Issue 48
July 2015
In this Issue
  • Exor's  latest bid causes Axis & PartnerRe delay
  • Data may drive Willis and Ace deals
  • CATEX binder system becomes even more powerful
  • Buffett rethinking reinsurance
  • Bookmaking and Underwriting
  • Long tail business model wrecked by low rates
  • Roger's tribulations with homeowners board

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Dear Colleague, 

Each month, it seems, we note that in the next issue of CATEX Reports we will no doubt discuss even more mergers or acquisitions in the insurance and reinsurance area.  This month though we have sort of hit the trifecta.


Ace is merging with Chubb, Willis is merging with Towers Watson and Berkshire Hathaway is acquiring a slice of Insurance Australia Group (IAG), a big enough slice for IAG to immediately announce that they are reducing their reinsurance spend on all fronts by 20%.


Meanwhile, back at the ranch as they say, it seems to us as if the PartnerRe-Axis-Exor battle is finally seeing some light at the end of the tunnel.  Validus CEO Ed Noonan spoke out publicly expressing what seems to be the consensus view of many of the people we talk to.


There is an interesting trend we saw this month focused (no surprise) on data and how it can be used.  We've seen laments by alternative capital providers about the lack of predictive analytics for casualty risk and we've seen head-long plunges by the same people into completely unmodeled property risks like volcanic eruptions and meteor strikes.


We're also seeing something in the Willis-Towers Watson deal that we haven't seen any commentary about yet.  Towers Watson is sitting on a very, very large amount of data it has amassed over the years from its Fortune 500 business consultancy operations.  Figuring out how to use all that data presents Willis with huge challenges and opportunities.


We've also noted some comments from Ace's Evan Greenberg about his intent to "weaponize" the data trove Ace will now have after the merger with Chubb. If the lack of solid modeling data is what's preventing the alternative capital markets from entering the casualty space maybe the next best thing is actual experience data?


Roger Crombie's column is here too and, as you will read, he has become frustrated with his homeowners association board and the structure of boards in general.


CATEX is booking meetings right now for Monte Carlo in September and we would like to meet you. Please let me know.


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

Around the "final" turn Exor may be leading

July 24 had been the date scheduled for PartnerRe shareholders to vote yes or no on the proposed merger with Axis Capital.  The competing bid, by the Agnelli family controlled Exor, has always seemed to us to be just a little bit better.  There is no doubt that the combination of Partner and Axis would create a huge insurer/reinsurer, overnight becoming one of the biggest in the world, and that the synergies claimed by deal advocates may provide a huge upside, but there's something to be said about "cash on the barrel" and that's what Exor is offering.


Apparently both Axis and PartnerRe may feel that way too as theytwo companies pushed the date of the vote back two weeks to August 7 to give them time to work out an improved offer to counter the latest Exor bid. (Minutes before the release of this newsletter word came that in fact Axis has added $6 a share to its offer for PartnerRe.)


We're talking about reinsurance here in the case of PartnerRe. Common wisdom supposedly states that the current investment climate (and low interest rates) combined with the erosion of premium support and flood of new capital into the market makes the prospect of a successful  "pure-play" reinsurer problematic to some people.  The future of PartnerRe, a pure play reinsurer, was apparently problematic enough to the PartnerRe board that they decided to accept a proposal from Axis Capital to combine the companies.  


The Axis proposal was initially an all stock proposal. Not that there's anything necessarily wrong with stock. But stock is always subject to market risk. And no one could argue that, especially in the current environment, there is more risk that is normally the case of a change in value between the time of the pricing of the deal and the time an investor can sell if they want cash not stock.


We hate "old sayings".  "Cash is king", "put your money where your mouth is" and "never spend your money before you have it" are three money aphorisms we've heard over the years. Someone else heard them too and that was John Elkann at Exor.


