CATEX Reports
Issue 34  April 2014
In This Issue
Endurance takeover attempt of Aspen to continue
Lloyd's will work with alternative capital
More capacity means more pressure on underwriters
Climate change is here but insurance can help
Data Vera and Emerging Markets
Roger Crombie on the Heartbleed virus
Aon-Berkshire sidecar, Canadian refinery fire, Louisiana pipeline and Solvency II


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Dear Colleague,

   Welcome to our April, 2014 CATEX Reports. Certainly, we never thought that at this date, nearly 8 weeks after Malaysian Airlines 370 disappeared, that there would still be no trace of the 777. Our thoughts are with the families of the passengers.

    If there was any idea that John Charman had mellowed a bit during the interregnum in which he was away from the industry the recent news about the effort of Endurance to acquire Aspen has dispelled that notion. The war of words is heating up on both sides.

    John Nelson will remain as Chairman of Lloyd's for two more years. That news was a bit blurred and included deep within the Lloyd's annual report. We don't know why the news wasn't more prominently featured as we think he has been more active in promoting Lloyd's and the market than perhaps many people would have thought when he was appointed.

   Based on the April 1 renewals and mid-year renewal projections reinsurance premium prices continue to drop. The ratings agencies and the brokers are beginning to wonder aloud now about when "underwriter discipline" will break down.

    Lloyd's has finally come out and said what everyone had been suspecting for a while --that they are open to the new forms of capital and in fact will embrace it so long as their standards and criteria are met. Traditional reinsurers are already well familiar with their own non-traditional, "new capital" sidecars.

     Roger Crombie (who we know for a fact is quite computer-literate) seems to be making a case that the old "stone tablet" insurance data schema would have remained immune, thank you, to the "Heartbleed" virus.

    And last, but not least, the CATEX Data Vera system has taken major strides proving itself as a resource for emerging markets as the need for accurate underwriting data increases.

   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









                        Old fashioned bullfight in Bermuda



We suppose we have to start with the effort underway by Endurance Insurance to acquire Aspen Specialty Insurance The two Bermuda companies are only an 800 meter walk from each other --Front Street down to Pitts Bay Road --but there is no doubt that a war of words has erupted between them so much so that there is now speculation that Aspen has already publicly said too much so that it never could accept any Endurance offer no matter how lucrative it might be!


There have been a spate of articles predicting intensified M&A activity in the reinsurance sector but it seems as if Aspen was surprised that Endurance went public with its attempt to acquire it. In a world of publicly traded companies where stock prices can be affected by anything, plus close monitoring by ratings agencies watching for any signs of weakness, it does seem as if Aspen's initial reaction to the publicizing of Endurance's offer was meant to signal that they were just fine, thank you, and had no interest in being acquired by anyone.


The problem was that Aspen's reaction didn't quite stop there. Their statement went on to question the value of the stock (Endurance stock) that would be used to pay for part of the acquisition. Escalating it a notch more (as if saying that Endurance's common stock wasn't worth its current trading price wasn't bad enough) Aspen went on to question Endurance's underwriting record and the viability of its own current business model.



You can understand Aspen's logic in wanting to firmly close the door to any speculation that it was in play but the remarks were a bit like waving a red flag in front of a bull in this case. Of course, the bull is John Charman, the CEO of Endurance, and his reaction was predictable albeit thus far surprisingly a bit muted--almost as if he is pulling his punches. One guesses that he really is serious about wanting to acquire Aspen and is refraining from saying or doing anything that would permanently wreck any future hope of an acquisition.

 John Charman



Aspen it seems has no such inhibitions and press commentary is already wondering how, after belittling the value of Endurance stock, Aspen management could ever recommend to shareholders that they accept even a much-sweetened Endurance offer partially comprised of that stock.


Aspen's shareholder equity is about $2.9 billion --hardly a small operation --and the premium price that would have to be paid (the Endurance offer was $3.2 billion) means that there really are only a limited number of reinsurers who could buy them. There is speculation that Aspen is waiting for just such a "White Knight" to appear and names like Partner Re, Validus, Arch, AWAC, XL and RenRe have been touted.


Of course any White Knight would have to overcome the effects of the "poison pill" that Aspen quickly put in place as added protection against a hostile Endurance bid. Aspen adopted a so-called "poison pill" strategy that attempts to make its stock less attractive to a buyer. Its board adopted a shareholders rights plan that would be triggered if a person or group acquires a stake of 10 percent or more, allowing other shareholders to buy Aspen shares at a discount.


