Issue 47
June 2015
In this Issue
  • The gloves are definitely off in the Axis-Partner-Exor battle
  • Duperreault looks to the "milennials" as the future of the industry
  • Swiss Re looks at "de-globalization" as biggest threat
  • Brindle's Fidelis seeks "Third Way"
  • Berger responds to overly optimistic investors seeking start-ups
  • Bolt warns syndicates not to write cannabis risk
  • Roger encounter a George Clooney look alike without the charm

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Dear Colleague, 

Lately we find it a bigger challenge than ever to provide up to date information about the reinsurance industry. So much is changing so quickly that the digital ink is barely dry before it's "old news".

We do know for certain that the PartnerRe shareholder vote is scheduled for July 24th so we think we are safe on that score.  


It's also always possible (if not likely) that there will be another mega-M&A event that occurs during the writing of this CATEX Reports that could require us to tear up the script and start over. (For example word has just come that Arch may actually be more serious than we reported last month in acquiring Axis).


We don't believe that there are going to be any significant changes to reinsurance premium levels by our next publication; unless you count the slowing rate of premium decreases (which some certainly do).


So we will stick with what we know and run through the ongoing PartnerRe saga and a few other tidbits.


After spending a week in London this month, I find myself still acclimating to the hot weather in New Jersey after the cooler London weather. It was a pleasure meeting new friends and catching up with old friends of CATEX..


We will be attending the Monte Carlo Rendezvous again this year from September 12-16 and are booking our meetings now.  If you are interested in meeting us, please contact me by email or phone. (By the way, if anyone is looking for a 4th member of their boat team, please feel free to contact me!)


As usual, we have our Roger Crombie article. In this column, he betrays his actuarial background to an unsuspecting insurance pension representative. Sadly, it had no effect on the discussion or on the size of one of Roger's pensions.


If you have any questions or comments about this newsletter, or CATEX and its product suite, please contact me.

Thank you very much.

Stephanie A. Fucetola
Senior Vice President/CATEX

Exor is pushing down to the wire

The battle between the Agnelli controlled Exor investment firm and PartnerRe and Axis over the fate of the former continues. It certainly hasn't abated and if anything has increased in intensity.  


Exor lost a court case in Bermuda in which it was seeking access to the PartnerRe preferred shareholders. The Bermuda Supreme Court upheld Partner's argument that the reinsurer was not obligated to divulge the names of the owners of the preferred stock. 


Some observers saw this as a blow to Exor as the preferred shareholders compose about 41% of the voting stock that will be voting to approve or reject the merger with Axis on July 24.

Last month, when we were assembling the May CATEX Reports, there had been no sighting of this preferred stock issue on the radar screen.  The issue popped up in public very quickly, and as news cycles permit these days, became what everyone was talking about for a few weeks.


We wondered about this. Preferred stock is a funny thing because in some ways it's really not like stock at all but more like a bond. The main interest of a purchaser of preferred stock is that the face value of the dividend rate on the stock continues to be paid. A preferred holder has little interest, we would think, in the business expansion plans related to a combined company which would increase common stock value. The more we thought about it we began to recall news stories concerning the sale of PartnerRe preferred from 2011 and 2013.  It had been the juicy dividend rates being offered back then that attracted our attention on page 139 of the PartnerRe annual report (7.25% and 5.875% respectively). 


From what we can tell the PartnerRe preferred stock is composed of three series of stock (Series D, E and F) which Partner sold in 2004 (6.5% dividend rate), 2011 (7.25% dividend rate) and 2013 (5.875% dividend rate) for a total of about $826 million. Each share of preferred has voting rights and the three series of preferred stock represent a little over 34 million voting shares.


According to page 174 of the PartnerRe prospectus filed with the SEC on June 1 there are over 47 million shares of PartnerRe common stock issued and a bit over 34 million shares of preferred issued.  The math works out so that the preferred represent about 42% of the stock that could vote in the July 24 proposal.


You can see why Exor wanted to be able to reach out to the 42% block directly. Their vote against the proposed Axis deal on July 24 will be critical to Exor. The Bermuda Supreme Court agreed with Partner that they were not obligated to release the names and contact details of so called "non-objecting beneficial owners".