Without going into the already public details of the Exor offers, and the Axis responses, the latest offer from Elkann has begun to attract the approval of analysts.  Elkann squarely addressed the issues supposedly raised by preferred shareholders by increasing their dividend rate payments by 1% and extending the terms before which PartnerRe would be able to "call" the stock in.  A dividend rate bump, on what are already pretty good rates, and an extension of the guaranteed period for which they will be paid, seems to have swayed analysts to publicly state that the Exor bid is clearly superior.


Reinsurance executives are not exactly a talkative bunch so although we had our sonar as finely tuned as we could get it we were having difficulty hearing what was being said about the initial Axis proposal and the subsequent Exor bid.  We suspected that there was some uncomfortableness with the Axis bid --not at all because it was Axis --but because the way the proposed deal came together and then the stridency of the PartnerRe's opposition to what seemed to us to be a pretty good proposal from Exor.  It just seemed a little odd.


It turned out that we weren't alone in our thinking.  Validus CEO Ed Noonan publicly criticized the PartnerRe board for the way it's been conducting itself during this process. Most interestingly, the Insurance Insider story that quotes Noonan extensively, also notes that the Axis deal "has been widely criticized by Bermuda executives."  


Noonan went on to say that the deal with Axis was "unfavorable" to staff and shareholders and offered "virtually no strategic benefit" to PartnerRe.  He said that "There was no market check on the value of the company (Partner), the deal was entered into in a seeming panic, and not surprisingly after the deal was made public the company attracted other suitors."


Mr. Noonan didn't pull any punches in his critique when he said of the PartnerRe board that they "should have abandoned their allegiance to Axis and negotiated with both Exor and Axis to get the best value for their owners."  He went on to say that he believed that the PartnerRe board's "governance track record here is abysmal --by the telling of their own proxy. In addition to the board seats (that would carry forward under an Axis merger), the special committee (of the PartnerRe board) are paying themselves fees as if they are investment bankers for the company when they are already being paid to discharge their fiduciary duties to shareholders."


Noonan is referring to the special incentives included in the proposed merger agreement that would see certain current PartnerRe board members rewarded financially if the Axis deal is approved.


Somehow we think that we could see Noonan's quotes reappear in language contained in any future lawsuits against PartnerRe should opponents of the Axis deal lose the special stockholder vote on August 7.  Having a respected reinsurance executive make comments publicly about his own opinion of the possible fiduciary failures of certain PartnerRe board members is pretty incendiary stuff.  If we saw it you can be sure a shareholders derivative suit plaintiff attorney won't overlook it.  


If it comes to that.  Right now, with Exor's sweetened offer aimed at the preferred shareholders, a number of analysts are suggesting that interest in the Exor bid will cause the Axis merger proposal (the item which is being voted on July 24th) to fail. Since Exor owns over 9% of PartnerRe stock already it needs only a bit over 41% of the stock that casts votes later this month to block the Axis deal.  The shoes everyone are waiting for to drop are those of the institutional investors who seem to own about 42 million shares of PartnerRe stock. The total stock pool, eligible to vote is about 81 million shares including common and preferred.


Institutional shareholder apparently tend to look at organizations called Institutional Shareholder Services (ISS) and Glass-Lewis for guidance. Recommendations from them are seals of approval that can provide an institutional investor with some legal protection against their own investors who may quarrel with the institutional investor's decision. 


ISS and Glass-Lewis recommendations, according to Insurance Insider, traditionally are published two weeks prior to a shareholder vote.  With the recent announcement that the vote is delayed to August 7th we may expect to see the recommendations around July 24th but their recommendation is likely to sway this vote one way or the other.


Meanwhile we've been thinking about Ed Noonan's comments.  At the heart of his words, after you strip away his criticism of the PartnerRe board and the possible breach of fiduciary responsibility, there is a clear sense that he doesn't think the Axis offer for PartnerRe is high enough.  He may be right.


Tokio Marine paid a 1.9 premium to book value for HCC last month. Earlier this year XL paid a 1.6 premium to book value for Catlin and the current Exor bid for PartnerRe seems to be a 1.23 premium to book value.


