Dear Friend,

Wow, that PXRE news was a bit of a shock!

I hope it all works out well for everyone, although I personally can’t see any easy way out of this. I don’t think capital-raising is an option any more — about $800m has already been raised.

And outright sale is hardly attractive — who wants mercurial loss reserves and a B rating?

Potential buyers can just wait for to get offered PXRE’s business as ratings clauses trigger mid-term cancellations on policies on which the ink is barely dry. And of course, the timing is dreadful for selling renewal rights. It’s too early to say that this is the death of the monoline model – because there is no corpse as yet — but the sad fact is that we won’t have to wait long to be put out of our misery.

But something else is on my mind that is bigger than the loss of a relatively high volatility Cat reinsurance specialist.

Now that the renewal season presentations are almost all in, let me run you through a series of quotes — not my words, but those of the captains of your industry:

1. “There has been no giant tidal wave of rate increases around the world”

2. “The speed of new money to the market was unprecedented, so we were very realistic in that, other than the US coastal areas, what would happen rate-wise. And what we expected happened.”

3. “The start-ups made a minimum impact”

4. “Heightened competition was noticeable”

5. “…Investor expectations for double-digit returns run high. Should the currently perceived market opportunities in property not be significantly realised, the companies that received much of the new capital that recently flowed into these markets might be forced to find alternative strategies”.

6. “There was a knock-on effect of previous monoliners desperately seeking diversification”

Now let’s run through all this — so what we are saying is:

This is not a hard market…

It can get softer…

If the class of 2005 starts deploying its capital it can happen at a speed that takes everyone by surprise…

The competitive pressures that became obvious in late 2004 never really went away…

Be prepared for a bloodbath in all non-cat classes if there is a hurricane. Now for the scary part — be prepared for a bloodbath in all non-cat classes if there isn’t a hurricane!

That fist fight for non-cat market share is already underway in many long-tail US classes, — how long before it goes global and multi-class?

The conclusion must be that the nascent soft market stayed with us all along — and like all proper soft markets, we will only truly notice it is upon us when it is too late to do anything about it!

Dear Friend,

The fourth quarter and 2005 calendar year results and January renewal reports are coming thick and fast and it’s all worse than I expected.

When I say worse I mean that the market is now more imbalanced and polarised than it has been for many years.

Imagine this market were a large wobbly jelly on a plate and the 2005 hurricanes were sledgehammer smashing down in the jelly’s general direction — something amazing has happened — the sledgehammer has bounced off!

Results are showing 2005 as a mildly loss-making year for most — but the overall capital position is extremely healthy. The real story is that competition is strong across all but the most loss-affected, “I wouldn’t touch with a long pole and a clothes peg attached to my nose” lines.

The incumbents have been able to scale back drastically on Gulf of Mexico exposures and still take in more premium and this has let the class of 2005 fill the gap without destabilising the market.

So far smiles all round – Mr Zeller of Hannover Re can say his book is more “weatherproof” than this time last year and the class of 2005 can say they are sticking to their short-tail business plans, although they are massively exposed to another bad Hurricane season.

What’s more, casualty and special risks have been putting in excellent numbers and competition is understandably hot in these sectors — and there is nothing to stop that competition intensifying.

The ratings agencies will be tweaking their capital models in the light of Katrina, but my gut feeing is that this is going to be a purely Cat market issue, and will only serve to make the longer tail classes more attractive by comparison.

The million-dollar question is whether the class of 2005 tries to force its way into non-cat areas to bring some balance to its current high-risk high-return book.

Of course, the 2006 weather forecast is awful and this is the other big variable.

The great paradox is that biggest worry for the increasingly “weatherproof” incumbents in 2006 is probably that the wind fails to blow this year and the class of 2005 ends up with more money than it knows what to do with.

Whatever you’re wishing for, fingers crossed.

Dear Friend,

As a former broker, this morning’s breaking news that Lloyd’s is going to sue brokers Aon and Benfield over their role in the famous £500m Central Fund dispute with Swiss Re and others sent a little shiver down my spine.

Any broker who has been involved in an errors and omissions (E&O) case will sympathise with those involved. The action began in April 2003 — so the main brokers involved have suffered had nearly three years of grief — and their troubles are only just beginning.

Benfield’s last interim accounts said that “on the basis of legal advice it has received, the Company [Benfield] takes the view that this matter will not result in a material liability.”

Well somebody else begs to differ — since Lloyd’s wanted £500m from reinsurers and only ended up settling for £152m — this looks like becoming the £348m ($615m) question.

The trouble is that in the previous paragraph when describing the preliminary decisions of the arbitration panel Benfield said that it had “found that with respect to the presentation of the risk, Swiss Re was prima facie entitled to avoid the policy.”

Ouch — “presentation of the risk” — that old classic. The one you learn all about on E&O awareness courses as a young broker — “Pine Top” and that case where the unwitting broker mistranslated the original Spanish “watches” for “clocks”, when the watches in question turned out to be a consignment of Rolexes.

That brings it all back! Funnily enough I still have these words ringing in my ears, memorised word for word in readiness for an insurance exam:

“The insured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the insured. If the insured fails to make such a disclosure, the insurer may avoid the contract.”

And since then I’ve read enough about non-disclosure law to know that as a broker one’s fate is pretty much in the lap of the Gods as is the definition of a “material fact” is anyone’s guess after the event. And when there’s a potential $615m involved, the ambiguities are amplified still further.

One of my Spanish local authority clients on a visit once asked a lead liability underwriter what he was supposed to do about the claims reporting procedure on his claims-made policy.

It contained something along the lines of having to tell underwriters about “any material circumstance, event or series of events that may give rise to a claim under this policy” — probably within a wholly impractical timeframe, like 72 hours.

My client asked that since he was ultimately responsible for thousands of kilometres of Spanish roads, did the underwriter want to be sent copies of the police reports on all the 15,000 traffic accidents that occurred in the region every year, just in case any developed into a claim?

Happily the underwriter blushed, politely declined the offer and amended the wording — our claims manager breathed an enormous sigh of relief that day! (thank goodness we were in a soft market).

But quite apart from the minutiae of this or any other case, which will doubtless make it into the CII text books of tomorrow, a small and mischievous part of me wonders what share of Aon and Benfield’s E&O insurance cover is placed at Lloyd’s!

Enough non-disclosure talk!