We thought about this and remembered when GM and Chrysler went into bankruptcy in the US. The common shareholders had to get in line behind the creditors of the car-makers before they received any compensation. That's basic bankruptcy law --debtholders get paid first and secured debtholders get paid before anyone.


Even though the preferred stock issue was being discussed we wondered if there was other PartnerRe debt.  Debtholders usually can't vote, as can shareholders, that's one reason bankruptcy law protects them by putting them at the head of the line when corporate assets are divided after an insolvency. 


Were any PartnerRe creditors floating around and if so they would have a say in who was going to be paying the money owed to them in the future?  We would think that their only interest (like that of the preferred stockholders) would be to ensure that they were paid or that their dividend stream continues.


It turns out that there are approximately $750 million in "senior notes" that have been issued by wholly owned PartnerRe "special purpose vehicle" companies.  There are essentially no covenants attached to the debt, as to who it can be transferred to, and that the new responsible party only needs to sign a document assuming the guaranty which PartnerRe gave in the first place to backstop the debt.  So, officially, there would be no impediment to transferring that debt to any successor company --either an Axis or Exor entity.


What about voting? We found section 3.9 of the agreement between PartnerRe and Axis states that "There are no bonds, debentures, notes or other instruments of indebtedness of it or any of its Subsidiaries that have the right to vote, or that are convertible or exchangeable into or exercisable for securities having the right to vote, on any matters on which its shareholders may vote."


You can see why Exor really removed the restraints then after the Bermuda Supreme Court ruled they couldn't contact the preferred shareholders directly.  The purchasers of the $750 mm in debt have no voice in any merger, and can't block it even if they wanted to. But the 42% of those shareholders eligible to vote (the preferreds), can help block the merger but can't even be identified to be contacted by Exor. 


Worse, from Exor's perspective, PartnerRe was claiming that Exor's debt rating level would negatively affect both the debtholders and the preferred stock owners thus raising the spectre of them not continuing to receive the agreed to dividend stream.. S&P would later say that that claim was erroneous and that the Exor balance sheet would have no bearing on either. 


Nevertheless, in a hostile takeover like this what's an acquiring company to do?  (Ah, the dilemmas some of us face!) Well, after first blasting certain members of the PartnerRe board, accusing them of "engineering" the Axis deal as they stood to benefit "personally and financially" from it, Exor went on the attack


Because of the Internet, it's become easier for a company like Exor to reach out to the preferred stockholders even if Partner has successfully prohibited them from learning their identities and contact details. One has to assume that the "preferreds" are not disinterested parties and have been following the Partner-Axis-Exor discussion to some degree.


Exor seemingly calculated that an incendiary press release, accusing some of the PartnerRe board (including the interim CEO) of clear-cut conflicts of interest, would be enough to prompt any preferred shareholder to at least glance at it. Once anyone opens the press release there are several prominently displayed hyper-links inserted by Exor aimed specifically at the "preferreds" and also a FAQ document aimed exclusively at the preferred stock holders.


Exor's bottom line argument is that the Exor balance sheet, which will assume responsibilty for payment of the preferred debt obligations, is superior to the combined Axis-Partner balance sheet. Exor also argues that if the commitments that have been made publicly by Partner-Axis, to reward common shareholders with special dividends and stock buybacks, are carried out, then the newly merged company would actually be weaker than the current PartnerRe (and certainly weaker than an Exor-owned PartnerRe).


Keep in mind that Exor already owns 9.3% of PartnerRe common stock and has voting rights. The vote by PartnerRe shareholders on the Axis merger will require a simple majority of votes cast to defeat it. This means that Exor needs 40.8% of the common and preferred stock which casts votes on July 24 to defeat the merger bid. You can bet that Exor will be sure to vote its own stock.


The argument is laid out here.  It will be up to any preferred shareholder to read and then decide.  There is another little nugget buried away in the Exor argument to the preferreds and to the common stock holders. It's one Exor has noted from the start of its takeover effort but it's rarely been noted in the media except that Axis-Partner deny that it's an issue.


Exor has argued since PartnerRe is a so called "pure play" reinsurer, and has no insurer operations, that once merged with Axis (which has substantial insurer operations) PartnerRe would face backlash from other insurers who of course are now current purchasers of PartnerRe's reinsurance products.  We suppose the idea is that those cedents who are now reinsuring with Partner could stop if they see Partner as part of an amalgamated company that includes an insurance competitor to them like Arch.