The initial Axis bid for PartnerRe was a 0.94 premium to book value. It was later increased to 1.06.  You can do the math for yourself but if we were running a major global risk bearing entity like Noonan is and saw a very strong brand name being snatched up for less than book value (the initial Axis bid) we wouldn't be very happy.


Would you be happy if your neighbor sold his house to someone for 20% lower than the market value?  There's the little thing called "comps" or comparable sales and it's the first thing any buyer looks at.  Now we understand the reference in Insurance Insider when it said of the Axis-PartnerRe deal "has privately been widely criticized by Bermuda executives."


So what will happen?  If we had to guess, and though we hesitate to do so, because the ISS and Glass-Lewis recommendations won't be known before we complete this newsletter, we think they will recommend that institutions reject the Axis bid as there is a better extant bid right now from Exor.  ISS may couch their decision but what Elkann seems to be counting on is really quite rational. 


He is publicly standing outside the door of the PartnerRe shareholder meeting with a pot of cash that by most standards represents a better bid for the company than the Axis deal that they're voting on.  From a fiduciary (there's that word again) perspective the existence of the Exor bid, and the guarantees Elkann has provided, would seem to put even ISS in a bind. We would be surprised if ISS recommends anything that prohibits eventual consideration of the Exor bid. 


Of course everyone still has to wait for what is now certain to be another revised bid from Axis.


So what of Axis if this effort to acquire PartnerRe fails?  If you look up you can see potential acquirers circling already.  Rumors abound that Arch Insurance, which has a market capitalization of about $8.5 billion, remain interested in acquiring Axis which has a market cap of $5.6 billion. Arch is said to be willing to pay $65 a share for Axis which is currently trading below $56 a share. The $65 per share price, if it's true, would represent a 1.25 premium to Axis' book value.


Supposedly, according to an analyst, even Everest Re may be interested in Axis too. 

Yes, if the PartnerRe deal fails to go through Axis will receive a $315 million break-up fee courtesy of PartnerRe (yikes!) and that fee won't be paid only if Axis and PartnerRe mutually terminate the merger or both parties' shareholders vote against approving it.  


Right now we can foresee that the PartnerRe shareholders might not approve the merger but the Axis shareholders are another story.  To approve the motion at Axis the Axis board needs a majority of 75% of the shareholders who vote --not the 50.01% of voting shareholders as with Partner.


If Axis did receive an offer presumably the suitor, as well as current Axis shareholders, would have their eyes on that $315 million. It's sort of like free money coming from Partner but this could all depend on the timing of any incoming offer to acquire Axis.  If something does come in prior to the Axis shareholder vote on the PartnerRe acquisition it would be a little odd to go ahead and formally vote to approve the terms of the PartnerRe acquisition and then move to the next vote which could be to approve the sale of Axis to a suitor.


For $315 million though, if PartnerRe shareholders votes no, we've seen stranger things happen than a nonsensical vote by the Axis shareholders of yes to an already wrecked PartnerRe deal just to get the $315 million from them before proceeding to a vote to sell your company to someone else.  


This could get even more interesting which, frankly, we didn't think was possible.

 Two big mergers data driven?

Before we get to Ace and Chubb we want to look at another big merger that was announced this month. This one, between Willis and Towers Watson was a "merger of equals" according to Dominic Casserly of Willis. Willis is paying $18 billion to acquire Towers Watson.

At first we were a little surprised at this one. Towers Watson is an international consultancy that helps businesses with benefits administration, risk and financial services as well as talent management and employee retention programs.  They haven't had an insurance or reinsurance brokerage operation since it sold JLT in 2013.

We couldn't figure out what Willis saw and why it was worth $18 billion to them.  Then we saw two more bits of information. We saw Evan Greenberg of Ace say that following the acquisition of data received from Chubb in the Ace-Chubb merger he was "going to weaponize" this data and that harnessing "awe-inspiring" amounts of data will provide him a competitive edge.