This brings back memories of the heydays of the "corporate raiders" of the 1980s with T. Boone Pickens, Carl Icahn, Kirk Kerkorian and Sir James Goldsmith. No one is thinking that the Endurance-Aspen imbroglio is anything like the "cut and run" tactics of the 1980s but you can't hear white knight and poison pill terms without being reminded of it.


By the way, Carl Icahn is still very much in business but we doubt we will see him appear in this one.





Lloyd's will dance with the new capital after all






There were a couple of headlines concerning Lloyd's this month --three big ones that we noticed.  The first headline was that Lloyd's viewed alternative capital as "one of its key strategic threats".  It's interesting what headline writers can do as the headline, and the article it trumpeted, pertained to the Lloyd's 2013 annual report


We had read the annual report and after scanning the headline wondered if we had missed something. As it turned out we had read it correctly because the next day a new headline appeared, dealing with the same topic, saying "Lloyd's to proactively embrace new capital" and that summed up what we thought we had read.


If you've been reading these CATEX Reports you know that we have been watching Lloyd's closely as it takes steps towards alternative capital. We've pointed out that Lloyd's has always been about alternative capital. Historically, how else could a wealthy Lloyd's Name pop in for a 3 year underwriting year cameo appearance and benefit from the returns earned on Lloyd's underwriting?  If that's not an alternative capital structure then what is?  It all depends on what "alternative" capital actually is.


Back when Lloyd's was composed only of wealthy Names the specter of soon to be incoming corporate capital was viewed as "alternative capital". After the corporate capital was firmly ensconced in the same boat as the remaining wealthy names then the ILS capital has become the "alternative capital". Maybe once the ILS capital is in the boat, with the Names and the corporate capital, the next swimmer headed toward the ship will be risk based mutual funds of regular investors providing capital for underwriting. Who knows?


The third item we noticed was that Lloyd's Chairman John Nelson is being retained and his contract extended through 2017. Details of his arrangement can be found on page 84 of the annual report. We think that Chairman Nelson has been good for Lloyd's. He has certainly been carrying the flag in a big way and his banking background has not been unhelpful as Lloyd's looks at the new capital ramifications.



Nelson, the Queen, Inga Beale and Prince Philip


We would also note that in at least one of the articles about Nelson's contract extension it was mentioned that as part of his successful efforts to maintain and increase the visibility of the market he had managed to arrange the recent Lloyd's visit of Queen Elizabeth.


We like Queen Elizabeth but frankly took greater interest in the next visitor Nelson has lined up for Lloyd's and that would be Paul Hewson. You probably know him as Bono.  He is coming to One Lime Street next month.





Pressure on Underwriters as more capital enters





Aon Benfield released information stating that some $540 billion in reinsurance capital was in the till by the end of 2013 of which approximately $50 billion of that was alternative capital.  In an era when reinsurance premiums are dropping the 28% increase in alternative capital contributed to an overall increase of 7% in total reinsurance capital since the end of 2012.


We've examined this issue in the past. Burgeoning amounts of capital lead to increased capacity which leads to price competition which leads to decreases in premium rates. In the last issue we examined how even now reinsurers are using alternative capital tactics to obtain capital at a lower cost and then deploying the capital to underwrite lower priced risks. 


Everything is finite (No, God help us, we are not talking about finite reinsurance!) and eventually all of the lower priced risks are going to be supported by lower costs capital. What will be left?  More and more capital that's what.  And it will be inexpensive capital and it will be looking to underwrite risk. 


Here is where the warnings begin.  First from the brokers themselves who have a more than casual interest in ensuring that as many reinsurers as possible stay in business. Aon Benfield is concerned that as reinsurers continue to compete aggressively, lowering cost of capital, relaxing terms and conditions (didn't Aon Benfield itself start that one with an expansion of the "hours" clause?) and offering multi-year contracts, "the risk is that diligence suffers and some firms become at risk of over-exposure when events occur or market conditions change."




Willis Re International Chairman James Vickers noted that during the April 1 renewals there were one or two cases where underwriters refused to write business at final reduced pricing and walked away. Vickers said "Some people are reaching the bottom of what they're prepared to do --unfortunately it probably doesn't make any difference  because other people will take it up. That's the misfortune for those who walk away."


Meanwhile, to hammer home the point, Fitch Ratings said the April renewals saw Japanese catastrophe loss free pricing down by as much as 17.5% for quake and 15% for wind and flood. US and UK/European CAT reinsurance pricing at April 1 was down by as much as 20% for loss free accounts.