Predicting human behavior is a dicey proposition and when you see predictions based on what one thinks a whole class of people might or might not do (the current PartnerRe client list) and the prediction is included in a formal financial presentation it seems a little out of place --or at least it did to us.  As a result we didn't pay much attention to it either.


That changed though when we read this story. The Insurance Insider reported that "the major relationship between Berkshire Hathaway and Suncorp looks set to be scaled back significantly as Berkshire's entry into the Australian primary market continues to create issues for its reinsurance business."


The article goes on to say that Suncorp "had been alienated" by Berkshire's decision to compete directly in the market where Suncorp has such a dominant presence.  Suncorp is said to be cancelling or concluding several big reinsurance contracts with Berkshire.


Warren Buffett has made no secret about his intentions for Berkshire Hathaway Specialty Insurance saying that "BHSI will be a major asset for Berkshire, one that will generate volume in the billions within a few years". Suncorp is a major Australian primary insurer and BHSI competes directly with them.

Maybe Suncorp had been hearing rumors because just as we were writing this news came that Berkshire bought a stake in Insurance Australia Group, one of Suncorp's rivals and that BHSI will be underwriting 20% of IAG's commercial business. 

Then we saw ACE go out of its way to reassure its own reinsurers that the existence of ABR Re, which it recently formed with BlackStone as a hybrid type of hedge fund reinsurer, has not strained Ace's relationships with any of its existing reinsurers.  Ace currently cedes about 75% of its reinsurance premiums to a panel of 10 core reinsurers.

These two stories would seem to validate what Exor has been arguing. When you think about it why wouldn't a primary insurer be perturbed when at renewal their long-time reinsurance partner comes in wearing the uniform of a combined commercial and reinsurance juggernaut?

 We suspect that the theme we hit on in the May issue, that of "pure-play" reinsurers coming back into vogue, will continue to gain attention. Third Point Re's Rob Bredahl made comments to this effect when he affirmed that the company was not moving into primary insurance.

 This is a tough issue and there are conflicting views on it. Michael Sapnar, CEO of Transatlantic Re said earlier this month that the concept of an independent reinsurer (pure-play) no longer exists.  Sapnar said "Let's be clear --the reinsurance industry doesn't exist anymore. Reinsurance is now an arm of a company it's part of --it's a business unit."


Maybe Sapnar is right. His credentials are certainly better than ours but insurers are well aware that the commercial rates have not suffered to the same extent as the plummeting of reinsurance premiums. They have even increased their own reinsurance attachment points to keep more of that premium. 


When long-time reinsurance partners begin to appear at your door at renewal, and, oh, yes, also now happen to be part of a primary insurance operation which competes for your premium dollar, it may be that John Eikann at Exor will be proven right. Time will tell.

Not everyone has the clout or pragmatism of Warren Buffett and Ajit Jain to dispense with the reassuring words and go ahead and try to beat people at their own game.

It could be a lesson to be learned --we won't speculate by whom.



 Duperreault looks to the Milennials

Before we move on to other core stories we just wanted to give a shout-out (again) to Brian Duperreault the CEO of Hamilton Insurance Group. We've applauded him in the past when he identified the huge gender gap in the insurance and reinsurance industry and stated that something needed to be done about it.  He's put his money where his mouth is as a cursory review of the personnel at Hamilton will reveal.

This time though we were struck by Duperreault's observation from a much more pragmatic perspective. Again, we think he hit the nail on the head when he was talking about the burgeoning importance (and availability) of data in insurance --and the need to get people into the sector who can actually understand all of it!

He identified the "35%-40% of each premium dollar (that) disappears into the cost of bringing our products to market and far too much of that is distribution expense. We can be using technology to make risk transfer a much more efficient process."

That's a pretty declarative statement for someone running an actual insurance entity but he went on talking about the millennial generation, referring to them as "digital natives" born into a world where technology was really starting to gain pace and the majority of whom are incredibly tech and digitally savvy.

He said that about half of all US-based insurance professionals are over 45 years old and that by the year 2020 there may be 400,000 vacant positions in the industry. Duperreault said that the "millennial generation" is the future of the re/insurance industry and the future of technology and as the two combine and evolve to create new, advanced solutions it will likely dramatically change the way the sector does business.

