CATEX Reports

It's a funny thing about insurance and reinsurance and none other than Brian Duperreault has noticed it. In a speech entitled "Where are the women?", delivered at the Bermuda Captive Conference, Mr. Duperreault sent out "a call to arms to his male peers to fix corporate issues facing women."

We think this is an important issue, Inga Beale and other prominent women not withstanding, and we will examine it closely.

There were a couple of major headlines this month as well. Did you know that a leading reinsurance figure thinks that as much as $1 trillion of pension fund money is headed our way as new alternative capital?

When you combine a prospective flow of that magnitude with the current market prices it's easy to see why some observers have taken to calling reinsurance capacity simply a commodity. Maybe those Chicago Board of Trade people had it right 25 years ago when they tried to wedge reinsurance capacity in with soybean and wheat futures?

We saw John Charman stating that alternative capital has already affected underwriting behavior and we have Denis Kessler saying that those in the Tier 3 class of reinsurers are doomed if they remain there.

We have our usual Roger Crombie column too. Next month Roger will have an interview with someone, I guarantee you, you will really want to hear from. This month we will hear about Mark Carney. the Governor of the Bank of England, the UK equivalent of the Chairman of the Federal Reserve Bank.

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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Duperreault

Where are the women?

You have to hand it to Brian Duperreault. This is a man who was raised as an only child by a single, working mother in Trenton, NJ in the 1950s. No trace of a silver spoon for him. He has always remembered what his mother Margaret did for him and the values she instilled in him.

1950s Trenton

Duperreault is a very successful businessman, which means that he is no pushover. In fact he's probably as hard as they come. His successes at AIG, Ace and Marsh are the stuff that legends are made of. His newest venture at Hamilton Re will no doubt soon add to that list.

Why this paean to Duperreault? Well it's not really " a song of praise or triumph" for Brian Duperrault as much as it's qualifying him as one of the top five or six figures in reinsurance over the past few decades. Only a fool would listen to what he says and just dismiss it.

Are you ready now?

In what was one of the most eagerly awaited Bermuda speeches in recent memory Duperreault spoke on this topic: where are the women? Meaning of course where are the women in the C-suites of insurers, reinsurers and brokers. The event at the Fairmount Southampton was sold out.

He noted that only 1.3% of the CEOs in finance and insurance are women. He said that there had been little change in the industry since a 2012 Forbes article said that the C-Suite and boardrooms are "male, stale and pale". He warned that as the pace of globalization increases, successful companies will be those that prioritize a path to leadership diversity and "account for different voices and different perspectives".

Duperreault left no doubt as to where he thought the blame for the gender imbalance lies. He urged his male peers to do more and urged women to speak up and pursue parity in pay and responsibility.

David Fox at The Royal Gazette in Hamilton covered the speech extensively and his story can be read here. Read it carefully. Like we said, only a fool would dismiss what Brian Duperreault has to say.

Fair disclosure. This writer has practiced many times on a beautiful Steinway donated by the Duperreault family to the Bermuda School of Music.

Underwriting capacity is now a commodity?

Flandro

Let's lead into the monthly "alternative capital" discussion with this little gem. David Flandro who was just named to a top slot at JLT Towers Re, coming from Guy Carpenter said that he thinks that the size of the investment from pension funds into insurance linked securities could eventually exceed $900 billion. Headline writers, who apparently can count too, saw Flandro's "could exceed" and the story ran under the header "Pension funds to invest $1 trillion in ILS".

Either way the number will get your attention. He thinks that talk of pension funds leaving the sector in the event of a claim-paying event is just that --talk and unlikely to happen.

Fishman

Next we heard from Travelers CEO Jay Fishman who wondered aloud about what "will be interesting to watch is people exploring casualty reinsurance". Does the CEO of a publicly traded company ever "wonder aloud" when reporters are in the room? Doubtful.

Then, after seeing the potential size of the possible alternative capital total jump from $100 billion to $1 trillion, and hearing the head of a major US casualty buyer basically signal that he would be open to looking at ILS casualty reinsurance options, we get this one next.