Worse yet, Fitch said that further sharp declines in rates should be expected in the June renewals. With the buildup in Florida capacity, the absence of any hurricane claims in several years, and the quiescent hurricane season forecasts, "further sharp declines" may turn out to be an understatement!


Then, from Oldwick, NJ, AM Best noted that the strong profitability of reinsurers in 2013, in the face of multiple challenges (including falling rates) was nothing short of "miraculous" but noted that "there are early indications that underwriting restraint may be waning as competition from alternative capital increases." AM Best noted that investment income, that traditional buffer against poor underwriting results, had fallen by about 18% last year across the Best's global reinsurance composite index.


It's the old conundrum again. Falling investment returns; falling reinsurance premium prices; underwriters warned not to chase poorly priced business but at the same time being pushed to bring in premium --something has to give somewhere.



Reinsurance can help on Climate Change


The UN released yet another report on climate change. This one was notable to us for two particular reasons. First, the report was unusually pessimistic in tone. Prior reports generally included the warning of dire circumstances to come unless immediate action was taken to reduce carbon emissions. This report was not so nice and one of its authors stated that "we're all sitting ducks" at this stage. The climate changes have only just begun said the report and they are going to worsen "faster and sooner that we had anticipated. The horrible is something quite likely, and we won't be able to do anything about it" said another co-author of the report. 


In other words we may be past the point where doing anything will ward off what scientists are seeing as nearly inevitable. The so called "tipping point" may have come and gone.


We said there were two reasons the report was notable and we are grateful to our friend Steve Evans at Artemis who apparently has waded through the 32 volume report and culled out this nugget. The report talked about the important role that risk transfer, insurance and reinsurance and instruments like CAT bonds and weather index insurance could play to help countries deal with increased weather related risk.


Many of the more pronounced effects of climate change will occur, at least initially, in underdeveloped and poor countries. It could be an opportunity for the risk industry to develop products to meet the challenge posed by these countries as they grapple for some way to protect their agricultural base and their citizens.


Maybe this is why Frank Nutter at the RAA has been talking about climate change for the past 20 years?



Data Vera and Emerging Markets








Haphazardly collected data could reduce the provision of insurance coverage in emerging markets, but technology provider CATEX offers a solution, as Frank Fortunato tells Intelligent Insurer.


We were interviewed by Intelligent Insurer about data challenges in emerging markets. We thought that if spreadsheet difficulties currently lead to problems in making pricing judgments on risks from the developed world, on risks we are familiar with, how difficult will it be to get accurate information for pricing on unfamiliar risks from spreadsheets coming from emerging markets?

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


    Insurers' innate Conservatism affords benefits after all




            For many years, insurance companies were accused of resisting the data processing revolution. They were said to be slow to sign up to 'everythingonline'. The reasons for their reluctance - concerns over security and the revelation of trade secrets - were laughed at by those who considered themselves more modern in their outlook.


            I recall visiting a major broker's office not that long ago, where Windows 3.something was in use, whereas even I, a lowly hack, had Windows 7 at home. A representative of the broker explained that with more than 15,000 computers, always buying the latest model was not only infeasible, but also (given new software's propensity for bugs) potentially dangerous.


            Insurers and especially reinsurers were again accused of all manner of Luddite behaviour when the Cloud became the flavour of the day and some companies raced to place all their data outside their control. Had this been a movie, rather than real life, someone would undoubtedly have said at this point: "What can possibly go wrong?"


            For every computing expert, there are perhaps 100 criminals with nothing better to do than to break computer systems for fun and profit. Often, those employed in government are dimmer bulbs than those who seek their fortunes in sophisticated criminal activity. It is not much of a contest between software programmers and those who crack their products and steal information en route to stealing money.


            No better example of this observation could be illustrated than in the Heartbleed virus, that has affected "up to 80 percent" of servers around the world in the past couple of weeks. From The Guardian: "It turns out that within OpenSSL there is something called the 'heartbeat protocol'. This is needed to ensure that communications between user and site are kept alive even when the line goes quiet. What seems to have happened is that when one of the programmers who work on OpenSSL was doing a software update in 2011, he made a coding error which then - unusually for open-source software - went undetected for several years."


            When the error was detected, Bad Guys did what Bad Guys do: they set out to destroy. Their path had been cleared by the mistake, thanks to deficiencies in the monitoring and supervisory system relating to the protocol.


            That there were deficiencies is hardly surprising. Look at the regulatory system for anything: it's deficient. Regulators step in after the battle and bayonet the wounded. The SEC, for instance, or the British Financial Services Authority (FSA), organisations supposed to bring order to the frenetic activity of financial markets and punishment to those who transgress, have been proved, time and again, to be largely useless. (The FSA is colloquially referred to as the Fundamentally Supine Authority.)