Don't quite believe this?  More altruism coming from an undeniably socially responsible citizen who just happens to be a very successful insurance executive (and we proudly note a New Jersey native)?

Look around you.  How old is the person who helps you when you're mired in an Excel issue or the stuck in the vagueries of successive versions of Microsoft Word's review comments section?  Imagine 400,000 of them running the industry in the near future.  They're not going to be doing things the way we are anymore than we're doing what our predecessors did. Duperreault, it seems, is betting on this.

Unfortunately though Duperreault noted the results of a recent study that revealed that only 5% of US high school and college graduates were considering a career in the insurance industry because they thought it dull, conservative and didn't offer them a chance to make much of a difference.

We're doing our part by reporting on Brian Duperreault's comments --show this to your kids.
De-globalization is main risk says Swiss Re

We have a good friend, Brian Spooner. Ph.D., who is a long-time professor of anthropology at the University of Pennsylvania.  His main focus these days is "globalization". He defines that as the increasing rate of change, encountered by humanity, as ever-increasing numbers of people interact with one another in increasing numbers of ways. 

He argues (he is an anthropologist) that globalization has been with us since the earliest communities were formed. People within a community would talk to each other. Later they would talk and interact with other communities and ideas would be exchanged. Change would occur --whether the implementation of a new tool, a new social custom, different planting method and so on.

Indeed some could argue that the whole arc of history could be traced by when ideas were passed off to others and by whom. We have a regular video chat that follows this discussion in relation to modern day events. 

Our friend's observation about globalization, today in 2015, is that it's entered its crucial phase. By that he means that change is occurring so quickly amongst all of humanity that we are moving closer to a completely interdependent society on a global scale. In fact Dr. Spooner has edited a book that was recently released titled "Globalization: The Crucial Phase". The book, quite frankly, should be read by any underwriter concerned with the next 50 years. As you will see below, it is remarkably coincidental with what long-range thinkers at Swiss Re are working on.

You need only remember those photos of horseback-riding Taliban members with cell phones glued to their ears or the explosion of Twitter messages after the Iranian election in 2009 to see that more people are interacting with one another to begin to suspect our friend is correct.

There is no doubt that humanity as a whole is on a high speed train to somewhere and at each stop it picks up more passengers. There are too many communication tools to deny communication and interactivity to anyone.

Naturally the insurance and reinsurance industry has picked up on this trend. The increasing velocity of change affects everything --increased numbers of urban risks, increased potential life and health insureds, increased spectre of drought and pollution disaster --the list is endless but Swiss Re has made a good effort in compiling a list of what they believe the industry needs to be watching.

The number one emerging threat Swiss Re's report identifies is something they refer to as "de-globalization".  By that they mean that the era since the end of the Cold War (the early 1990s) is ending.  That era, Swiss Re observes, was marked by world governments limiting themselves to "principle-based regulation" instead of "hard" actions like invasions, sanctions or other "strong interventionist tendencies".  

These "interventionist tendencies", Swiss Re fears, could wreak havoc with global financial systems, compliance matters and the disruption of the free flow of capital.

Swiss Re says that one symptom of "de-globalization" is the "upsurge in populist and nationalist parties, eventually intensifying the threat of more protectionist and legislation in the near future". The study notes that "In Europe, these could trigger territorial separatism (eg Scotland or Catalonia and eventually undermine integration projects such as the European Union and the Euro area."

It's pretty hard to disagree with that point. Nationalistic tendencies are emerging everywhere. In fact we would argue that there is even more conflict due to social/cultural and religious groups who are dissatisfied with supposed "national" governments who have authority over the areas in which they live.

This type of more localized conflict --tribes or social/political groups versus the government that controls them --we see everyday. Pakistan, Iraq, China, Syria and many countries in Africa have internal struggles they are dealing with, often violently, every day.

Oddly, we view these struggles to be a symptom of globalization rather than de-globalization. We think it's precisely because these previously unheard interest groups are now connected to more contact with the rest of the world that they want to achieve what they see others have achieved.  