Hancock

The new CEO of AIG Peter Hancock, no small buyer of reinsurance themselves, said he now views (re)insurance capacity as a "commodity" and one which AIG embraces as "a way to offer cheaper capacity to our customers and make us more competitive".

We thought about Hancock's comment. We know what a commodity is. It's something that's bought and sold. Whether it means that the exact same item is bought and then sold we're not sure. We write this sitting only a few scant miles from the same Trenton where Brian Duperreault was raised. Our in-house philology department is a bit lacking.

We looked "commodity" up on Webster's and also found this meaning.

Commodity: good or service whose wide availability typically leads to smaller profit margins and diminishes the importance of factors (as brand name) other than price.

If Mr.Hancock was aiming at this definition then hold on to your seats. If the CEO of probably the biggest US reinsurance purchaser has come around to viewing reinsurance that is so widely available, as to diminish the importance of factors other than price, what will his view be after an additional $1 trillion of alternative capital is pumped in?

If this view is true it would help explain the increase in M&A activity in the reinsurance sector of late. We remembered the comments made by Pat Ryan and John Charman at the New York InsiderScope conference last month when they said that a reinsurer has to be big enough to serve as many of its client's needs as possible. If you add in the "commodity" factor to the mix being "bigger" also means having a diversified enough, and large enough, book of business so that a reinsurer can compete on price.

We thought about this when we saw comments made by Scor CEO Denis Kessler. He observed that the industry is becoming split into different tiers of reinsurers but that there is trouble ahead for those in the lower tier.

Kessler

He said "Tiering of the industry is the key word in 2014 and 2015. It's not just a question of size, it's the quality of underwriting and the choice of business lines where you could prove to your clients that you're competitive." Kessler thinks the battle right now is among the Tier 3 reinsurers desperate to move into Tier 2.

The Tier 1 companies can meet the qualitative and quantitative needs of their clients but Tier 3 companies "should buy a T-shirt that says no future" because he believes they won't last in this environment.

By the way Kessler was speaking at the S&P Annual Insurance Conference and a survey of the conference delegates revealed that 51% of them think that there will be an active M&A season this year with as many as five major transactions.

Where does this all end? If you are a faithful reader of CATEX Reports you know that our crystal ball went on the blink years ago so we don't use it. We did see this however. The drop in reinsurance prices has become "more of a problem than not" because of the need to pass along the cuts to consumers to stay competitive. This wasn't coming from a reinsurer though and that's what got our attention.

Kerner

Mike Kerner, the head of general insurance at Zurich Insurance Group, said the decline in the cost of reinsurance is now feeding into the direct pricing charged by primary insurers to end customers. Kerner said "If you're on the primary side, part of the input on your cost is the cost of reinsurance. If that cost goes down, some competitors will let that flow through to their direct pricing and the end customer will benefit from that."

But wait, there's more...Nomura Securities said the alternative capital driven pricing pressure is certain to spread beyond property catastrophe lines. Nomura noted "The establishment of Watford Re, by highly respected Arch Capital, will be a major alternative underwriter of casualty risk." Nomura expects more entries in this space, possibly eyeing liability lines such as auto or workers' compensation as "potentially stable sources of assets" for asset managers.

What should we make of all this? Even observers who steadfastly defend the brand names, underwriting and claims paying records of major blue chip traditional reinsurers have, we are sure, dabbled on Priceline, Orbitz and car insurance comparison sites for their own needs. How has that worked out? The sky hasn't fallen. Hilton and Marriott are still making money as are the major airlines --but there has been significant consolidation in many of these industries as the recognition has dawned that consumers do view products and services as commodities.

Still though, brand and reputation will often win out. One does not automatically select the cheapest hotel or lowest cost flight or least expensive auto insurance if there is a major brand alternative that may be at a higher cost but "in the ballpark".

Maybe this is what John Charman meant when he said at the InsiderScope conference that he wasn't concerned about the current state of the market and that what we're seeing is the natural state of the market trying to evolve to find the most efficient way to distribute its products.

It's good to remember, of course, that Mr. Charman and Endurance are continuing their takeover/merger effort in regards to Aspen Specialty. The result would be a much bigger company --maybe depending on what metric Denis Kessler is using a big enough company to become a Tier 1 player.

