Issue 54
January 2016
In this Issue
  • Multi-use of clean data mandatory as crisis nears
  • Hedge Fund reinsurer model "dead" says Dowling
  • January renewal pricing remains poor: more to come
  • Zurich and Willis move down the food chain
  • Roger recalls a financial side of David Bowie
  • Quick Bytes: CSC seems to have won; Icahn still pressuring AIG; change at AIR; drought in Syria may have caused instability; and K-pop music

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Dear Colleague, 
The theme of this issue seems to be data, data and more data.  We're never certain which direction the news will flow when we assemble this narrative but this month there seemed an endless flow of stories about data and how modelers and companies hope to improve use of it in 2016.
CATEX is co-sponsoring the CAT Risk Management & Modelling London 2016 on March 3-4. Our presentation is on Day One. CATEX will also be in London the first week of February to see clients.

We also note that one of the "innovations" of the past several years --the "hedge fund reinsurer"-- may be falling out of favor. The current interest rates and investment returns when combined with the soft market haven't done anyone any favors it seems.  
Both Zurich Insurance and Willis have taken steps to respond to the current market environment and both actions have each "moving down the food chain" to get closer to the originator of the risk.
Any hopes that people had about premium rates stabilizing at the January 1 renewals seem to have been dashed. There are a number of stories about, not only continued falling rates, but that expectations for 2016 are bleak too.
There are also concerns this month about the predominance of risk models used by the industry that originate from a fairly concentrated number of modelers. CAT modelers at insurers are wondering whether that concentration is healthy.
Our regular Roger Crombie column is here too.  Roger noted the death of David Bowie earlier this month but remembered something about the singer (and actor and playwright) that you might have forgotten.


As I mentioned CATEX will be in London the week of February 1 visiting clients and prospects and will be back again the first week of March for the CAT Risk Conference we're co-sponsoring.


As always if you have any questions or comments about CATEX Reports, or want more information about CATEX, please feel free to contact me.

Thank you very much.

Stephanie A. Fucetola
Senior Vice President/CATEX

Failure to "liberate" data plagues industry

Three years ago this month we heard Tom Bolt from Lloyd's speak forcefully about the need for underwriters to amass their own experience data, and not just rely on models, when petitioning him for rate changes or broadening of underwriting permissions. Bolt noted that prospective data from models was fine, as far as it went, as was loss data from the last several underwriting periods. But if an underwriter was truly concerned that underwriting parameters needed changing then he or she had better be prepared to justify the request with reams of their own historical data bolstering the case.

Bolt's point was simple enough. It's easy to take a snapshot of anything in a point in time and claim the picture "proves" the need for an amendment.  Taking a longer look though at the loss experience of that LOB would be a stronger selling point to getting sign-off on "permission" change if the data warranted it.

Bolt made his comments at an event hosted in London by CATEX.  At the time his remarks were greeted with a bit of a "ho-hum" response.  Insurers are often amalgams of merged and acquired companies and retrieving true "apples to apples" data was often easier said than done. Yes, the data existed, but it was on one system or another or it wasn't data that exactly matched a specifically needed LOB experience run. Extracting it would be laborious.

In his own manner the Lloyd's Performance Director let it be known by use of one of his famous "Bolt-isms" what supplicants who had not done their homework could expect from him if their data was non-existent or non-sensical.

At the time the listeners in the room weren't gripped by a sense that they were hearing an earthshaking pronouncement. In fact, it almost seemed a little pedestrian. What could be more logical that the head of the Lloyd's office charged with approving mid-plan changes reminding those asking for relief to bring their loss data with them?  

But it wasn't the mandate itself that was the ultimate news. It took us a while to realize that. Those requesting changes certainly could have surmised that they would be asked by Lloyd's the question "How has this business performed historically for you?" The real news was that even though they knew this question would be asked they had difficulty providing the data.  

As CATEX has become more immersed in industry data processes we've remembered Bolt's words.  Our own Data Vera product, which cleanses, validates and audits hundreds of thousands of data files within seconds, was initially developed for underwriters to import premium and loss information for risks from hundreds of different data originators. Soon enough we were to see the flip side of this data coin

Insurers began to use Data Vera to cleanse, validate and audit their own data prior to modeling.  Insurers also began to use Data Vera to prepare data for Lloyd's reporting requirements, for upload to their own legacy systems, for upload to our Pivot Point System, for ACORD data conversion and for several dozen different purposes we hadn't envisioned.

