CATEX Reports
Issue 43   February 2015
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Dear Colleague,              

If you are reading this in the Northeastern or Midwestern United States you are well aware that we're enduring one of the coldest winters in memory.  In New York City the East River has practically


                                          East River at South Street (Michael Mikitiuk)

frozen solid near the South Street Seaport.  And if you're in Boston, our prayers are with you as you continue to struggle with nine feet of snow over the past few weeks!

There was a dusting of snow in London on February 5th when we were there.  To be honest, we barely noticed it.  Weather, like everything else, seems to be relative doesn't it?

There was an outpouring of interest at our London sessions about the interface CATEX built to our client RFIB's Delegated Authority Management System and Lloyd's Lineage service for Canadian binder business placed into Lloyd's.  We had over 90 attendees and had to schedule an additional session to accommodate those interested.  More details follow below.

 M&A activity has picked up, even since we left London, as Fairfax Financial announced it was acquiring Brit Insurance.  There aren't too many listed Lloyd's companies left anymore and those that are have been identified in the press as takeover candidates.  One company, Lancashire, has decidedly indicated that it's uninterested in even being approached. We wonder what Stephen Catlin would have to say about that?

 There were a few other themes we began to hear about too.  First was the idea that certain "mainstream" reinsurers are actually easing the way for greater amounts of alternative capital to enter the market by acting as fronting mechanisms.

 Next we noticed remarks by RSA's CEO that insurers had erred by "letting" brokers take away much of their own business and speculated that the intermediary model may not last forever.

 Finally we couldn't help but notice the conflicting signals being heard about CAT reinsurance. Certain brokers are saying that more of it needs to be sold while certain reinsurers are warning that the "easy" profits of event-free CAT years have led to the current pricing crisis.

 Roger Crombie is here too.  He's been noticing the beneficial aspects of sleeping and, better yet, may have identified a way to get paid for it!

  As always any comments or questions would be appreciated --either about CATEX Reports or any of our products. 




Stephanie A. Fucetola

Senior Vice President/CATEX








Is there a "hidden hand"? 


Maskirovka revisited




No doubt you are aware of the recent explosion in growth of American oil and gas production. The growth is due to innovative new techniques used to extract fossil fuels from beneath the earth including a process known as "fracking".  

Fracking can be a pretty messy business. Catlin has produced an excellent summary of the process, its extent in the US and the risks associated with it.  Let's just say that it's turned parts of North Dakota, Pennsylvania and Montana into semi-lunar landscapes but made a number of farmers and oil companies very rich.  The value of the mineral rights underneath a farm or homestead has led to the creation of overnight millionaires in a number of areas.



                                      Fracking: Before and After

But it's undeniable that fracking, and other new extraction technologies, have helped lead to a surge in US energy production which, when combined with the global economic slowdown, has led to a worldwide glut of oil.  The resulting tumble in the price of oil has stung a number of countries who's economies rely on "petro-dollars" to keep them going.




One such country is Russia. It is the leading oil producer in the world and when the bottom fell out of the global oil market the bottom fell out of the Russian economy.  Added to this difficulty are the economic sanctions imposed upon Russia by the West, as punishment for their actions in the Ukraine. Most economists think Russia is headed for a long period of stagnation and ratings agencies seem to agree.


Bear with us. Each day, driving home from work in New Jersey, we notice dozens of lawn signs in people's front yards. The message is always the same --either "No to Fracking", or "You're Frack-ing Crazy" or "No Frack-ing Way!".



                                                    (WNBC TV)

The signs are rarely homemade, although a few of them are, and we had thought were distributed by environmentally conscious groups based in New Jersey such as the Sierra Club or NJ PIRG.


It's easy to sympathize with the intention of the protest as you hum by in your car filled with gasoline at $2.10 a gallon.  Probably, as altruists at heart, we would pay a bit more for gas if it meant saving the environment so the signs inspire sympathetic reactions.




Then we noticed this story in the Royal Gazette in Bermuda. It's a little hard to follow but the upshot of it is that there are serious allegations that Russian oil money has found its way into the coffers of US environmental groups who are protesting the proliferation of US fracking.  


There is a Russian term called "maskirovka". A good definition would be "strategic, political, and diplomatic means-including manipulation of "the facts", situation and perceptions to affect the media and public/world opinion, so as to achieve or facilitate tactical, strategic, national and international goals."


Naturally, if the allegations of Russian money supporting the US anti-fracking movement are true the goal would be to inspire enough public ire in the US against fracking so as to lead to its curtailment thus reducing the global oil supply and improving the Russian economy. If you've ever read any John le Carre you know the Russians are supposedly very good at this.