Not practicing capacity "commoditization" in Florida

We have been familiar with the R Street Institute in Washington DC for a while. It's composed of people who split from the Heartland Institute after Heartland placed a billboard near a busy Chicago highway with a picture of the Unabomber Ted Kaczynski with the wording "He still believes in global warming. Do you?'

Heartland lost a significant number of corporate contributors after that move and the R Street Institute was begun by disaffected staff who moved out on their own. R Street has a couple of prominent insurance and reinsurance people on their board and while certainly no one would ever mistake them for the Huffington Post they do seem to be balanced in their analysis of issues affecting the insurance industry.

R Street was in the news last month and it attracted our attention, mainly because their comments touched on some issues we had been wondering about too. With the dramatic softening of reinsurance rates in Florida (depending on who you believe maybe a decrease of 20%) R Street wondered why one of the "largest government-backed catastrophe insurance entities in the US -the Florida Hurricane Catastrophe Fund -isn't taking this opportunity to shift some of its $17 billion in potential 2014 obligations off the backs of taxpayers and onto a private market that is clamoring for more risk."

You may remember that the COO of the FHCF, Jack Nicholson, had proposed that the fund buy up to $1.5 billion in private reinsurance earlier this year. That plan was shot down in the state legislature. There were particularly rancorous comments from some elected officials that the FHCF was sitting with a total of $21 billion in total claims paying capacity and the notion of sending taxpayer dollars to Bermuda or London to pay for unnecessary reinsurance cover was a non-starter.

Nicholson

We covered this a bit and found ourselves amazed at the shortsightedness of this approach. Now we are even more amazed. R Street indicates that $4 billion of the $21 billion in claims paying funds "available" would result from a bond issuance funded by post-storm hurricane surcharges on nearly every insurance policy in Florida. The report noted that since 2009 there have been only three municipal market like bond issuances as big as $4 billion.

With the issuance being funded by policy surcharges, the normally volatile Florida homeowners insurance market would likely become outright combustible, reducing even more the attractiveness of the FHCF terms for the bonds. Translation: they would need to be priced with a pretty attractive interest rate to woo buyers.

Citizens Property Insurance, the Florida insurer of last resort, did purchase reinsurance coverage and you have to wonder why, when the cost of reinsurance is a bargain, the FHCF didn't take advantage of the same. The FHCF provides support to state property insurers after a large CAT claim when their reinsurance levels are triggered and essentially is acting like a state reinsurer that has bonding capability that is funded by homeowners policy assessments.

Andrew strikes in 1992

We sure hope there are no big hurricanes this season in Florida or those same state lawmakers who said they didn't want to buy reinsurance are going to be hearing from constituents. If there is a major event that triggers surcharges, given the current availability and cost of reinsurance, it could turn out to be disastrous for those who insisted there was no need for coverage. We're sure they will be watching The Weather Channel closely for the next few months.

Remuneration grumbling

We suppose we could have seen this one coming. In a nonbinding vote of the shareholders of Endurance Specialty Insurance 24,507,304 shares were voted against the insurer's executive remuneration package and 15,839,513 voted in favor of it. The remuneration of John Charman and other executives was not affected as the vote was nonbinding.

Charman has an unusual remuneration package and famously has a base salary of $100 per year. Much of his compensation involved stock awards, stock options and reimbursement of expenses paid in arrears with Endurance stock. Remember that he purchased some $30 million in Endurance stock in May, 2013 when he assumed control of the company and has pledged to buy an additional $25 million in stock to help finance the company's proposed acquisition of Aspen.

Charman

Endurance shareholders were apparently disgruntled that the complex compensation package produced as much as $46 million in compensation for Charman and the "no" votes (albeit nonbinding) signaled such displeasure.

In Charman's defense though one could argue that he has squarely tied his remuneration, if not his fate, to the success or failure of the company because of the equity component of his package.

By the way, when it came time for the Endurance shareholder to vote for something pertaining to Charman that actually was binding, like being reelected as a director of the company, Charman obtained 39,650,450 votes in favor with only 706,638 opposed. That's a landslide in any election.

In case your curiosity is peaked by this Insurance Insider just published a table with the top 50 highest paid P&C (re)insurance executives of 2013.