Their goals could be a separate state, inclusion in the current government or more important (and this is the scale-tipper) economic equality.  If you don't have enough to eat every day but are able to see images of modern life in the West on your iPhone, and communicate with other people around the world by Twitter and texting, how long is it going to be until you become politically active?  Not too long we think.

Connectivity and contact is increasing at an ever-faster rate and the dissatisfaction of those who feel oppressed will only increase. Swiss Re is probably being conservative. We think that we will be facing an increasing number of clashes between local interest groups and the national governments that control them.  The empowerment that technology has provided to even the most remote and smallest groups has indeed connected them but it has also awakened them to what is possible.

Brindle sees a "Third Way"

Richard Brindle's Fidelis has completed its financing and getting ready to underwrite business. Brindle has raised some $1.5 billion to date and has been talking about a so called "Third Way" to operate an international carrier.

Brindle argues that traditional legacy insurers (the First Way) have been "sleepwalking" for the past seven years. He says that the low interest rate environment has seemingly not registered with them yet.

He told the Insurance Insider that since the financial crisis began "everyone has had one hand ties behind their back" when it comes to their low-yielding portfolios.

Brindle feels that the legacy carriers have failed to "re-calibrate" their underwriting to compensate for the loss of portfolio yield.

That's Way 1.  Way 2, it seems in his view, are the so called "hedge fund reinsurers".  He said that Fidelis won't be seeking the same level of investment returns as some of the more aggressive hedge fund insurers.

He said "We're not trying to be like Third Point Re and make 15 points a year on investments."  Instead Brindle aims to achieve returns in the high single digits on the asset side.

Here is the 3rd Way -- "A total return carrier that will dynamically change the amount of investment and underwriting risk it takes depending on market conditions."

He said that there are definitely opportunities in the reinsurance market because brokers were getting "spooked" due to the "disappearance of counterparties" as M&A activity continues apace.

He said that be believes the industry has overreacted on the belief that only a certain sized carrier will ensure relevancy. He said carriers are now "obsessed with becoming hulking big companies" but that a nimble carrier, with a $100 mm line size, was a better option.

Brindle suggested that at the onset Fidelis is going to focus more on the investment side rather than underwriting. He is still targeting " a few percentage points of return on equity from underwriting in the first full year of operation  but "to begin with the underwriting piston will be pushed most of the way down and the investment piston most of the way up" he said.

He emphasized though that he could "move our allocation to mostly cash and fixed income almost overnight if we need to."

Brindle's "Third Way" is possibly closer to the optimum way a "First Way" reinsurer would hope to operate.  It's interesting to note though two things about what Brindle said.  First he hopes to see positive ROE on underwriting this year.  And second, his investment portfolio is going to be short-termed enough (or liquid enough) that he will be able to convert it to cash almost overnight.

An underwriting profit in the first year is a challenge. For example,Third Point, referenced by Brindle, sustained a 129% loss ratio on $190 mm GWP in 2012 their start-up year. But Third Point did manage to deliver a $13 mm return in that same year --mainly as a result of an approximate return of 25% on investments in their portfolio managed by Dan Loeb.

If Brindle eschews the high yield portfolio returns he is going to need to underwrite at a profit starting from Day One.  He understands that and although his initial focus was going to be specialty insurance he said "it's carnage in some specialty insurance classes --pricing has just gone off a cliff. We're not ideological about which lines of business we write."

Hence is earlier comments about the reinsurance space which he is eying closely. He noted that while "the garden is hardly rosy" some reinsurance classes, including property CAT, continue to have attractive returns.

This will be interesting to watch. Brindle's track record is nearly unsurpassed in the industry and he is well fueled financially (and says he is not finished fundraising) and has the expertise to create something new.

We will admit we once had the pleasure once of meeting Brindle's dog, a Labrador named Pompey. He was supposedly a fixture at Lancashire (which Brindle also founded) which is where we met him. 

Anyone who takes his dog to work is OK in our book.


Berger notes the road isn't easy

It's hard to not like Third Point CEO John Berger. In fact we don't know anyone who does. He is unfailingly affable, courteous and quite obviously immensely successful.

Running a so called "hedge fund reinsurer", when you have a reputation as an excellent judge of underwriting talent, can sometimes be a challenge

In Berger's case lately the IRS has been looking into supposed tax loopholes used by hedge funds who capitalize offshore reinsurers and then repatriate the profits at a capital gains tax rate rather than ordinary income.