We realized that by eliminating so-called "single purpose-driven" data cleansing and validation we were liberating the data of our clients. Once processed through Data Vera the audited data could be used for any purpose.

We saw this article, "Clean data is the biggest challenge facing reinsurers, say analysts" in The Business Times from Singapore. The gist of the article is that the future of insurance, particularly reinsurance, lies in data analysis but this is "hampered by the insurer's ability to gather and interpret clean data, which is the single biggest challenge the insurance industry now faces."

We had suspected the data cleansing and validation challenge was big, but even we wouldn't have publicly classified it as the single biggest challenge facing the industry. Maybe we should have better remembered Tom Bolt's words?  But some level, though, what Bolt said that night had sunk in with us. Here's how we arrived at the same conclusion outlined in The Business Times article.

Our Pivot Point platform processes over $7 billion annually in premium and claims for reinsurers, brokers, MGA's and DUA partners. It was on our Delegated Underwriting Authority system that we first began to get a taste of the data gathering challenge.  Our systems are remarkably granular in nature and track premiums and claims down to a risk level --whether it be a location, football player or specific physician.  

That type of precision, which we believe to be necessary for successful 21st century real-time underwriting, requires specific risk level information.  Since risk-bearers were already providing the coverage for these specific risks who'd have thought that getting accurate information about these risks would be a problem?  Guess again. It was a phenomenal problem and one that required us to go through a range of possible solutions both available off the shelf and in the marketplace.

In the end none of the solutions worked to our satisfaction. They still required laborious "mapping" of incoming values to specific, different template data fields depending on the purpose of the export.  We started anew, and built our web-based Data Vera application, which has now become the gold standard for data cleansing and loading for all our Pivot Point systems.

Thankfully, we recognized the benefit of licensing Data Vera independently, without the need to license the full scale Pivot Point transaction software. This decision allowed us to open Data Vera to licensees whose transaction systems were just fine but required accurate and complete data to run them.  That was a problem we were familiar with and Data Vera is designed to seamlessly integrate with other systems.

It wasn't too long until the other side of the data coin was brought to our attention. Almost sheepishly, we were asked if Data Vera could be used to cleanse risk information already possessed by a risk-bearer (and sometimes already written) prior to being sent to a modeler. The response to this request was easy --most emphatically -- yes. Once the incoming data is cleansed and converted to structured data by Data Vera it can be exported to any format or template very easily

Being at the center of the import of unclean data; watching and learning the preferred actions to clean and perfect such data; converting the unstructured data to structured data; and noting the export reports built by our clients, we began to recognize that we could bring even more value to Data Vera.

We've added an analytics section to Data Vera. Now the user can see graphically or tabularly; the composition of the incoming risks by immediately identifying risks lying outside chosen geographic or LOB "cap" metrics, coverage type or premium value and can contrast of the proposed new risks against existing aggregate coverage

We've also been able to expand the analytics portion to include comparison of imported data by modeler risk codes so that an underwriter can more easily inform the data sender of anomalies prior to modeling. Data Vera has an online collaboration feature that allows a licensee to bring anyone into the missing or questionable data field to correct it themselves. That correction, as well as the corrections auto-populated by Data Vera, and modeler responses to the exported data are maintained and tracked in the audit log.

This digression about our Data Vera application is interesting (we hope) because of the current hue and cry about accurate data. Let's take a step back and look at this again from a different perspective and follow the data as it flows now.

We had been a little surprised that risk bearers who had already issued coverage were, after the fact, seeking to clean that data. We thought that by the time data reached the modelers that it would have to be in pretty good shape.  After all, the data intake requirement for these models is often enormous. What would be the sense of knowingly populating them with suspicious data?   

It was no surprise then to learn the modelers themselves have recognized that the quality of their output can be compromised by the use of poor data.  Corrupt data would naturally lead to a faulty model and resulting "she said, he said" arguments about --was it the fault of the data or the model --are discussions no one wants to have. Modelers have responded and have deep relationships with data scrubbing operations to prepare and cleanse data for use in their models.  The service isn't cheap, and accurate data entry requires continuous interaction with insurer staff, but insurers have little choice if they want an accurate model based on accurate numbers.

