Dear friend,

What a busy week — I’ve been scrambling around London and beyond interviewing all and sundry for bits and pieces that will end up in upcoming issues of Reinsurance and Fac magazines. I’ve crunched numbers and lunched with the best of them — (hopefully the exercise of running to meetings will be able to offset the extra calorie intake).

We’ve had some great sessions on the results front — an almost unbelievable string of numbers has been paraded our way over the last month.

And quite apart from anything else it’s great to get out of the office and meet people face to face, especially when they are in a good mood because they have posted record results.

You can’t really build up a rapport with someone over the telephone, because you can’t see how they react to what you say and of course, they can’t react to your facial expressions and gesticulations (and mine have to be seen to be believed).

And that’s why I don’t think the worldwide reinsurance market and the London market is ever going to go completely virtual.

Yes, we are on the cusp of an era in which all business will be placed processed and settled electronically, but in no way will this put and end to face to face negotiations.

If anything the electronic marketplace will produce such wondrous productivity gains that it will free brokers and underwriters up for more business travel, and more meaningful face to face meetings.

The result should be more innovation, better end products for our customers and more prosperity for all.

It’s like Woody Allen in the classic 1973 sci-fi spoof Sleeper.

When offered a quick romp in the Orgasmatron by Diane Keaton “I’m strictly manual”, comes the reply from the diminutive funny man.

But then he has a go anyway…

Dear friend,

If you want to learn more about the law of unintended consequences, no matter how well-menaing the intentions, check out this report from AIF, a Florida business lobby group.

Now these guys are hardly pro-insurance (although I do understand their ranks do include some Floridan insurance companies).

What they want is reasonably-priced cover with decent quality security behind it.

They wanted to see what the recent Cat fund reforms as well as proposed extension might do to the market, so they paid Towers Perrin to have a look.

Surprise, surprise, the gap needed to be plugged by post-event funding through bonds might be $50 billion for a big hurricane.

Per household, total nominal assessment costs to pay off the bonds could range from approximately $1,700 for a moderate hurricane to $14,000 for a major storm.

And check this out — even a series of smaller storms across the state, like what happened in 2004, would “lead to assessments that exceed the incremental savings created by the legislation”..

Reality always has a way of spoiling the best laid plans.

And these are clearly nowhere near the best laid sort!

I love this business, warts and all.

Aging bucks of the market, you’re not the catch you once were in your youth. Unsightly folds hang where once taut flesh proudly sprang.

Your hair is becoming a Jekyll and Hyde affair.

Atop your head sits meek and retiring Dr Jekyll, thinning like an Indonesian rainforest when the loggers are in town. Yet in nasal cavities and eyebrow territory rages a follicular Mr Hyde, sprouting thick twigs of wiry whiskers that would not seem out of place on a toilet brush.

Evidence of time’s inexorable erosion is all around.

Wrinkles gather around the eyes like tributaries of a great river returning to their source.

Whilst it may be tempting to get a little cosmetic work done to keep the old dear happy — don’t do it. All great stories start as heroic tragedies but eventually degenerate into farce.

Don’t let it be you. You’re no spring chicken, you’ll never get away with it.

And you must admit that even though the skin around your neck sometimes wobbles like an old turkey, you still have a certain grizzled charm that some ladies still find attractive.

You’ve got a certain amount of the Sean Connery or Clint Eastwood look about you.

If things look too perfect, they don’t look real.

Sorry to be cryptic, but here’s a fun challenge.

Look at the week’s news and try and spot the old turkey, sporting a few battle scars but still managing to cut something of a rakish dash.

Dear friend,

Remember my rant on Friday about trying to make sense of what Hannover Re was doing with its numbers, despite sitting right opposite the people with all the answers?

Well those clever people at Keefe Bruyette and Woods have published a note that I think clarifies the situation somewhat.

“A swing factor in our 2007E combined ratio reconciliation is the "cycle management" element. Whilst natural catastrophes were low at 2.7% of P&C premiums (against an 8% budget) and reserve development was a further positive 9.0pp, management has guided that it would be incorrect to use a "clean" base of 113% going forward.”

So there was positive development, I don’t know why they didn’t just say this on Thursday!

Now here’s the good stuff,

“It is clear to us that current accident year loss ratio picks are being managed to balance prior year reserve development and catastrophe experience. Higher cats or more negative reserve development would just be balanced by lower current accident year loss ratios. A German based reinsurer is less vulnerable to the regulatory pressures that have affected US/Bermudian underwriters and Hannover Re intends to use this to manage earnings to smooth the reported impact of underlying portfolio volatility.”