Davies

Brian Duperreault would probably not be surprised to learn that only one woman appears on the list and that's Aon's Christa Davies in 44th place.

Aggregate cap tracking

We will be demonstrating the CATEX Data Vera System in London for two weeks beginning June 16th.

We developed Data Vera because our own CATEX Pivot Point Systems, including the Bordereau Management Systems, were encountering challenges (to put it mildly) in uploading incoming data into our database. Incoming Excels came in all shapes and sizes and often included inaccurate or missing data.

Worse yet, from our perspective, if we were unable to effectively catch 100% of the errors in the incoming data it became a little bit like the American legal doctrine about dismissing evidence that was found as the fruit of the poisonous tree! In short, we lacked 100% confidence in our data reporting because we were uncertain about the quality of the data we had converted.

We process nearly $5 billion a year in premium and claims so having certitude about our data is key.

Data Vera has given us this certitude and we now can accurately convert disparate data of any type after cleaning it, validating it and correcting it, and then import it right into our database for multiple data report creation.

Now that we can produce, with certainty, highly auditable and clean data, we have come full circle.

We have hooked up Data Vera to our Bordereau Management System to produce a very comprehensive solution. Data Vera can look into the Bordereau System data and compare that data to data that is being imported. This means that the potential effects of new business on a client's aggregate caps and TIV can be examined down to the lowest, granular level worldwide before the business is bound.

Of course, post binding the same comparison features are available too. Our new Data Vera dashboard has maps, graphs and charts, as well as numeric comparisons, so that a user can adjust the proposed new business to see what the effects of binding it would be on any metric chosen.

Data Vera can still be licensed alone, as a stand-alone product, that can be integrated with a competing bordereau system, or integrated to an internal reporting system.

In the next two weeks, though, we will be showing how Data Vera can be used to provide fast and effective analysis by utilizing a two way data flow to and from an existing system database. We naturally chose our own Bordereau Management System.

If you want to meet face to face when we're in London the weeks of June 16th and June 23rd please let us know.

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

Roger Crombie

Roger wonders about the BOE's Mark Carney

He's got some nerve, that man. Mark Carney is the Governor of the Bank of England, the UK equivalent of the Chairman of the Federal Reserve Bank. Carney is Canadian, an acknowledgement by the powers that be of Britain's lack of competent regulators. Can you imagine the Fed naming a Canadian, or any other non-American, to run the show?

Carney was appointed Governor on July 1, 2013 because Canada seemed to suffer less than most from the Great Recession of 2007/8. Safe pair of hands and all that. Since his arrival in London, he has overseen a rigid lack of activity at the Old Lady of Threadneedle Street, as the Bank of England is known. Although the UK economy has risen well past the point where interest rate rises are clearly needed - and beyond the level at which Carney himself said he would start to raise rates - he will not raise them by so much as one basis point.

Bank of England Carney

I've said before that rates would never rise from the essentially zero environment we've had foisted on us for umpteen years. What politician, or apparently Governor, would be brave enough to reintroduce economic reality to the financial Disneyland we now inhabit?

One result of this inactivity has been a massive real estate bubble in the UK. Properties in London have been rising in value at several percentage points a month of late. (Full disclosure: I made a bundle thanks to this mad scheme and sold my London apartment to lock in the profit before the bubble bursts. My new apartment is appreciating faster still.

Carney would lose his job in a heartbeat if he banged, or even gently eased, rates back to the 5% neighborhood, where any sane economist would confirm that they should naturally live. Probably to deflect the growing criticism of his inertia, Carney has turned on the insurance industry, one of the least guilty sectors of the financial community, and vowed to crush it beneath his iron fist. The industry hasn't done anything wrong, you understand. Incapable of managing the bankers, however, Carney has decided to demonstrate his awesome powers by beating up on those too dignified to respond.

"The insurance sector faces challenges in adjusting to the post-crisis landscape," Carney says. He adds, with utter gall, that the main challenge the industry faces is low interest rates that are "making some types of traditional insurance business less viable.