Next we saw this about Towers Watson: they are the world's largest supplier of actuarial software and capital risk management. Its clients represent 73 percent of the Fortune Global 500, 75 percent of the Fortune 500 (U.S.), and 75 percent of the FTSE 500.  The penny dropped.  Talk about weaponizing data! If Willis as an insurance and reinsurance brokerage can figure out how to effectively mine and use the data that Towers Watson has the $18 billion it paid will seem like a bargain. 

We also noted that, looking at this market scope another way, Towers Watson has some $2.2 trillion in assets under advisement.  One analyst said that it appears "cross-selling is the primary objective" for the merger.

Apparently a presentation from the companies show that through the merger Towers Watson will have access to Willis's insurance offerings, while Willis will have access to Towers Watson's treasury, investment consulting and outsourced chief investment officer services.

Dominic Casserly, Willis CEO, was less veiled when he said "in North America, Willis will be able to rely upon Towers Watson's large company relationships to increase our penetration to more than $10 billion US large property and casualty corporate market."

Meanwhile, Evan Greenberg's "data weaponization" hopes may be well-founded.  Chubb has a very large US presence in the middle insurance market with a large agency distribution and is particularly strong in large account and upper middle market areas.  One analyst said "Strategically, for Ace the acquisition creates a global P&C industry leader, provides it with an industry-leading presence and strong brand in US personal lines and commercial lines."

The data possessed by Chubb for these lines of business, and their important high net worth coverages, will yield the new combined entity that opportunity to "weaponize" the firm's entire approach to P&C and maybe even to reinsurance. When Greenberg was asked whether the $980 million in ceded re premium Chubb ceded in 2014 would be available to be placed into the recently launched Ace-Blackstone ABR Re vehicle Greenberg answered "yes, is the answer, in general terms. But I have to admit to be honest, I've hardly thought about it."

With the synergies and savings expected from combining the two companies expected to reach some $650 million one can expect that the reinsurance opportunities for ABR Re involving the Chubb book will be computed in to the overall $28.3 billion deal price paid by Ace soon enough.
CATEX Binding System more powerful

And now a quick word from our sponsor as they say.  CATEX has recently moved into new offices at Carnegie Center, Suite 340, Princeton, NJ.  We are steps away now from the Princeton Hyatt Place hotel which should warm the hearts of our visitors. We know that our old location, where we had been for over 20 years, was a bit of a challenge for visitors without cars.

CATEX has also unveiled a new advertising campaign with a new theme.  You will see it appear in the July edition of Intelligent Insurer and we will coordinate our Monte Carlo advertising in the campaign's expansion next month.  

One of the prompts for this "word cloud" is that our Data Vera product is very much a part of our Binder System.  Date Vera, intakes data of any size and format with no mapping, and cleanses and validates every single data cell and may be licensed independently. We did originally develop it for the CATEX Delegated Authority System, a business where the importance of incoming data integrity is becoming more critical.

At the binder level Data Vera is at its most powerful. Data Vera can ensure that the binder system is dealing with verified, homogenous data and can export that data out to any format desired.  We have clients processing hundreds of thousands of files in seconds with certainty of data accuracy.  Data Vera even provides an "audit certificate" our clients are sending to their clients that shows every data change or correction made to the incoming data and who made it and when.

The new advertisement outlines a sampling of the capabilities of the CATEX Delegated Authority Management System and Data Vera.  If you're interested in seeing a demo of what we believe to be hands down the best BDX management system in London let us know.

Buffett and Reinsurance

There was an article written by
Anupreeta Das and Leslie Scism in the Wall Street Journal two weeks ago with the headline "Buffett rethinking reinsurance"

We had sensed this after reading Buffett's comments about reinsurance at the Berkshire annual meeting back in May but the Journal managed to talk to Ajit Jain after the Ace/Chubb deal.

Jain said since "the reinsurance business isn't going to offer as many opportunities for the foreseeable future, we feel like we should go down the food chain."