There we have it — they are doing more of a de Niro in Raging Bull than a Hannover House of Horror.

It’s interesting that they probably wouldn’t be able to do this sort of thing if they were domiciled anywhere else — but you pays your money and you takes your choice!

Dear friend,

We journalists often get accused (usually perfectly justifiably) of jumping to conclusions. Rare is the scribbling hack that is not able to add one and one together and come up with three as an answer.

It is to combat this natural tendency to exaggerate and speculate that we are often treated very well by very senior figures in our industry. They know that we are generally a simple lot and need things explaining so that we don’t run off and report a load of nonsense.

So we get access to top people. We sit down in boardrooms, drink lowest-common-denominator tea and coffee, eat biscuits and stare out of the window while the great and good of our sector regale us with tales of adventure on the high seas of the financial markets.

One such occasion was yesterday when Wilhelm Zeller of Hannover Re and his team came over to London for their annual analysts’ meeting, followed by an hour with a gaggle of London-based journalists.

It was a good session —we had all had plenty of time to digest the results, so Mr Zeller kindly dispensed with the usual run-through and we got stuck straight into the questions.

Mr Zeller always comes across really well at these occasions — he’s got a good sense of humour and communicates an infectious enthusiasm for his company and the way it goes about its business.

We hammered on about the state of the reinsurance and retro markets, the impact of the Florida Cat Fund reform, the Praetorian sale and Hannover’s pioneering capital market securitisations. So far, so good.

But as the hour came to a close and I asked a routine question about the company’s reserving changes, something weird happened.

I’ve just spent the last month looking at least one set of annual results every day.

It’s quite a routine, what’s happened t the top-line? the bottom line? combined ratio? Anything funny on the expense ratio? What’s the outlook? Investment income? Return on equity? And finally — prior year development — reserve releases or additions?

Bob’s your uncle, on to the next one.

Mr Zeller immediately launched into a speech about how probably 19 out of the last 20 major reinsurance failures had been down to reserving inadequacy on US Casualty business written either in the US, or worse still, in the London market.

He said that Hannover was pursuing a conservative reserving policy and had increased reserves this year, which went some way to explaining why its combined ratio was 98.4% and those of its peers were 92.6% (Munich Re) and 90.4% (Swiss Re) respectively.

I then asked by how much — say in simple terms of how many percentage points on the combined ratio, this reserve-strengthening had cost — and Mr Zeller said that “we are a very transparent company, but even we must be allowed to have a few secrets”.

This is rather like standing in the middle of a field full of Spanish fighting bulls and waving a large red rag in the air.

Hang on a minute — every other company that has reported so far this year has given this number as a matter of routine — yet you’re sitting opposite me with your very own CFO next to you and you’re saying that yours is a secret?

It’s an open invitation to speculate and sensationalise!

So here goes:

Like Robert de Niro preparing for his role in Raging Bull Is Mr Zeller saving some fat up ahead of lean soft market times ahead?

Or like the all-American blue-eyed dad in any standard US horror film, has he gone down to the cellar to find a cash-eating monster in his reserves basement, determined to violate his right to freedom and the pursuit of happiness (and perhaps eat his family pet?)

We just don’t know — it’s a secret!

So please help me out here — go to page 131 of the Hannover Re Annual report and check out the reserve triangulations and see if you can see the secret.

For me it’s a bit like staring at one of those Magic Eye pictures — it just gives me a headache.

Is it a happy secret, like discovering a 1950’s Berkshire Hathaway share certificate in a dusty drawer?

Or is it something a bit saucy, like finding out your long-departed grandfather had a secret sideline as a gigolo?

I’m only a simple soul — I thought that drinking tea, munching biscuits and asking the boss and the CFO straightforward questions was enough.

It seems I was wrong (again)!

Dear friend,

Well, that’s settled then, the Elliot Richardson – Benfield/Aon saga is over.

On the face of it, it looks like a bit of a score draw.

My own highly unscientific (and probably untrustworthy) sources had been saying that Aon had offered $15m in compensation, which Benfield had rejected, seeking $50m.

So to accept around $18.5m looks like a bit of a result for Aon.

Obviously this was never going to go to court, but then again $18.5m is a heck of a lot of cash by anyone’s standards.