That whole argument, pushed by Senator Ron Wyden, is dependent upon the reinsurer being essentially a "pass-through" entity that is minorly involved in underwriting and exists only to lessen the tax on hedge fund investors.

It doesn't help Berger's case that Third Point is owned by Dan Loeb who is one of the more visible and successful hedge fund managers.  We noted in the last issue that (horror of horrors) he actually criticized Warren Buffett.

The last time we checked the First Amendment was still in effect and as far as we're concerned Dan Loeb can say anything he wants.  We're also pretty sure that Mr. Buffett possesses the wherewithal to respond if he was so inclined.

The point is this: a highly successful, young-ish, hedge fund manager founds a reinsurance company in Bermuda with the notion that by hiring skilled underwriters he can bring in premium, aim for a positive loss ratio, and manage the premium float (as successfully as he's been managing his own hedge fund return) and make money.

See Buffett, Warren, E. as a reference. By his own admission this is just what Berkshire does.  In 2014 Third Point wrote $613 mm in GWP.  By what definition would this company be considered a pass through?

In fact, you can detect some exasperation from the Third Point people when the IRS question is raised. "Anyone that spent a day in our office would clearly see that we're a real insurance company," said Chris Coleman, the chief financial officer.

And despite the IRS issues there are apparently more hedge fund managers and investment firms lining up to start their own Bermuda insurers. And this supposed queue is forming despite Warren Buffet's warning last month that all the excess capital the hedge funds have brought in already has caused the industry to "turn for the worse."

So there is John Berger, methodically following his business plan, growing his premium base and incorporating the returns from Loeb. He avoids underwriting unattractive risks, maintains the focus on building the company into something bigger. 

When he reads the papers he sees the IRS wondering if he is a "real" reinsurer and sees a lineup of other hedge fund types lining up to try to do the same thing he's been working so hard to do --successfully thus far.

Patience has its limits and frankly, in defense of his shareholders and his people Berger made some comments at a Morgan Stanley hosted conference we were happy to see.

Berger observed that fund managers "have a lot of money, and they go, 'Hey, we can get any dummies to run a reinsurance company."  He noted that because of increased scrutiny from A.M. Best "it's going to be increasingly difficult for new companies to form."

Berger is right of course. There have been several supposed Bermuda start-ups that were pulled. Whispers were that the A.M. Best process was not going to result in a satisfactory rating. 

Berger said that potential new entrants should know that Third Point's A- rating is not an easy thing to emulate. He said "It's a pretty tough road to get through. We talk to the Best people frequently. And they say they see a steady stream of alternative capital coming in who just don't understand how hard it is to start a reinsurance company."

Third Point was formed in 2011 and was the shiny new experiment then. Traditional legacy carriers voiced real concerns.

Success breeds stability and now we see John Berger warning that following his road isn't as easy as it looks. Good for him.

The Cannabis risk is here and Bolt orders underwriting stop

We're not quite finished with the Swiss Re "Emerging Risk insights and trends" study.

A medium term emerging risk (meaning sometime in the next three years) are "lifestyle drugs". We're going to quote right from the text here: "Several new or returning 'lifestyle drugs' are legally available and enjoy great popularity. For example, Shisha smoking (water pipe), a longstanding tradition in the Middle East, has become a recent trend in Western countries. Similar to e-cigarettes, scientists are debating the health effects of these substances. They are also assessing whether the practice could encourage consumers who do not smoke to pick up the habit."

We're not finished yet. The report goes on.

"Some US states have recently legalized consumption of marijuana, with unknown consequences for health and public safety. Will use of synthetic pain killers decrease, while psychoses and traffic accidents increase? The arrival of the e-joint (a vaporizer for marijuana's psychoactive compound, THC), and poorly regulated and abundant supply of drugs on the Internet are exacerbating the problem. We are also seeing increased diversity, complexity, and uncertainty on the international regulatory map."

My goodness. Some of these things hearken back to dormitory life in college.  We will say this though. We will never again walk by the Swiss Re headquarters on Mythenquai in Zurich without having a different opinion about the people inside.  If Brian Duperrault wants to show young people that the industry is not staid and conservative he should show them what long-range experts at Swiss Re are working on. It would be an eye-opener.