What Ajit is referring to is of course Berkshire Hathaway Specialty Insurance the Berkshire commercial insurance unit that sells specialized coverage to business. BHSI has been growing quickly and Buffett makes no secret that he expects it to be a "major asset for Berkshire, one that will generate volume in the billions within a few years."

This idea of going down the "food chain" is something we've talked about in the past. Reinsurers are seeing their space getting crowded by alternative capital and the once vastly popular CAT reinsurance (based on predictable event loss models) has been populated by the new money.

If reinsurers make moves in the direction of the original insured, directly into the commercial space, it's thought they can capture more of the premium dollar by bringing their underwriting expertise in at lower if not original levels.

It's a policy not without some peril.  You may recognize it as one of the raisons d'etre behind the PartnerRe-Axis deal. The thinking is that PartnerRe can no longer remain as a "pure play" reinsurer and needs access to commercial risks underwritten at a primary level.

Conversely one of rival bidder's Exor's concerns is that a newco composed of Axis and Partner will be aiming to write the same commercial business at a primary level that PartnerRe's current reinsurance clients write and retaliation could be swift --i.e. those clients won't reinsure with a company that's competing with them.

This business about stand alone "pure play" reinsurers is one thing but now we're seeing the possibility that stand alone "pure play" P&C companies may soon be threatened!

Read this article about concerns expressed over The Hartford --a little operation with a market capitalization of over $19 billion that some now apparently feel is not "big enough" to compete with the likes of Ace/Chubb.

This is a little deja vu actually. We can remember a time when companies like Chubb and The Hartford actually had their own reinsurance operations. But this kind of scaling would and has dwarfed anything attempted a few decades ago.

We saw something else though that struck us. We were reminded of it by this passage in the WSJ article. "Mr. Buffett has always liked insurance because buyers--be they are owners, businesses or insurance companies --pay premiums upfront, while claims can often be paid out much later. Berkshire is able to invest the funds for its own benefit in the interim. Mr. Buffett calls these funds 'float'".

Far be it from us to suggest that what Berkshire is doing looks like the original prototype for a so called "hedge fund" insurer but having seen this comment of Buffett's several times, and analyzed how the new hedge fund reinsurers work, we were always a little confused.

We were surprised then to see Exor's John Elkann confirm what we'd been sensing when he denied industry speculation that Exor planned to turn PartnerRe into a "float" making machine to simply reap investment profits.

Elkann said that while he admired Buffett and has studied Berkshire "we could set up a hedge fund if the reason we were buying PartnerRe was just so we could invest the premiums. It would be easier and cheaper."

Maybe so. Everyone is entitled to an opinion but you can't argue with success. Berkshire does have $84 billion in float, half of which was generated by its Berkshire Hathaway Reinsurance Group, and when combined with good underwriting and even modest investment returns can generate big profits.

So in 2013 Berkshire Hathaway Specialty Insurance was formed.  One of the world's largest reinsurers by assets made a statement that it had ambitions of premium generation of "billions" within a few years.  

Only two years later we see major consolidation as pure play reinsurers are claiming they can't survive without a strong commercial insurance component and we may shortly be seeing the reverse too --that major pure play P&C insurers can't survive without reinsurance operations.

It's tough to say at what premium level BHSI is writing right now but we would not be betting against Buffett and Jain. The recent BHSI deal with IAG in Australia, as well as its recent approval to write business in New Zealand, are signals that Berkshire continues to have big plans for the unit.

Bookmaking and Underwriting

Ron Pollard died earlier this month. Next time you pass a Ladbroke's betting shop you should think of him.

Any underwriter who knows who he was should really not be broadcasting that fact. Still, you have to admit that Pollard, and the bookmaking odds he set on the possibility of just about anything happening, was one of those characters that every underwriting department used to have.

The development of sophisticated models over the past years has meant that underwriting is supposedly different now. The kind of skill combination exemplified by a Pollard-esque character --a little bit of data and a lot of intuition would make one of those so called "intuitive underwriters" a dinosaur now when once they were prevalent.