To recap: a man too politically craven to make the economy work will punish those who suffer as a result of his mismanagement. The insurance industry, Carney admits, "weathered the financial crisis better than many other institutions." He's darn tootin'. Of the major industry players, only AIG, which suffered solely from the unexpected and immoral closure of the financial markets, gave anyone any pause at all.

Not a single banker in Britain has paid any price for his or her part in the crisis, excepting only Fred Goodwin, whose knighthood (but not his pension pot) was withdrawn. Carney cannot prosecute, nor apparently can he even influence those in banking. Instead, he runs around the playground like the cowardly bully that he is, threatening the A students.

The test of a man, a system or a government comes when the chips are down. Any fool can manage when things are going well. It requires talent, skill and bravery to take charge when turbulence hits.

I have the highest regard for Canadians. All of my family, bar one, live in what my Dad dryly referred to as Canadria. The fact that Canadian people are relatively well-behaved and sober citizens stands not to the credit of the man lucky enough to have been in charge of its central bank when the storm hit.

(A short story, entirely not relevant. In a radio competition a few years ago, Canadian listeners were asked to complete the Canadian equivalent of "as American as apple pie." The winning entry was "as Canadian as ... possible under the circumstances.")

A 'carny' is a person who works in a funfair. Most carnys are sharply aware of the difference between reality and the fun of the fair. Mark Carney isn't.

* * *

Roger Crombie is an American Society of Business Publication Editors national award winner. An English chartered accountant who lives in

lives in Eastbourne, on England's South Coast, 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].

June 16, 2014

Quick "Bytes"

We actually have been asked this question so "yes" this dog, Omar, is one of the writer's two canines.....Reinsurers look set to absorb the lion's share of insured losses from the recent anti-China riots in Vietnam as Taiwanese insurance losses hit reinsurance levels. No

Burning factory in Vietnam

fewer than 24 Taiwanese-backed factories and businesses were set on fire by Vietnamese protestors. (Note: China and Taiwan have been separate countries since 1949 but this fact was overlooked by the rioters.)....Typically you need to have $1 million to invest in a hedge fund but one analyst notes that a cheap way in is to buy shares in one of the publicly traded hedge fund reinsurers. Since the hedge fund reinsurers see their capital managed by the hedge fund the reasoning is that the typical high annualized returns for a hedge fund can be replicated at the reinsurer share level. Of course there remains the matter of underwriting loss or profit....The World Cup is in full swing now --finally it seems. There have been months of protest in Brazil as citizens complain about the high cost of staging the Cup in the face of a paucity of services for the poor. The most recent demonstration involved 300

Brasilia: May 27, 2014

indigenous Indians armed with bow, arrows and spears facing off against heavily armed police in the capital Brasilia. Several police had to have arrows surgically removed after a tear gas vs bow and arrow battle --all of which was televised live....Facebook's Mark Zuckerberg had better stay out of Iran even though we doubt it's in his upcoming travel plans. A judge in southern Iran has ordered Zuckerberg to appear to

Zuckerberg

answer complaints by people who say Facebook-owned applications Instagram and Whatsapp violate their privacy. Hopefully the judge in the Islamic Republic doesn't look at any of the content or hoodie wearing billionaire will really be in trouble...Remember David Cash, John Charman's predecessor at Endurance? He is still fighting the good fight in his position as interim CEO of the Bermuda Business Development Agency. When US comedian Bill Maher, who as a nightly TV show with about 4 million viewers branded Bermuda as a "tax loophole masquerading as a country" Cash responded that if Maher had taken

Cash Maher

the time in the past to thank Bermuda when its reinsurance businesses paid billions of US hurricane, drought and earthquake losses without the benefit of tax deductions afforded US insurers, then I would be more willing to listen to his rant...The US federal government approved $535 million to build a massive system of dikes, berms and barriers around Manhattan to protect it from another Superstorm Sandy. There will be a 16 foot high dike around lower Manhattan and the entire system is designed by the Bjarke Ingels Group of Denmark...Finally if you have ever wondered what a 100 mph tornado can do (we know that underwriters can tell you)

KCTV Channel 5: Willis, Kansas

Look at this picture. 52 empty coal cars were knocked off their sides by the wind in Willis, KS. It makes you realize how little a chance anyone or anything in the path of one of these things actually has....