This is a stretch you think? It could be but please read one more anecdote until we get to our point. One night in Paris several years ago an older man, who turned out to be a professor at the Sorbonne, sat alone next to us at a table in a restaurant. We invited him to join us.  He spoke from personal experience (he was there) about the crippling 1968 uprisings in Paris.  The Rolling Stones song "Street Fighting Man" was written about it.




Our professor friend swore, unequivocally, that the KGB had been financing and influencing the protests on a daily basis.Their goal, he said, was to split French and European opinion against continued US involvement in the Vietnam war and possibly affect the November,1968 American Presidential elections.



France essentially ceased to function during the protests --with over 11 million workers on strike. President de Gaulle even left the country for six hours because he feared his security detail would be forced to shed blood to protect him if mobs attacked the Elysee Palace.


The civil strife had its desired effect. Students and agitators in the US picked up on Europe's sentiments. Hubert Humphrey, the Democratic candidate for president never recovered from the riots that broke out at the Chicago Democratic convention and the "peace candidate" --Richard Nixon --won a very close election in November.


We thought a little bit about maskirovka  when we read the stories for this month. We like to try to keep things simple as regular readers know. But this month we had a strange feeling that other forces were in play.  You can decide for yourself.


We saw that Brian Duperreault was warning that reinsurers had risked it all on CAT reinsurance and were now paying the price with forced consolidation. At the same time we saw Aon Benfield say that reinsurers need to sell more CAT coverage


We learned that a significant percentage of ILS deals are being brought to the market by big reinsurers acting as fronting mechanisms.  Many of these same markets have been among those warning of  the disruptive effects of alternative capital. By acting as ILS MGAs some reinsurers are bringing deals into fruition that they formerly could have written on their own capital (and collected the lion's share of the premium) but are now just collecting an MGA commission. 


Where will this trend go?  How long until the insurers realize that they could go directly to the capital markets?


We don't know the answers.  But having lived through 1968 we are fairly certain that predictions on its outcome were impossible and that the KGB was as surprised as anyone that funding the Paris insurrection led to LBJ's retirement and the scale-down of US involvement in Vietnam. Hindsight is always 20/20. The Kremlin may have pulled off a neat trick influencing Western public opinion but it didn't save them 20 years later.


Is anyone actually trying to influence the evolution of the current reinsurance market? Maybe some are --certainly some think they are --but realistically there are too many variables out there for anyone with even a passing familiarity with risk management to believe that they possess a long term plan that will mold the growth of the market over the next decades.


We were about to say that we will just have to write about this 20 years from now with the benefit of hindsight but realized that, God forbid, if we are still churning these out by 2035 we will be on issue 283 instead of issue 43.  


Let's see what you think. We'll start with reinsurers as MGAs. 




Who exactly is bringing ILS deals to market?




We've mentioned this in the past but four years ago we noticed that Neill Currie spotted the possibility of reinsurers acting as underwriters for a coverage that was underwritten by alternative capital.  Currie was smart enough to see that underwriting, servicing and structuring a deal involving new capital (and collecting fees at each juncture) was smarter than standing in front of a tidal wave of new capital. 


Neill Currie  


The world has changed dramatically in the four years since Currie's realization. In June of 2012 there was less than $15 billion in alternative capital in the market. Now alternative capital is at $62+ billion and seems to have broken itself down into CAT bonds and collateralized reinsurance. Much of the growth has come from pension and hedge funds flush with cash and hungry for yield. This is not new news but this next bit is.


Henning Ludolphs at Hannover Re said that capital markets offer "extra protection and risk transfer as well as an opportunity to earn fees."  He went on to note that Hannover is earning fees in the "low, two-digit million-euro range" for arranging reinsurance coverage for industry outsiders. 




That's a small fraction of what Hannover Re (the third largest reinsurer in the world) earns from traditional coverage but last year Hannover placed about 10% of the worldwide total of collateralized reinsurance transactions according to Ludolphs or about $3 billion.


We also saw that Allianz was described as "a major fronting partner for Nephila Capital" in an article noting the support lent by Allianz to New Paradigm Underwriters a Florida MGA writing risk borne by ILS funds operated by Nephila. 



In fact the top three "arrangers" of collateralized reinsurance are Hannover Re, Allianz and Mitsui Sumitomo Insurance.


This is interesting. Allianz and Hannover are on record as saying on more than a few occasions that alternative capital  should not neccessarily be feared and with good reason it seems.  Both markets are maintaining their traditional business shares but both are also taking in and arranging (like an MGA) alternative capital for ILS deals.  Smart business on their part.