If you watch American television you can't help but notice ads run by law firms looking for clients who may have mesothelioma as a result of asbestos exposure. Keep in mind that the US EPA began to take action against asbestos as early as 1973 but obviously the latency period makes these cases active.  R&Q is just one firm that recently bolstered reserves against potential asbestos claims.

Models have advanced in the property space to the point where alternative capital can feel comfortable underwriting all or part of a property CAT risk based on a modeled analysis of the proposed risks.

There are few such equivalent models in the casualty space (risks like asbestos, cyber and D&O) despite the interest of alternative reinsurance capital and ILS players in penetrating the casualty market.

Goldman Sachs came out with a study that drew heavily on a 2014 Guy Carpenter report about the inherently difficult task of modelling casualty catastrophes.  

The bottom line according to Goldman is that there are very high entry barriers for alternative capital in the casualty space. Here is a key conclusion from the study: "Owing to the longer duration of casualty risks, a lack of historical data and sparse, advanced technological capabilities cedents require longer-term, reliable partners for their casualty business, which can prove more difficult to achieve than building shorter-term relationships to cover property CAT exposures."

Translation: look at asbestos risks that are still developing 30,40 or 50 years later and realize that a ceding company is simply not about to switch to a new reinsurer just to save a few dollars. The long-term certainty is the key in casualty risks and that "certainty" means it is de-linked from the capital supporting all the current surplus capacity.

We thought about that, especially when we read this comment. "In fact, many potential casualty catastrophes (especially those in the broad "technological" emerging risks category) are still considered "black swans", to at least some of the re/insurers that cover them. Some can appear out of nowhere and wreak havoc quickly."

We can understand this actually but it doesn't bode well for what we think is an essential part of the future of risk. Somehow coverage for these incalculable "black swan" casualty events has to make it to the alternative capital markets doesn't it?  Aren't the capital markets the only source of funding of that size that could cover such an event?

Maybe not.  Smart people like Stephen Catlin and Tom Bolt are already saying that some risks are just so big that the government has to step in an accept them --they go beyond the bounds of what private enterprise can provide.

Then we saw this article in the Royal Gazette. "Remote risk? There's a cat bond for that" was the headline. Although the "remote risks" noted in the article were property risks and not casualty the article noted that "scenarios with all the ingredients of a Hollywood disaster movie are now being covered by the ILS market."  

Some of the risks being covered are volcanos and earthquakes "rocking New York, Boston and Washington, DC, to a large space rock devastating part of the northeastern US."  These are remote risks, yes, but the article notes that some of them are, as yet, unmodeled. 

Surprisingly even blue chip underwriters like Chubb are involved as the insurer's East Lane Re VI Ltd. $240 mm CAT bond provides coverage for volcanic eruptions and meteorite strikes in the northeastern US.  The risk isn't modeled but S&P noted that there are no active calderas in the region covered which stretches from Virginia to Maine.

S&P did not offer commentary on the odds of meteorites striking the same area but noted that the 2013 asteroid explosion over the Russian city of Chelyabinsk damaged more than 7,200 buildings.

These are low probability events and while covering them is a headline grabber our interest lies in whether they will ever be an extension of this "wagering" to certain casualty events.  We hope not.
Long tail business models wrecked by low interest rates

There were a scattering of comments which we saw this past month that all have to do with alternative capital.  Several of the comments were more than the usual "embrace it or become extinct" warnings we've seen in the past.

The most interesting one came from the CEO of Munich Re Canada, Philipp Wassenberg, who said in a long article in Canadian Underwriter reinsurance is "in a state of structural crisis and we have to overcome this crisis in order to stay relevant."  His observation was not just limited to how the industry is dealing with the flood of new capital but extended to the core model of pricing, reserve releases and interest rates especially we think in how casualty risks are priced.