So where does this end?  We noticed this article citing the work done by Future of Humanity Institute at the University of Oxford in a study commissioned by Amlin. If you've seen the movie "The Big Short" you'll have a head start in understanding Amlin's concerns which motivated the study. The basic idea is since there is a concentration of insurance and reinsurance industry modeling with only a handful of modelers how would that work if even one of the underlying assumptions shared by all of them are proven wrong?  The answer is that it wouldn't work too well at all.

From this study you can clearly see a straight line to the industry's embrace and support of Oasis as it tries to bring more and different models into use. We know Oasis and have worked with them since their inception.  One of their goals, to create a marketplace for models, data and services that will lower the cost of entry, is one of the reasons we've developed Data Vera. If the data is cleansed, validated and properly structured it's liberated for use by ANY model

Bringing the shopping cart of models available through Oasis to the insurer, not only reduces the dangerous concentration of models, but makes tools like Data Vera even more important.  It also allows to niche expert models to get to market - eg storm surge on the New Jersey shore or flooding in northwest England - which otherwise would not see the light of day and can give a very different and possibly more accurate view on specific peril/locations mixes.

We've also noted comments from people like Brian Duperreault who, to his credit, continues to talk about the need to entice young people --so called "millennials" --with exceptional technical skills --to become involved in what he views could become the biggest arena of data yet assembled. As he puts it "The issue isn't simply gathering massive quantities of data. We need to take the data we have and know how to ask the right questions, and refine the right algorithms, to get the analysis we need to provide our products quickly and efficiently to a world doing business on smart phones."  That just about really boils it all down to the basic challenge doesn't it?

None of these goals are attainable if the data can't be cleansed, and cleansed quickly, by using automated processes with verifiable audit records.  Just as important, is the ability to export clean and validated data for multiple purposes as a result of one process.  As more and more models need to be utilized the impracticality of repeated mapping to each different model becomes apparent

CATEX is co-sponsoring a conference in London on March 3-4 the title of which is CAT Risk Management and Modelling.  Our presentation at the conference, "Getting Started with Modeling on Multiple Platforms", will show; how Data Vera can clean, auto-fill missing values and validate data from multiple incoming sources; and how that cleansed data may be exported to any modeling platform of choice. Single purpose data formatting is dead and we'll be sure to put the nail in that coffin on March 3rd in London. 

If you read the article about the study commissioned by Amlin you'll note some observations by JB Crozet, Amlin's Head of Underwriting Modeling.  We know JB Crozet, and like most modelers he's a pretty smart guy, and, like most modelers, he's very aware of factors that are "outside the box" of the models he uses.  In Crozet's case, he's way outside the box, as he indicates when he says, "There are more and more of the same models being used within the industry and within companies as well, so we are much more exposed to the systemic risk that one of those models is wrong, that it will affect a lot of insurers at the same time, in quite a dramatic way."

Amlin, Crozet, Oasis, Oxford and others, are doing something about the possibility of model error by insisting that their data be easily able to reach other models that are perhaps less frequently used by the industry.  By using tools like Data Vera they can do just that.  

Data is finally on everyone's radar. Kurt Karl, Swiss Re's chief economist, predicts that "I think the big thing that's driving interest in insurance, in life and non-life, is technology and technique changes, and the data and information that we have available to get better underwriting on the risks that are out there. So this seems to be about the right timing for it being a theme at Monte Carlo --so that would be my guess for 2016".

If Karl is right, and we think he is, we will need to ensure a significantly better Wi-Fi connection at the Cafe de Paris in Monaco for demos this coming September.

Risk "gatekeepers" leapfrog hedge fund reinsurers

Not so long ago the concept of "hedge fund reinsurers" was the next new thing.  The idea was that hedge funds were doing a better job than traditional reinsurers in investing their capital and could earn better returns from the "float" generated by underwriting income. Investing in shares of the hedge fund carriers was also a way to invest in the hedge fund's investment strategy without meeting the high minimum investment requirements. 