On its face this development seems promising --or so we thought until we read comments in the Insurance Insider Bermuda Roundtable 2015.  In an innocent enough discussion about retro coverage being provided largely through ILS covers being placed by reinsurers Nicolas Papadopoulo, CEO of Arch, mentioned that the "big players in that space don't have as much skin in the game" and noted that when you look at the primary or insurance sector "most players still have a lot of skin in the game."


The discussion took off from there with Jed Rhoads, President of Markel Re, saying "It's an MGA mentality, which is what most of the people writing on behalf of the capital markets effectively are --they don't have enough skin in the game. We know what happens when the industry is run by the MGA's, right?"


                  Rhoads                                        Reardon


Kathleen Reardon, CEO of Hamilton Re, firmly summed up what seemed to be the prevalent opinion of the group saying "If we're talking about reinsurers becoming an MGA, we're not going to be sustainable in that role because insurers can go direct to the capital market and then the reinsurance market is gone. So we ought to continue to retain some risk, keep it on our balance sheet, innovate and be relevant to our markets or we're going to become irrelevant pretty quickly."


Suddenly, really without realizing it, the conversation had dropped into a potentially explosive area. Certainly large companies like Hannover, Allianz and Mitsui Sumitomo can continue to act as MGA's and earn fees without concern for any diminished effects on their traditional books but for a market other than a leviathan such a strategy could become, in what Reardon described, one that makes you "irrelevant pretty quickly".



This isn't such a black and white discussion either --even the biggest of them are seeming to wrestle with it.  Within the "White Castle" at Mythenquai 50/60 overlooking Lake Zurich the top Swiss Re command seem to be determining how to approach this too.


Swiss Re home office in Zurich


According to Artemis, Swiss Re "has an industry leading practice in ILS and the capital markets but consistently at the top-level talks about challenges and has been almost negative on ILS at times over the last year or so".  Artemis was commenting on remarks by Walter Kielholz, the Swiss Re Chairman, who said "We have all read a lot about alternative capital forcing its way into reinsurance and trying to substitute for traditional reinsurance."


Contrast this with Hannover's Ludolphs' remarks quoted earlier and his observation that the growth of ILS is "more friend than foe" and that the "world is changing."


Swiss Re's Capital Markets group spawned some of the best known ILS names in the business today including Al Selius and Luca Albertini. Indeed, they were at the forefront of CAT bond development and Swiss Re seemed to welcome capital markets as the natural home to transfer peak CAT risks to.


What's changed?  Probably nothing but it is interesting seeing the titans grapple with what seem to be two realizations. First is that the capital market flow is now so large that it's better to gain revenue on it anyway one can and second that the money is here to stay.  One group of markets is being fairly naked in their effort to front the deals --even risking the criticism of peers such as Rhoads and Reardon, while another group may be doing the same thing but talking a slightly different game in promoting the traditional line.



CATEX unveils Lineage-RFIB Interface


                 Lucie Payette, Lloyds, David Belsham, RFIB and Tom Bailey, CATEX


Some 90 London market practitioners turned out at an event sponsored by CATEX, Lloyd's and RFIB on February 6 to hear of a successful pilot project achieved by the three groups to transfer Lloyd's Lineage data direct to the CATEX binder management system licensed by London broker RFIB.  


Lineage pumps in data from Canadian binder authorities representing about 10% of all Lloyd's coverholder business. For the first time data is being directly exported from Lineage into a third party binder management system thereby greatly reducing errors and increasing speed and efficiency. You can watch the entire 60 minute presentation here.


This proof of concept was Phase 1 for Lineage. Phase 2, at which CATEX and RFIB are already hard at work, is to approach the 70% or so of Canadian coverholders who are manually entering data into the 110 Lineage fields.  Automating this data flow into Lineage will root out data discrepancies at the beginning of the process and produce clean, homogenous data for Lineage and for subsequent transfer to CATEX binder systems handling Canadian business.


Much of the CATEX solution for Phase 2 will rely on the CATEX Data Vera application which has been successfully implemented by RFIB and others.


Data Vera is particularly well suited to the intake of disparate Excel spreadsheets and accurately verifying each data cell and automatically converting the data to structured data ready for any export purpose.


You can learn more about Data Vera by contacting CATEX.

The long predicted M&A frenzy arrives

We used to know an investment banker in New York who proudly would boast that he would glean all of his information from the market and didn't read newspapers.  His firm has since gone out of business but we wonder what he would make of the current M&A market in reinsurance.