It's not so much of an eye-opener though to Tom Bolt at Lloyd's. The Lloyd's performance management director is on this already and sent out a market warning to Lloyd's members telling them not to take on US cannabis exposure.  

Bolt said that even though some US states have relaxed their marijuana laws US federal law still considers cannabis to be illegal.  States like Colorado, Oregon and Washington, which have elected to legalize marijuana for recreational use, have spawned a boom in cannabis farmers, marijuana distribution and the need for financing.  All of which require insurance.

Bolt warned that syndicates should not write marijuana related business until or if the federal law changes or they incur the risk of running afoul of US anti-money laundering laws.

He's right. The retail outlets that sell cannabis are forced to rely primarily on cash transactions because banks and credit card companies have the same concerns about federal anti-money laundering statutes. In the meantime the retail outlets amass sizable amounts of cash on a daily basis and employ armed guards and controlled entry to customers.

Thus far the US Justice Department has not acted to enforce the federal cannabis laws, but that decision would be made by the Attorney General who is appointed by the President.  
An unintelligible sales pitch is received by Roger
Even a George Clooney-like smirk can't win him over

A little knowledge is a dangerous thing, it is said. Much more dangerous is a little knowledge in the hands of someone who believes themselves to be highly knowledgeable.


I shall very soon qualify for my pension. Or pensions, I should say, since I have a few, albeit for puny amounts. Between them, I should just about be able to afford a fish sandwich every third Wednesday. But that's not my point.


 As the deadline approached for certain decisions I would have to make regarding one of the pensions, I was asked to visit a fellow at one of the big UK insurance companies to discuss my options. He was one of those people who was so pleased with himself that he could barely stand it. He wore the same smirk that George Clooney swans around with (which is vaguely justified in his case). My pension fellow was, in short, a blowhard, one of those people who believe that they know everything, and that you know nothing, or less than that.


 He began explaining to me how annuities work. Although I too am comfortable in the certainty that I know everything, I chose to listen, In order to see if there was obscure information I didn't have, or new terminology, or something. After all, what's the point of doing anything if you can't learn from the experience?


At one point, he suggested that I could use the value of the annuity to boost my pension, by borrowing against it. Interest costs, he explained, would be amortised over the period of the loan. As to how the interest might be calculated, he said to me: "The majority of the interest is taken up front. There is this thing called the Rule of 72."


"What's that?" I asked, aware that the Rule of 72 relates to how long it takes the value of an investment to double. I even know that the Rule of 72 is also called the slightly less snappy Rule of 69.3 (because I just now looked it up). I just wasn't sure what that had to do with borrowing costs.


"Ah, yes, well, it's highly complicated," the fellow said. "The Rule of 72 is an actuarial method of calculating interest based on the months in the year." That didn't make much sense, but it did help me to understand what he was talking about. "You mean the Rule of 78," I said.


"No, no, it's the Rule of 72," he said, dismissing my objection in much the same way you might not listen to a child who insisted that the moon was made of old socks.


"You're referring to the Rule of 78," I said, "It's also known as the sum-of-the-digits method. I can prove it to you quite quickly. This was one of the first things we learned in accountancy training." He stared at me in a distinctly unimpressed manner, with a sort of "off with his head" look playing about his features. He was giving me enough rope to hang myself.


"There are 12 months in the year," I began. "The Rule of 78, which is indeed used in calculating interest and for other purposes, is based on the sum of the digits 1 to 12. You can add up all the numbers from 1 to 12, and they'll come to 78. To save you adding them all up, here's a quick method. One plus 12 equals 13. 2 plus 11 equals 13. 3 plus 10 equals 13, and so on. There are six pairs like that in the numbers from 1 to 12. Six times 13 is 78. That's why it's called the Rule of 78."


He looked at me. "No, I think you'll find it's the Rule of 72," he said and we moved on to discuss what I might be able to do with my tiny annuity. I must admit that I stopped listening. If the man didn't know what he was talking about, and refused to be corrected when proven wrong, where was the point?


We settled on a pension that would bring me 27 (about $40) a month.


A week later, he wrote me the most extraordinarily self-congratulatory letter, transferring me to another advisor.




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

June 19, 2015

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