There’s an old Spanish saying, that presumably exists to clam the fears of expectant mothers, worried about how on earth a new young mouth is to be fed:

“A baby always comes with a loaf of bread under its arm.”

Well, it seems that high-flying brokers come with IOUs under their arms.

I’m sure Elliot is worth every penny — I interviewed him for the first issue of FAC magazine and was impressed.

But I certainly wouldn’t want to start in my new job at a global player with all of my new colleagues knowing exactly how much I had managed to knock off the P&L without even setting foot in the building!

Dear friend,

High-flying brokers — are they worth the bother they sometimes cause?

I remember one such character being hired by the firm I worked for very early in my career. He sauntered in, plonked himself down, introduced himself to me and promptly reeled off the jumbo-sized remuneration package he had been able to negotiate for himself.

I was a little taken aback — he only had six months more experience in the market than me but was earning almost twice my salary.

Don’t get me wrong, he was a nice guy and worked hard — and the knowledge he had so casually imparted was rather valuable when it came to my next salary review, so I wasn’t complaining!

The guy didn’t hang around long — people like that seldom do — within 3 years he was a director at a large London broker. Meanwhile dear old steady Eddie here was still waiting for an invitation to join the company pension scheme!

Admittedly I’m not a very good example because I didn’t really have my heart in broking and was dreaming about becoming a journalist or writer (but palpably failing to summon up the courage to do anything about it!)

But it highlights the different types of broker that exist out there. He and I had the same skill sets and did the same work to the same standards — but his career path was stellar and mine pedestrian.

The trouble in our business is that it seems that loyalty is rarely as rewarding as deserting to join the ranks of the competition.

And looking at Benfield’s results yesterday one need not look far for confirmation of this.

Benfield bemoaned the fact that a chunk of its Fac team had been bitten off by Aon yet the broker has been doing plenty of costly poaching of its own to stock up its relatively small Benfield Corporate Risks pond with a collection of big fish.

To be fair, at the same time the broker did highlight the effort it has been putting into its own ‘Top Gun’ and ‘Footprint’ internal talent development programmes (and the fact that it is by all accounts a cool place to work).

But it will take strong leadership to nail the problem.

How about a moratorium on poaching brokers from other firms? Why not get up and say that if you can’t get one of your own guys to do it in house, you ain’t going to do it at all. Broking is not rocket science after all.

Or if you can’t help yourself, how about buying and selling teams of brokers more openly – by making formal approaches to the broking houses concerned?

The London rumour mill points to big-bucks lawyers squaring up over this latest high-profile defection, so surely this would save on the legal bills if nothing else?

And how much business do big hitters ever really bring in their gilded slip cases?

It’s rarely that simple these days, is it?

I know this is supposed to be a blog but sometimes its good just to shut up and let someone else do the talking:

Last week was Berkshire Hathaway's annual results and that meant we got another one of Mr Buffett’s classic folksy letters to his shareholders.

Over to you Mr Buffett:

“....In 2007, our results from the bread-and-butter lines of insurance will deteriorate, though I think they will remain satisfactory. The big unknown is super-cat insurance. Were the terrible hurricane seasons of 2004-05 aberrations? Or were they our planet’s first warning that the climate of the 21st Century will differ materially from what we’ve seen in the past? If the answer to the second question is yes, 2006 will soon be perceived as a misleading period of calm preceding a series of devastating storms. These could rock the insurance industry. It’s naïve to think of Katrina as anything close to a worst-case event

“Neither Ajit Jain, who manages our super-cat operation, nor I know what lies ahead. We do know that it would be a huge mistake to bet that evolving atmospheric changes are benign in their implications for insurers

“Don’t think, however, that we have lost our taste for risk. We remain prepared to lose $6 billion in a single event, if we have been paid appropriately for assuming that risk. We are not willing, though, to take on even very small exposures at prices that don’t reflect our evaluation of loss probabilities

“Appropriate prices don’t guarantee profits in any given year, but inappropriate prices most certainly guarantee eventual losses. Rates have recently fallen because a flood of capital has entered the super-cat field. We have therefore sharply reduced our wind exposures. Our behavior here parallels that which we employ in financial markets: Be fearful when others are greedy, and be greedy when others are fearful”

Hear hear! You don’t got turn $19m into $50bn by undercharging for your product

You can get the whole text here — it’s always worth a few minutes and this time Buffett gives one of the best potted histories of Lloyd’s I’ve ever read.