If you read the papers you see Lancashire reporting strong profits and saying "We're happy as we are, we don't want to be an insurance company with offices all over the world. We have to remember that with M&A, one plus one doesn't equal two, and a lot of people that go into new homes don't get the jobs they wanted and become disillusioned."




Talk about putting a "Not for Sale" sign on your front door but these comments haven't quelled incessant rumors that Lancashire is next on the M&A block. 


After the Fairfax acquisition of Brit Insurance there remain only five publicly traded listed companies within Lloyd's of London.  Lancashire (market cap of 1.26 billion GBP), Novae (market cap of 421 million GBP), Amlin, Beazley and Hiscox, are independent, publicly traded companies and could, in theory, be the target of a takeover effort. 



Of course that's not to say there are not distinctions within that group. Hiscox, Amlin and Beazley are substantial players --Hiscox alone has a market value of 2.5 billion GBP. Amlin's market cap is even a bit higher at 2.63 billion GBP and Beazley's market cap is 1.6 billion GBP.  These are not small players by any means.


To keep things in scale though remember that Fairfax paid 1.2 billion GBP for Brit and XL paid 2.5 billion GBP for Catlin. Based on that math it would be within the realm of possibility that slightly larger deals could be done.


What do the "experts" think?  UBS analysts say "Given current industry dynamics, we think it is most likely that there is more consolidation to come". UBS continued saying "We think the next candidate could be Lancashire trading at 1.4 times this year's net asset value."


What about the larger companies?  Joanna Parsons at Westinghouse Securities writes "There is no reason why Amlin, Beazley and Hiscox could not be bid for as all are high quality operations that would make attractive acquisitions."



What about Novae, the smallest of the five remaining publicly traded companies?  We go back to our friend the investment banker who didn't need to read newspapers and watched only the market. He would see that Novae's share price has jumped 19.8% in the last 90 days.


We'll see if he was right.




  Brokers should not be needed says RSA 's Hester
Over the past five years there has been a continuing clamor from everyone other than the Big Three brokers that the wave of consolidation in the broking space meant that there were fewer medium-sized and small brokers. Danger was supposedly ahead because larger and larger amounts of global reinsurance placements were increasingly in the hands of fewer and fewer brokers.

We're not sure if the reinsurance market response has been prompted at all by the desire to meet size with size but if the M&A trend keeps up we could soon be saying the same thing about the markets. There will be fewer places for the Big Three to go to to place risk as there will be fewer markets as a result of consolidation.

We've all heard stories about markets being at the receiving end of "hard" negotiations from brokers. Maybe some of this effort is a desire to become big enough that such discussions with a Big Three broker is on a more equal footing?  

We've spoken about the brokers and the reinsurers but what about the buyers?  We noticed an interesting comment from Stephen Hester the group CEO of RSA The headline of the article was "Brokers should not be needed, says RSA CEO".

With a headline like that we had to read on.  Hester said that insurers had given away an important part of their value chain by allowing brokers to play a role in the market.  He said that this happened because the service to customers provided by insurers wasn't good enough.

Hester said "It is sad that insurance carriers allowed space for brokers and they have paid the price by ceding an important part of their value chain". He did note that the top brokers do provide valuable services and that RSA uses them to provide services such as modeling but he said that the intermediary model used in the insurance world, with brokers bridging the gap, is now unusual in the modern world and is relatively old fashioned.

That's an interesting comment and it brought to mind Kathleen Reardon's concern about the reinsurer acting as an MGA front for capital markets.  If someone like Stephen Hester of RSA is publicly saying brokers shouldn't be needed then could it be only a short hop, skip and jump to cedents directly approaching capital markets for coverage cutting out not only the broker but also the reinsurer?

Back to maskirovka again.  With everything we've discussed in this issue, is it possible that there is a plan behind all of this?  Frankly we doubt it. There are too many variables to consider with too many interests to be addressed.  More than maskirovka it is increasingly looking like an old-style "score settling" kind of scenario in which the parties are taking advantage of the market condition to address long-held concerns.

                                Steve Buscemi as Nucky Thompson

Perhaps we need to stop watching Boardwalk Empire but we still have two more seasons to go.



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


Sleeping as a Personal Profit Center    


Early this year, the California Supreme Court (CSC) ruled that employers must pay certain employees while they sleep. Yes, you read that correctly: full pay for those who are sleeping.


While we all know that California operates under its own rules, this must be seen as a dramatic breakthrough in employment conditions that may spread to the civilized world. After all, those of us who are paid only when we're awake and at work could use the extra income.


Full disclosure requires me to tell you that I have slept through about a third of my life. That makes me fully qualified in this regard, despite the fact that I have never once been paid for sleeping. On some occasions, I wasn't even paid for being awake and working.


