something else is of course the financial flexibility noted in the earlier story that permits the return on the float from the underwritten premium to be stepped up by pooling it into an aggressively invested fund. Keeping in mind of course that the fully collateralized nature of the risk means that notionally the float would sit in the most conservative asset class in the larger fund.


We thought about this long and hard. Lloyd's, after all, has cut its teeth on the efficiency of the underwriting market. Annual underwriting losses in a syndicate cannot be absorbed for long so there had better be underwriting profits and there usually are.


But the flexibility and profit provided by being able to better invest the premium float within a large, large fund can't be denied. We think some of the sense we were getting from some underwriters was that even their best might no longer be good enough.


Of course we think that but then read that Lloyd's has seen a 14% rise in profits in 2013 up to about $5.3 billion US so what do we know? 




More Uses for Data Vera











During the London trip earlier this month we learned that people have difficulty with Excel data in areas unrelated to bordereau and location information.


Data Vera is foremost developed to "intake" and "cleanse" insurance data - good underwriting begins with good data. Data Vera is about data confidence. Once you have control over the data you import and once you gain confidence in its accuracy, you can do wonders with it (modeling, predictive analysis, proposed aggregate effects, etc.)


In today's "Big Data" world, getting good, accurate data to work with can often turn into a bigger challenge than analyzing the data.


After the initial round of implementing Data Vera's basic capabilities, our focus moved towards more complex issues with data intake. Issues such as the ability to work with multi-row headers, import multiple sheets at the same time and even perform analysis over multiple files coming from different senders, began to come into focus. We have ticked those functions off our checklist.


So now, once a data issue is discovered --whether singularly present in one Excel or in dozens --the user can efficiently address it. Prior to Data Vera we had found that 'fixing" data issues could take even more time than than importing the data into the system in the first place. No more. Data Vera now has a variety of tools that allow our users to do online collaboration to work through these issues quickly.


And, by the way, as we had suspected and which was confirmed earlier this month in London, a number of additional suggestions for actual Data Vera use came from users. Data Vera can be used for a wide variety of data including financials, aggregation data and even data migrations.


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


    Roger goes in search of a Bitcoin
"What is Mt. Gox anyway?"



Stupidity: it's not a crime. Being a bone-head is legally permitted, thank Goodness.


And yet ... wilful (or tactical) stupidity, i.e. doing something really dumb when one ought to (and does) know better, can be criminal behaviour.


Which brings us to Bitcoins. By the time you read this, the 'currency' might be finished, but at this writing Bitcoins have already encouraged stupidity at something approaching record levels. In case you've just woken from a year-long coma, a Bitcoin is an electronic algorithm considered currency by some. It was said to be exchangeable for actual money, and some people were able to do so before it entered what must surely be its death spiral.


It is said of the Bitcoin that those who understand the technology don't understand the economics and vice versa. I'd be in the group that understands neither.


The Bitcoin fluctuates in value and can disappear without trace. One fellow stored his coins on his computer and then lost the computer: $6 million down the drain. Permissible stupidity on his part? One rather thinks not. From the time he chose to buy 'em until the time he lost 'em, this man's investment was only ever an accident waiting to happen.


There is no doubt that, in time, money will become a purely electronic commodity. No more cash, with its attendant costs and security problems. No more untraceable transactions, either. Electronic money, like a slug, leaves a visible trail; cash is anonymous and hard to trace.


Those without cell phones may therefore find it increasingly hard to function in our brave new world. It is already impossible to park in London without owning a cell phone, for example. Perhaps that's why many people reportedly value their mobile communications more highly than their food.


We don't know whether the man who lost his computer and his wealth was insured, but we do know that insurers who underwrite electronic currencies that lack suitable security systems might be considered wilfully stupid. It's hard to buy a home contents policy if you insist on leaving the front door unlocked 24 hours a day.


Not long before half the Bitcoins in the world were lost at Mt. Gox (which stood for Magic: The Gathering Online Exchange), a separate group of chancers announced that they would start a currency called Kanyecoins, named after a hip-hopper of some repute. Would anyone in their right mind have bought such a concept? I'm sure someone would have. As George Carlin reminded us: think of how dumb the average person is, and then remember that half of everyone is dumber than that. Kanyecoins didn't make it to the starting blocks.


Greed makes fools of men, and the greed of insurers sometimes encourages the greed of others. From the customer's perspective, why not take the risk of Bitcoins if someone else will cover your losses for a small premium? And that concludes our work on moral hazard.


Some insurers, deep in competition, will underwrite almost anything. Take, for example, Kim Kardashian, the aforementioned Kanye West's companion. Her sitting-down quarters are reportedly covered for something north of $20 million.


Insurers have a social responsibility, although not one you hear much about. They wouldn't insure a Somali pirate, probably, but they might cover acts, events or even people's bottoms so stupid as to defy comprehension. (Yes, I know. You can't have a stupid bottom, but have you seen Ms. Kardashian's?)


No one ever went broke by underestimating the public's stupidity, and fortunes have been made by correctly judging it. If you think I'm being old-fashioned about Bitcoins and the electronic future, let me interest you in putting all your money into an invisible currency not backed by any government or trustworthy entity. You'll keep the currency in the most stolen object of the 21st century.


Put that way, it sounds pretty stupid, doesn't it?




* * *


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


Copyright CATEX Reports

March 26, 2014




Quick "Bytes"
The US National Transportation Safety Board has issued a memo helpfully reminding commercial pilots that it's important to land at the correct airport.....Unless you like Kim Jong Un's hair you're in trouble if you are a male North Korean. The government ordered all male students to get hair cuts just like him. In case you're interested it's called
"the Chinese Smuggler" look....We've been talking about Watford Re for a while. It's open for business now and is an ILS reinsurer looking to write in the casualty space. Arch, High Bridge Capital and JP Morgan are backing it.....Xchanging announced that its insurance division had recorded profits of about 27% on revenue. Two weeks later they announced layoffs in the same division noting that "losing their monopoly" with Lloyd's would mean competition...Terrorism reinsurance rates in Kenya have jumped by as much as 40% said a Kenyan insurance figure. The Westgate Mall attack will reverberate for a while yet...Speaking of which Ed Noonan of Validus says that there are ILS investors looking to take on terror risk especially if TRIPRA is watered down at the end of this year...As of this writing still no
word on Malaysia Airlines 370, the 777 which apparently is down about 2,000 miles off its intended course. Allianz has already begun claim payments on the loss but if it's determined to be terrorism then reports are that Atrium is on the lead....Explain this one to your claims people. 3 elephants escaped from handlers at a circus in St. Louis. The female
elephants were supposed to be performing with the Moolah Shrine Circus, CNN reported. But instead, they took to the parking lot and walked over several of the vehicles.  "These huge elephants literally went through these huge RVs," said one witness to local KMOV-TV, United Press International reported. "Then they went through two trucks breaking mirrors off, and panels off and breaking the windows."   Another eyewitness to the mayhem said people started chasing the wayward beasts - though what they would have done had they caught them is largely an unknown...