Of course insurers are required to hold equity in safe investments but a hedge fund managing a multi-billion dollar portfolio holds a range of investments from cash deposits to sophisticated "hedges".  Assigning investment values to the safest of the investments, for the invested surplus, was simply an accounting process.

Several high profile hedge fund managers including Daniel Loeb and David Einhorn set up hedge fund carriers.  In each of the cases the underwriting team was very experienced. Operating in an era when reinsurance premiums were declining it was still important to maintain discipline and try to write to an underwriting profit.  In a normal reinsurer the addition of investment income hopefully produces an overall profit even if the underwriting results in a loss and it was thought that the hedge fund managers would realize even higher investment profits.

Unfortunately it hasn't quite turned out that way.  Investment income has dropped significantly at some of the hedge funds and the continued rate pressure has meant that underwriting for profit has become very difficult.  The temptation to just write to produce premium cash must be great but management, such as John Berger at Third Point Re, have been around long enough to know what happens if you compromise underwriting discipline. Thus there are fewer and fewer "safe" risks, which can be written at adequate rates, that can produce the float needed to invest by the hedge funds.

It's almost a potential triple whammy.  Investment returns are low. Premium rates are low. And the idea of simply opening the underwriting gates to take in premium cash, if it was ever broached at all, is a non-starter. There are no safe investments, yielding decent returns, worth the risk of obtaining less than adequate premium just to get the float. Rather than make such a miscalculation, and face claims on business written below technical support rates, it's better to pass and wait for a better risk at a better price.  Such a strategy cuts down on the amount of money that can be invested but if the returns are poor anyway why risk writing the business in the first place at a less than adequate rate? Even more disastrous problems could loom if claims arise.

It's a tough situation, so tough in fact that the "traditional hedge fund reinsurer model of asset managers launching new independent carriers is 'absolutely dead', Dowling & Partners managing director VJ Dowling claimed".  Dowling said that the future of hedge fund reinsurers lay in partnerships with existing carriers.

In a speech at Lloyd's on January 18 Dowling said that the hedge fund reinsurance model championed by the likes of Third Point Re and Greenlight Re "will not happen again". He claimed that "These were the old masters of the universe, where you had the brand name, you hired a team of people and you went and competed for business in the marketplace. That model is absolutely dead."

Interestingly Dowling said that the model that Arch Capital used with Watford Re, built on assuming existing chunks of business and having lower return hurdles, would be the new model.  He said Arch "broke the model" and "was able to go out and find capital providers, find investment managers, and to share the revenue".  Arch's own reinsurance operations expect to generate a 1-2 percent investment return while Watford Re's business plan assumes a 5-6 percent return.  He predicted there would be a big shift toward setting up such third party hedge fund vehicles.  

Dowling's observations may have traditional reinsurers smiling.  It all comes down to the cost of capital and in the case of Arch having Watford, with its lower cost of capital, Arch is able to place business it might not normally write (because of its own higher cost of capital and projected lower investment returns) into Watford and benefit from a share of the profits. Presumably there are also ceding commission fees and underwriting fees that flow to Arch as well.

This should all sound very familiar and Dowling admits as much. "It's not hedge fund re", he said. "All it is is 'total return re', which has been around forever. There are more and more people taking a greater percentage of their return of the business by looking at the underlying economics".  

Arch CEO Dinos Iordanou would probably say Dowling has it right.  Iordanou has said that his "company has embraced alternative capital."  He continued "Independent of the capital structure, whether it's temporary that becomes permanent, or a sidecar, or virtual companies and facilities that have been created, the nucleus is around talent and who has the underwriting and analytical capability in place. We embrace it --we don't say we're going to be a traditional company with permanent capital. If we can deploy alternative capital to benefit our shareholders we will do it and that's what Watford Re was all about." 

A.M. Best has noticed this trend too and says that as the convergence of reinsurance and capital markets continues some reinsurers are becoming "gatekeepers of insurance risk" and are agnostic to the form of underwriting capital employed to write the risk. Best said that "Reinsurance companies understand the need to form larger, global, well-diversified operations with broad underwriting capabilities to assess risk and to serve as transformers of risk to the capital markets".  Reinsurers can best serve their clients said Best by "matching risk with the most appropriate form or capital."  