            Men and women who work for regulatory agencies should be regarded as heroes, yet no child demonstrates a burning desire to become a regulator. Regulatory people are often less exciting than ordinary folk, and in many cases less skilled. Clearly, whoever oversaw the heartbeat protocol was less than efficient.


            For those who find a lifetime of hard work an unappealing prospect, computer crime represents a dazzling opportunity for self-fulfilling prophecy. After ruining the lives of regular, hard-working people, criminals can say: "See? I told you hard work was a waste of time. Look how badly off these hard-working people are, now that I've brought down their world."


            It takes something special to accept a lifetime of hard work as the necessary qualification for achieving the things that matter. Only cowards and charlatans adopt a life of crime, rather than be tested by the demands of a mainstream life.


            It took guts to resist the onset of electronic computing. The insurers who held back were pilloried for their supposed excess of caution, but now stand revealed as eminently sensible. They have entirely sensibly adopted an approach that reflects my school's motto: paulatim sed firmiter, slowly but surely.


            Let us pray that insurance, and for that matter every other industry, resists placing the economic well-being of their staff and customers in jeopardy by handing off the responsibilities of control to some acned teenager writing code for an apparently loosely controlled world wide web.

            Not for nothing is insurance and reinsurance regarded as the bedrock on which civilisation stands. More power to those who defend its - and our - interests by questioning those who unthinkingly rush to embrace the new.



Editor's Note: CATEX systems have not been affected by the Heartbleed virus and we continue to take every possible measure to protect our systems from evildoers, hardened criminals and acned teenagers alike.

* * *


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

April 25, 2014




Quick "Bytes"


Aon's Greg Case said that a year after its launch the controversial 7.5 percent Berkshire Hathaway sidecar has performed well enough that it validates Aon's predictions that it would be "good for clients, good for London and good for Lloyd's". He said that over 2,500 individual policies have been placed through the facility in its 9 months of operation in 2013.
Estimates suggest that up to $2.5 billion in premium is expected to flow through the facility over a 12 month period which, Case said, a number that represents 70% of the eligible premium. Does that mean Aon is expecting a potential total premium possibility of $3.4 billion or that it's planning for defections of $900 million (30%) of premium from insureds will pull their business from the sidecar?.....The explosion and fire at the Co-op Refinery Complex in Saskatchewan on Christmas Eve is growing in cost. Initial estimates in January topped out at $400 m for property and BI but the total may be as
high as $500 m after more deterioration in BI loss development. RSA is the lead on the program...A multibillion dollar hedge fund, ArcLight Capital of Boston, controls American Midstream Partners which owns a 370 mile long gas pipeline in Louisiana. The Midla pipeline was built in the 1920s (yet we wonder at the frequency of gas line explosions) and the company wants to abandon it. The line serves 10,514 meter clients (approx. 42,000 people) including the State Penitentiary. The customers say their rates will increase 15 fold for replacement gas...Former Max Capital CEO Bob Cooney is said to be working on a Bermuda reinsurance start up that will be capitalized at up to $1 billion...Nigeria has overtaken South Africa as the continent's largest economy. Its GDP is now at $500 billion but it's
probably been in first place for a while now as they hadn't overhauled their GDP calculations since 1990 and had been completely missing their e-commerce, mobile phone and prolific "Nollywood" film industry. Nigeria will now recalibrate their GDP formula every 5 years like everyone else...The first ripples of US sanctions against Russia stemming from the Ukraine dispute were felt in the industry when Russian insurer Sogaz
wrote a comfort letter to London market brokers saying that no single shareholder (read that as Bank Rossiya which was the subject of US sanctions)had a controlling stake in the company. Sogaz places reinsurance into the London market and to the big European reinsurers...It seems that Europe's 40 largest insurers and reinsurers spent over $6.6 billion in 2013 alone to comply with new regulatory requirements. This is according to a study by Deutsche Bank. The report says that insurers believe that these costs will continue at the same rate to
at least 2015. A decade or so ago the US was hit with costs associated with implementing the Sarbanes-Oxley Act but Solvency II, it would seen, is more than holding it's own as a major expense item. Let's hope it's implementation is not delayed again....Finally, we know that at least a few of our readers ran the Boston Marathon earlier this week (you know who you are!) and we congratulate them on their effort. Great work and kudos to you for participating in what turned out to be a very proud and important day for Boston.