Wassenberg traced the start of the reinsurance "hard market" back to the 9/11/01 US terrorist attacks. He referred to 9/11 as the "last drop in the ocean" that contributed to the insurance and reinsurance industry entering a hard market for the next 7 years.  

The 2008 financial crisis, and the regulatory response of lower interest rates, changed everything said Wassenberg.  "Our models were basically built on higher interest rates" and that goes for all long-term business, casualty, workers' compensation and life insurance he said.  Worse, said Wassenberg, in an effort to compensate for the absence of income as a result of the lowered interest rates "a lot of insurers and reinsurers still release the reserves from those very good, long fantastic years" of 2001-2008.

This is a fascinating observation coming from a senior executive at Munich Re.  It leads one to realize that the industry had better adjust their long term pricing models to accommodate lowered interest rates or interest rates need to increase as it's likely that there are little loss reserves that can be safely released.

Wassenberg had an observation on US natural CAT models and its applicability to global CAT models.  He said that since the US Natural CAT market is "really where the profits are made" the benign CAT environment (since the trio of Hurricanes Rita-Katrina-Wilma in 2005 caused significant natural US CAT claims) has seen rates decrease because of the entry of alternative capital.

Hedge funds and pension funds can be selective and participate in US CAT only and not be bothered with worldwide global CATS, like flooding in Australia and Thailand and earthquakes in Japan and New Zealand.  To those funds, experiencing benign CAT activity, he thinks "it seems an incredibly profitable business. They have no clue what can actually happen, that you have to make money over time and that it's about recurrence and calculating the recurrence."

He pointed out that in 2011 there were more than $100 billion in insured losses from natural catastrophes (Australian and Thai flooding and NZ and Japanese earthquakes) bus since the CAT models are built on US hurricane risk as opposed to worldwide global catastrophes "all the global bearing of this incredible 2011 year was borne by the international global reinsurers, and some local insurers," he pointed out, "the loss situation seems benign."

Wassenberg's words validate more than a few of our points.  Writing risks without the benefit of a model is risky business. Second, long tail business is predicated on income assumptions and when they fail an insurer can be in a tough spot --nearly requiring it to make reserve releases from other lines, which it may not want to do, but believe they must to lessen financial losses.  Finally, we think we can see the impetus for the "scaling" mania currently going on in the industry from what Wassenberg says. He feels that the "sad part about" the current reinsurance situation is that it "cannot get cheaper and cheaper because we have to stay with our models."

Hence the criticism of "pure-play" entities who may be coming to resemble the nearly extinct monoline reinsurers.
Shots fired in prospective long war with management association
A situation that goes beyond "normal" homeowners association standards


I have sat on corporate boards for most of my life. After a while, the rules and standards that directors must meet become second nature, and one starts to believe that one will never run into a situation that one cannot handle. Then, suddenly, one is proven wrong.


Last year, I was invited to join the board of the management company that oversees the apartment buildings I live in. I was quite quickly appointed finance director.


The work was enjoyable, until the board became corrupted. In short: we have a Sinking Fund of about 300,000 ($450,000), retained for emergencies. Our chairman has decided that we should spend about 800,000 ($1.2 million) on painting the buildings. She intends to exhaust the sinking fund and jack up the annual service charges two- or three-fold to fund the project.


The board unanimously agrees that the work is unnecessary and purely cosmetic in nature. I briefly led the opposition to this ill-considered idea, until the chairman permanently suspended voting and took sole charge of the company's destiny. She was abetted in this decision by the managing agent, a professional firm that looks after the day-to-day technical details that we lay people could not be expected to understand.


This was terra incognito for me. May a board chairman arrogate sole responsibility for a company's activities? Are the other directors bound to sit in silence while important decisions are taken? It didn't sound right, but the managing agent (who will earn about a fifth of the total cost of the decoration, but fails to understand the phrase 'conflict of interest') assured me that everything was in order.


I wrote a detailed memo to the board, explaining that, even if it were acceptable for the chairman to impersonate Kim Jong-un, there was one insuperable obstruction to the plan: our directors' and officers' insurance.   