These observations aren't new, except perhaps in the context of funereal analyses of hedge fund reinsurers. If you look at Mt Logan Re, Everest Re's $900 million third party capital sidecar (in which it maintains a 15% stake), Artemis has reported that Everest has taken an approach of allowing Mt. Logan to augment its own capacity in the catastrophe reinsurance space, putting the lower-cost third-party capital to work alongside its own to lower its own cost-of-capitalThat seems to have been an effective strategy, as the reinsurer has been steadily increasing the premiums written under Logan, which has helped to offset some of the decline in reinsurance premiums seen at the reinsurer overall.

We always harken back to former RenaissanceRe CEO Neill Currie who as long as three years ago had spotted this role for reinsurers. If the risk bearer holds the underwriting expertise, and has the market reputation to attract the risk, then not deploying the lowest priced capital would seem to be imprudent.  

In this era of low investment returns and falling premium rates it's become nearly mandatory to be aware of the cost of capital as A.M Best warned. Artemis reports "There is sure to be a painful adjustment for some to undergo, as they try to move in this direction (obtaining alternative forms of capacity). It won't work for all companies, culture will have a bearing on how well the shift to efficient providers of risk capital can be executed and some will even fail". 
 Not quite a "Happy New Year"

This far the stories about the January renewals show that rates continued to decrease, and the rate of the decrease might not even have slowed as people had hoped. The headline of a January 4th Insurance Insider story says it all:  "Rating downswing more severe than expected: Vickers".  James Vickers, chairman of Willis Re International, noted that rate reductions in the US property CAT reinsurance did slow up to between 2.5% to 7.5% but said that in other markets there were few signs of slowing pricing cuts.

Jumping in too was PwC which Artemis reports believes that the London market is facing further "significant" price declines in 2016 and that 1 in 4 may have to rely on their investment returns to make a profit (yikes!).

And analysts at Peel Hunt said that rates in London, while remaining technically adequate, are producing underwriting returns near the cost of capital.

If that's not enough bad news analysts at Sanford Bernstein suggest that reinsurer earnings are "not yet painful enough" and that the industry would sustain a further one to two rounds of rate softening.

On top of that it's been observed that some European property CAT risks renewed on 1/1 were priced at levels near or even below the modeled expected losses.  The reasoning behind such aggressive pricing apparently has to do with reinsurers maintaining needed exposure levels of diversification so that they can keep writing better priced US exposures.

In such a context the observation by JLT's David Flandro makes sense. Flandro said that "what is developing is a bifurcated market. The rate of decline in the US --the world's largest reinsurance market --is materially slower for the third major renewal in a row."

Interestingly one of the reasons the US rates are dropping less quickly is said to be a withdrawal of capacity from ILS carriers that are now an integral part of the US CAT market. This cut-back by the ILS market, in the face of even lower rates in the US CAT market, is being cited as a sign of underwriting discipline which has to be a pleasant surprise to all those who claimed that this was "naive capital".

To be fair to the analysts, the period continues to be one where claims remain benign; the introduction of ILS has lowered capital costs; and reserve releasing continues.  This can't last forever as everyone knows.  

But there yet may be one more rock to look under that Guy Carpenter's Nick Frankland observed.  As margins continue to compress Frankland said more focus would move onto the industry's "colossal" expense ratios of around 30 percent.

That is sort of a juicy target.
Steps down the "food chain" for Willis and Zurich

Two stories this month showed how brokers and markets are each dealing with the soft market. Both stories have been in front of us for a while but we began to think about them differently as we noted the continued premium decreases at 1/1. 

Last month Zurich Insurance agreed to purchase Wells Fargo's crop insurance unit, Rural Community Insurance Services, for a price of up to $1.05 billion.  RCIS is the largest US multi-peril crop insurer with a 20% share of the market.  At the time of the purchase it was observed that the deal "will see Zurich use part of its much-touted excess $3 billion excess capital, which had been earmarked for investments or to be returned to investors by the end of 2016".

Since Zurich pulled back from its bid to acquire RSA, due to Tianjin losses and unexpected US auto liability reserving, the popular notion was that Zurich was still looking to sensibly spend money.  On its surface the acquisition of the US crop insurer certainly fit the description of a "sensible" spend.  (As we write this Zurich has issued a Q4 profit warning and its shares have tumbled nearly 9% so the import of that supposed $3 billion of excess capital has only grown).