See you later...

Dear friend,

Right on cue, here comes the new consensus.

Bumper profits are fuelling excess capital, which is accelerating the overall softening tendency that has been underlying the market for the past two years, despite mega-catastrophes.

That softening is pretty much across the board now that Florida has put the Cat amongst the pigeons and other Southern US governors are pricking up their ears.

Now that Florida is off limits, there aren’t any good no-brainer reinsurance bets left, so it looks like its time to take a bit of cash off the table.

Munich Re and Swiss Re are going to pursue hefty buybacks, and Arch has authorised a repurchase scheme that could take a quarter of its capital out of the game.
I’m looking forward to the first announcements from prominent class of 2005 players for the icing on the cake.

In fact it’s all very much like the first half of 2005, isn’t it, dear long-suffering friend?

Back then huge wedges off cash came off the class of 2001, like fleeces off sheep when spring has sprung. I remember all Bermuda being agog at the paydays for players like Tony Taylor of Montpelier as whopping special dividends swelled investors’ current accounts.

But remember what came next? It wasn’t long before that same Montpelier was posting one of the largest hits to capital of any reinsurer (sorry can’t remember the exact numbers off the top of my head) and was out on the fund-raising stump once again.

It’s, this capital management business. Too much and you’re wasting precious capital, too little and you risk death.

And on that cheery note, let’s move on.

I was going to say that the Florida Hurricane Catastrophe Fund news has dominated the headlines since we last spoke.

But that wouldn’t be strictly true, would it?

The newsflow on this weighty subject has come wedged in between the arrests at PWS International brokers in London by the UK’s Serious Fraud Office, news of the launch of not one, but two insurance-linked futures contracts on recognised global exchanges, as well as the Bermudians’ annual results season and a slew of market and individual company estimates for the financial impact of winter storm Kyrill.

No rest for us wicked reinsurance journalists.

Well, Governor Crist, the news storm may have been over, but now that the headlines have changed, you’re truly on your own, at the mercy of the elements.

I know you only want the best for your people and affordable insurance premiums are a big part of that, but there is a line that has to be drawn between optimism and hope for a better future and wilful ignorance of a problem that is staring you and the people of Florida in the faces.

Yes, it’s a problem — but it’s not an insurmountable one — it’s quite simple really. Your 7 million households have cost insurers about $36bn over the last 3 years. Let’s call that a straight $5,000 a head. You think insurers were trying to recoup that loss too quickly because of cost being loaded on them in turn by the largely offshore reinsurance industry. So you called the Bermudians’ bluff and stepped in to bring relief to the insurers on condition that they pass the saving on to consumers. If the big one hits, you’ll pay through bond issuance and insurance levies.

But it’s not that simple is it? If you had to go out into the bond market and raise that kind of cash in a hurry, you’d have to pay a chunk of tasty yield, wouldn’t you?

Your triple-AAA rating might be under threat if half of Miami’s business district were destroyed, tourists were staying away and tax receipts were plummeting. You’d have to offer a little bit of a premium to get bond investors interested, and let me see, if you’re a bit strapped for income you’d probably have to place the bonds with expiry dates over a fairly long-timeframe, say 20 years.

Now get out your calculator and you’ll find that even paying a coupon of only 5.5% if you borrow $36bn over 20 years, you’ll be paying the same again in interest. Five grand per house becomes ten.

And these are US Federal dollars, not Floridian ones — even if you wanted to succumb to the temptation of simply printing more notes to pay off your debt, you couldn’t.

And what makes you think the freewheeling international bond market is going to behave reasonably rationally and charitably when the reinsurance market has already been burned and not allowed to set its own prices? Why trust one market and not another?

Maynard Keynes – heard of that guy? He is a famous old British economist of the early twentieth century, long since departed and now largely discredited. (Perhaps a little unfairly — his economic theories are often blamed for the failed inflationary experiments of the 1960s and 1970s).

Anyway, Mr Keynes famously once said that markets can stay irrational a lot longer than most people can stay solvent. Well said sir! But I would have to add that it has been proven throughout history that most politicians can stay irrational a lot longer than their countries can stay solvent!

Just ask any citizen of Argentina, Brazil, Mexico, Zimbabwe (insert economic basket du jour here) or anyone who lived in the UK in the 1970s if you have any doubts.