In the memo, I wrote: "The directors have insurance against errors. Directors' and officers' insurance rarely, if ever, covers unreasonable acts, leaving the directors personally liable for any costs associated with activity that the insurance company, and perhaps subsequently the Courts, might deem unreasonable."


The chairman rejected the memo and its balanced analysis out of hand. The managing agent advised me that insurers are not interested in the reasonableness or otherwise of insureds' activities (!). An appalling campaign of dirty tricks and lies followed that made it plain that the project was going ahead, despite the wishes of the majority of the board. There seemed to be nothing I could do to stop it. So I resigned from the board.


Boards may make decisions without contacting the company's shareholders, but the latter may call an extraordinary general meeting to air grievances. (Each leaseholder in this case is a shareholder of the management company.) The chairman's ungracious and accusatory acceptance of my resignation ended with an instruction not to tell the other leaseholders or anyone else of the plans.


Hey presto; I knew what to do. I've just spent the weekend printing, signing, stuffing and addressing 88 envelopes, and will early tomorrow deliver an envelope containing the memo and a covering letter to every leaseholder.


The only parts of the whole nonsense that remained vague to me were (1) may a chairman disenfranchise the other directors at will and (2) would a D&O insurer refuse to pay out where a board had acted unreasonably and with self-interest?


As to (1), I am advised that a chairman may do whatever he or she can get away with. Fair enough.


As to (2), a D&O underwriter of my acquaintance warned me that what one man sees as unreasonable, another might feel was rational and correct behaviour. I outlined the matter to him, and he confirmed that the policies he underwrites would automatically exclude irresponsible and imprudent spending on vanity projects against the wishes of a majority of the board.


He warned me, however, that such disputes often end up in the courts, and that, depending on the board's position, the company's defence against a refusal to pay by its D&O carrier might end up costing my fellow leaseholders more in legal fees than the proposed decoration costs.


I have just posted the letters into every mailbox. Wish me luck.





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

July 16, 2015

Quick Bytes

In what may be the best line of the year so far Lloyd's CEO Inga Beale said "Insurers will be Uber-ised unless we find new ways to add value."  She continued saying "Back office systems are unable to communicate with each other and our syndicates are unable to mine their own data effectively. We need a 21st century infrastructure to support a 21st century market...Stephen Catlin observed the fact that in his view processing in London hasn't moved on significantly in 40 years and the market stands to lose out to modern rivals. He slammed the London Market's businesses processes calling them a disgrace and Luddite...The recent investigations into FIFA conducted by US and Swiss authorities have attracted the attention of insurers. World Cup insurers are likely to refuse to pay out on many cancellation contracts if Russia and Qatar lose the rights to hold the tournament because of fraud experts say. Insureds linked to fraudulent behavior as has been implied in press reports related to the FIFA scandal would be unable to collect on event cancellation coverage...Aon Benfield has noted that global reinsurance capital increased by 1% and reached $580 billion by the end of Q1, 2015...As Europeans know this has been a particularly hot summer in Europe marking the third significant heatwave of the century (and it's only 2015). On June 29th the temperature in Madrid reached 104 F and a day earlier in southern Spain, at Cordoba, it hit 111 F. Further north wasn't immune either. Dieppe, on the French side of the Channel saw 101 F on July 1st the same day London reached 98 F. Yikes!  What was the Central Line like that day?...We're not sure whoever appointed Kenneth Murphy, director of the FEMA District 10, was nodding approvingly when he or she read his comments in an article in The New Yorker about the likely effects of a long anticipated strong earthquake in the Pacific Northwest.  Murphy said that the city of Portland should expect up to 6 minutes of shaking followed by severe landslides and then a 50 foot high tsunami. Some 13,000 people are expected to be killed and as Murphy said "our operating assumption is that everything west of Interstate 5 will be toast."  We can hear the phones ringing now at moving company offices...

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