The initial reports about the RCIS acquisition did note that Zurich "has had a relationship with RCIS since 1992 and currently assumes 25% of the unit's retained premiums via a quota share contract.

Three weeks later more detail emerged.  Yes, Zurich does assume 25% of the RCIS premiums through a quota share. But the quota share is a deal that sees RCIS ceding 75% of all its premiums ($1.1 billion was the 75% figure in 2014) to four reinsurers.  Zurich's 25% stake represented $336 million.  Now that Zurich owns RCIS it plans to retain all the business currently ceded by RCIS which means it will add another $764 million in premium (2014 numbers) in exchange for the purchase price of up to $1.05 billion.

Fireman's Fund, Munich Re and Partner Re stand to lose a significant chunk of premium because Zurich will retain the entire 75% quota share.  RCIS was sold by Wells Fargo after regulatory restrictions caused the bank to reconsider underwriting insurance.  The crop insurer's GWP has decreased since 2011, which Zurich said was largely due to lower crop commodity prices. Unfortunately, the outlook for commodities including agricultural, is mixed at best. 

Meanwhile, Willis successfully merged/acquired with Towers Watson in a deal that faced institutional shareholder opposition.  Kudos all around as the success of the deal was a bit of a surprise. Our view of the rationale prompting the deal was discussed last July. Towers Watson has a tremendous amount of data on its clients who represent 73 percent of the Fortune Global 500, 75 percent of the Fortune 500 (U.S.), and 75 percent of the FTSE 500.

We also noted that 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.

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."

As Willis seeks to "move down the food chain" to get closer to the risk, acquiring Towers Watson, and its relationships to the owners of a large number of those risks, seems like a wise strategy.  But wait, there may be even more to it.

Steve Evans of Artemis, to whom we would defer on any topic, thinks that the newly merged company also has a compelling opportunity in reinsurance and ILS.  Steve thinks that while identification and production of risks, mined from and by Willis Towers Watson brokers, is certainly an opportunity his focus is on the $2.2 trillion in assets under advisement managed by Willis Towers Watson as a possible source of ILS capital.

Steve notes that that $2.2 trillion is held by pension funds, endowments, foundations, sovereign wealth funds and family offices.  We can't think of a more current list of "investors du jour" for ILS vehicles. With the natural connections to broking and risk that Willis already has, the title of Steve's article, "Willis Towers Watson: a risk & capital connector in reinsurance?", hardly seems far-fetched.
Roger recalls another side of David Bowie
Securitization of Ziggy Stardust and others raised $55 million

Roger Crombie

The death in January of David Bowie robbed the financial services industry of a pioneer. Music and acting were among the frontiers he notably explored, but history may well remember David Jones, aka David Bowie, for his financial acumen.

The Thin White Duke was the only global issuer of what were called 'Bowie bonds.' I'll explain.

The term 'Bowie bond' was coined in 1997 when the man who played Ziggy Stardust raised $55 million by promising investors future royalties from music he had recorded before 1990, a catalogue of songs and some 25 albums.

The bonds were an innovative way for the musician, who was then 50, to raise cash in hand. The plan called for the bonds to be repaid with royalties from Bowie's music as they came in. Music writer Paul Trynka has written that Bowie used part of the $55m to buy out his former manager Tony DeFries for an unconfirmed $27 million.

Prudential Insurance Co. of America, the nation's largest insurance carrier, bought all the Bowie bonds, and then itself issued a 10-year bond, backed by the musician's future royalty stream, with a fixed annual return of 7.9%. (These were the heady days when interest rates were at a sensible level.)

Bowie, whose musical career was essentially over by 1997, had taken a leaf out of a technique that insurers couldn't stop talking about in the mid-1990s: securitization. Insurers were talking about it, but not doing very much of it at the time.

Investment banker David Pullman struck the deal with Bowie. It was the first time a musician had sold intellectual property rights via a bond. Other artists, such as James Brown, Rod Stewart and Iron Maiden, later did the same, although Brown sued to get out of his securitization arrangement in 2006, a year before his death.

There seems little doubt that the arrangement worked well for Bowie, but investors in the bonds may not have been so pleased. Online music sharing services, and the downright theft of copyrighted materials known as 'peer-to-peer', rewrote the dynamics of the music industry.