The downside to the new rule, of course, is that you have to live in California to be paid for being unconscious. Plus, according to the Supreme Court ruling, until the new regulations apply to everyone, you would have to work as a construction site safety guard. The ruling only applies to night watchmen.


Some background might be germane, to anchor this madness in something approaching reality. California now require that employees be paid for "all hours worked." On the face of it, that sounds entirely reasonable. In Mendiola v CPS Security, however, the California Supreme Court ruled that 24 hour security guards at construction sites must be paid at the full hourly rate when they are asleep in their trailers.


The CSC said that, even if employers and employees were to agree that pay for sleep was not necessary, any such agreement would be invalid. The words 'free market', 'rights of the individual' and 'common sense' mean nothing out West, apparently.


One of these people is not being paid 


To turn a bizarre decision into utter slapstick, the CSC made its ruling retroactive, although the reports I read did not give a date from which this process would be considered to have started. California became a State on September 9, 1850, which is about as good a date as any, one supposes.


Those who met the requirements of the law in the retroactive period by only paying for hours worked will now doubtless be heading to jail. The CSC did not rule on whether prisoners should be paid throughout the length of their sentences, but one imagines they will be.


What does this mean for the insurance industry? It's a little hard to say, although "get out of California as fast as possible and never, ever go back" is always sound advice.


Insureds may claim for many covered events that occur while they are asleep, in California and elsewhere, unless sleeping is specifically excluded from the policy. Sensibly enough, they may not claim for losses incurred by their next-door neighbours or strangers who live in Australia. Once the CSC hears of this, no doubt, the law will change.


Then, too, insurance companies may not claim premiums from the dead. But why not? After all, Edgar Allen Poe called sleep "those little slices of death", so, logically speaking, the CSC has ruled that the mere fact that an employee is dead need not interfere with him or her being paid. Now that's a pension program everyone could get behind.


To recap, in California, if one is at work while fast asleep, one should be paid. After all, one is at work. One imagines that REM sleep should be reimbursed at double time, and REM sleep on Sundays at triple time.


It's easy to make fun of judges in California; it's almost as if they were asking for it. It is harder, however, to understand how a position as important as that of judge can be awarded to people whose grasp on reality is as tenuous as those who sit on California's Supreme Court. What will they think of next? Will diners be rewarded for suffering indigestion? Should the array of girlfriends who dumped me be paid extra for all the effort they had to go to in order to find a new boyfriend? Should you be recompensed for having to read this drivel? (No.)


I'd love to write more on this subject, but my bank account could use a top-up, so I'm off for a nap.



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


Copyright CATEX Reports

February 26, 2015

Quick "Bytes"

AIG announced a new product called Celebrity Product Recall Response designed to help clients respond to risks from a celebrity endorser's public


fall from grace, scandal, or unexpected death. We can see that this could have very, very wide appeal...Anthem Insurance in the US disclosed that as many as 80 million customers may have had their personal data stolen in one of the largest computer "hacks" yet. The insurer is said to have blown through its self-insured retention, 100% of its primary cover and eight more layers



above this as it blew through its $100 million cyber cover....Stephen Catlin picked right up on this saying that cyber attacks are now too big for private insurers and that governments should take over risk coverage for hacking and malware. Catlin said "Our balance sheets are not large enough to pay for that" and that cyber security was the "biggest, most systemic risk" he had ever seen...While we're on Mr. Catlin we also noted his comments that process cost is "what's killing this industry". He was




referring to expensive paper processing still relied upon by parts of the industry...Solvency II is back in the news.  Lloyd's Sean McGovern now says it has grown into "something of a monster". He said the S2 regime now stands at 3,250 pages of legislation and regulation compared to the current directive requirement which is 200 pages long". Worse yet, there are no fewer than 270 reporting templates and "EIOPA is still issuing guidelines at an alarming rate."  S2 is due to come "on-line" in 10 months, January 2016.....This site is no secret to marine underwriters. It tracks the movement of ships globally. This article in the Gazette caught our attention. It notes that during the severe weather at sea in the winter months Bermuda regularly earns revenue from providing medical


                             Container ship in heavy seas (Joe Stanford)


services to injured crew on the hundreds of tankers and cargo ships transiting the area. In addition to citing the daily revenues earned by a stay at the King Edward hospital the article also helpfully notes that in regards to those seriously injured personnel, "anyone who is brought into Bermuda from a passing ship will also have to pay a departure tax to the Government at the airport before they leave."  Well, times are tough all over and you need to find revenue wherever you can...

Copyright MMXV CATEX