In 2001, Pullman sued Prudential Insurance for breach of contract and for "unjust enrichment." Moody's Investors Service first assigned the Bowie bonds the seventh-highest investment grade rating, A3, but downgraded them to near junk status in March 2004.

The 'assets' that backed the Bowie bonds were, of course, the future sales of his music. Those sales were theoretical, an expectation rather than what passes for assets in most other cases. The assumption was that Bowie's music would remain in demand, which may not have been an unreasonable expectation at the time. The reduction in the future value of those songs once the Internet arrived could not have been foreseen (probably).

Let's set this in context. Take a man of 40 who has enjoyed a fairly successful business career. He might be expected to have 20 years of work left him at, let's say, an average annual salary of $150,000. That would equate to earnings of $3 million over the 20 years. Would you buy a bond based on that likelihood? Of course you wouldn't. What if the man fell ill or became bored and went to live in a grass hut in Bali?

On the other hand, basing a bond on a promise with the added allure of a star name, as Bowie did, isn't that far removed from reality. A bond itself is just a promise, after all. So, for that matter, is an insurance company: IPC Re's Jim Bryce always referred to insurance companies as retailing a single item: a promise to pay.

The Bowie bonds were paid off after 10 years and the ratings accordingly withdrawn. Bowie sold about 150 million albums worldwide in his career. A 2015 English newspaper estimate said he was worth 135 million (about $200 million).

Fans will appreciate the album released a couple of days before Bowie died, and sales of his music will presumably remain buoyant for a while. But who would have thought that, as his music inevitably dates and falls out of favour, we would remember Bowie more as a financial innovator than as a musician?

You can't, as they say, make this stuff up.

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
January 21, 2016
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Sadly, Dr. Peter Taylor passed away in November, 2015. Peter was, with Dickie Whitaker, one of the driving forces behind Oasis. There is a memorial service in London at Merchant Taylors' Hall for him on February 5...It finally does seem as if CSC will win the battle to acquire Xchanging. CSC has played it close to the vest as to their future plans for Xchanging Insurance Services but given Xchanging's profile at Lloyd's it's a much discussed topic at One Lime Street.....Florida Insurance Commissioner Kevin McCarty, who has been on the job since 2003 and helped guide the state's fragile insurance market in the wake of eight hurricanes a decade ago will leave his post in May...Carl Icahn has intensified his war with AIG management and now says that management has either been "purposely misleading" or "negligently uninformed" in their public disclosures on the feasibility of a plan to split up the insurance giant...Speaking of AIG one of the best reporters in the business Leslie Scism of the WSJ has a story about the insurer investing in a company that makes wearable devices designed to monitor the movements of employees in factories or construction sites and at other hazardous workplaces to help prevent job injuries. Sensors attached to the back or worker's safety vests would transmit real-time data about the movements of workers and maybe be able to even warn when they wander into the path of an oncoming forklift.  Of course there are privacy concerns that need to be addressed but it's an interesting idea to address workers comp related injuries...One of the nicest people in the industry, Ming Lee, has retired as CEO of Applied Insurance Research (AIR). Bill Churney, who has been with AIR for 14 years will succeed Ming...Here's something interesting. There's a theory that the "unrest" (yes, we realize that's an understatement) in Syria may actually stem from a prolonged drought in the country from 2007-2010. Zurich Insurance co-authored the World Economic Forum's latest Global Risk Report released in Davos this week...Talking about risks, here's a really big one. The largest container ship in the world, the 1,300-foot-long Benjamin Franklin, owned by French shipping line CMA CGM SA, has been visiting ports on the West Coast of North America.(The 102 floor Empire State Building is 1,250 feet high for comparison). The ship is so big that the cranes that load containers at ports like Los Angeles can't reach the top of the ten container stack that the vessel can bear so for now it's a challenge to load to capacity...Finally, South Korea has responded to North Korea's claimed detonation of a hydrogen bomb by blaring "K-pop" music into North Korea from huge banks of 48 speakers along the DMZ. The music can be heard about 12 miles into North Korea. We've never heard "K-pop" but if Seoul was looking for "audio-torture" we could have suggested some US cable TV news channels had we been asked...

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