Dear friend,

What a week — the first CDO-backed reinsurer has come into being on the same day that details emerged of what at $4bn must be the largest single Cat bond in history.

What’s a CDO? I hear you cry. Well, a CDO is a collateralised debt obligation.

What’s a collateralised debt obligation? I hear you cry once more (but this time ever so slightly feverishly). Well, a collateralised debt obligation is a bond/debt instrument that effectively bundles and packages up other bonds or debt instruments.

“So you buy a load of debt one end and you sell some other debt linked to the first lot of debt?” I hear you say.

“That’s right”, I answer somewhat smugly.

In this case a company that is going to play in the Cat bond market is planning to sell off tranches of other debt linked to how the Cat bonds perform to some other people. It’s not that complicated — until you start thinking about the underwriting chain.

Under this system I buy homeowners insurance in a Cat zone, the insurer buys reinsurance, the reinsurer buys retro through a Cat bond vehicle, a hedge fund buys the Cat bond and now somebody else buys the hedge fund’s CDO.

You can breathe out now.

Back in the old days we always thought retro underwriters ended up taking on huge unintended risks, because they were too far removed from the original risks to have an accurate take on what the real underlying exposure was.

Every major loss event of the last fifty years has borne this out

So pity the poor CDO buyer here — he’s another two steps removed from my little house on the bayou. Analysing one of these beauties must take roomfuls of supercomputers. It must be like holding a telescope up to your eye the wrong way round while you try to pour yourself a beer.

Before long you’re likely to spill something all over your jeans.

Today’s risk is being sliced, diced and packaged off in ways that were scarcely imaginable to mere mortals.

Chances are tomorrow’s losses will be packed up and shipped out in a million new unimaginable directions too.

Make sure you have a spare pair of jeans on hand.

Dear friend,

Here's a great piece of journalism from the Galveston Couny Daily news

It's all about the trials and tribulations of the Texas wind pool, wondering whether they should be spending scarce cash on reinsurance or using the funds to shore up thin catastrophe reserves instead.

Predictably those representing consumers voted against spending too much on reinsurance and many others expressed the wish that they didn't have to buy reinsurance at all (although at 15 on line the deal on offer didn't look too bad for a what looks like a very low-lying layer)

And I love the line that buying reinsurance is the only sensible thing to do - well said that man!

- Anyway read on.

One is only a little surprised that cover isn't in place yet!

They shoud get a move on - we're already on letter C, after all.

Dear friend,

Poor old Benfield – no sooner has it won $19m from Aon in the Elliot Richardson defection case is it handing the lion’s share of that windfall over to Lloyd’s to settle the Central Fund reinsurance case.

I keep asking, (but no-one will tell me) which of the two was the lead co-broker was on this deal and what shares each broker placed. Apparently it’s confidential or something, though quite why such basic facts should be is beyond me.

Just imagine being the junior co-broker on a deal that goes this sour?

Getting it in the neck is one thing, but when it wasn't even your idea to place it that way and you weren't getting paid the big bucks, that must be a killer!

And I wonder what Benfield's E&O deductible is?

But anyway the settlement is a lot less than the approximate $650m shortfall Lloyd’s had on the Central fund cover, so Benfield and Aon might be feeling thankful that they have got off relatively lightly.

Still, it seems a bit harsh — after all, we are not talking about an unsophisticated buyer who needs a lot of protection here — this was a contract presumably negotiated by the highest-ranking executives at Lloyd’s at the time.

But as we know there isn’t a reinsurance broker in the world who wouldn’t bend over backwards for his client.

Especially if that client is as big as Lloyd’s.

Dear friend,

This is getting to be a nasty habit - a suspected car bomb was discovered in the small hours of this morning in the street where Reinsurance Magazine's offices are located, in Haymarket in the heart of London's theatre district.

The area has been cordoned off, which means we shan't have access to the office for some time and that we will probably not be able to get the weekly news alert out to you today.

The good news is that there are no reports of injuries or damage and the BBC reports that police have said that they have made safe what they describe as a 'potentially viable explosive device' via a controlled explosion.

It's all really frustrating, but we need to give the cops time to gather as much evidence as they need so they can catch whoever did this.

Yesterday we changed government in one of our periodic 'very British coups' where no votes are cast and no shots are fired. Presumably the plotters wanted to change that and remind our new Prime Minister that they can still be a force to be reckoned with.

There was no warning given, which is the hallmark of the usual suspects.

Or who knows?

These days it seems every crank with a grievance is at it - animal rights, divorced fathers, disgruntled ex employees of Incisive Media?!

I'll keep you posted!

Dear friend,

I’ve just put up the basic details of the Paris Re IPO on our website.

It’s not a massive deal — although the exit door is now open for investors. But the most interesting piece of information to be revealed was that Paris Re said it wants to use some of the proceeds to decrease its reliance on retro.

Funny thing is, Paris Re has only just got into a whopping 2-year deal with its $185m Triomphe re sidecar. Is it the end of the affair so soon?

The other night I was hazily flicking through TV channels when I landed on a French film with the intriguing title une liason pornographique. I immediately felt it important that I investigate, for research purposes, you must understand, and anyway I need to brush up my French.

Anyway it wasn’t quite pornographique, but it was the usual French staple of a man and a woman conducting a doomed affair, drinking morosely at various cafés and then checking into the nearest hotel to get better acquainted, despite not knowing each other’s names.

I don’t know what happened because I got bored of the existential angst and went to bed, but today’s announcement somehow prised it from my memory.

These sidecar-sponsors are a bit like a glamorous Parisian woman from a French film — they get you all hot under the collar and after a you’re off to the races in no time.

But soon it’s all over and you’ve both moved on, wondering what was the point of it all, with a little empty feeling in the pit of your stomach!

Dear firend,

Just a quick snippet.

The US Army Corps of engineers has published some interactive maps for residents of New Orleans showing how their flood risk profile has changed since Katrina, almost two years ago.

Residents can check out the before and afters for 1-in-50, 1-in-100 and 1-in-500 year events

I thought I’d check out the French quarter

Trouble is – it looks like nothing much has changed — even for the city’s most famous and prestigious district.

I then started to wonder - if the good engineers can’t do anything for this world-famous area – what hope is there for anywhere else ?

Dear friend,

Another week another Lloyd’s syndicate, another gut-busting Cat bond, another collateralised debt obligation.

What a world we live in – what reinvention and what constant revolution — it’s like David Bowie in 1975 — what alter ego or new suit of clothes are we supposed to be assuming this week?

We scarcely have time to pause for breath, let alone inwardly digest what it is all supposed to mean.

We are probably best advised not to even try

— but here goes anyway.

First to the new Lloyd’s syndicate, talk about spot the difference between today and the first half of 2005. Back then, just like now there was perceived overcapacity and rates were coming off like excess garments in a heat wave — and players we giving back capital like they playing pass the parcel at a kids’ party.

If I remember rightly back then Montpelier took a whopping slug of equity off the table in the form of a jumbo-sized special dividend. No Lloyd’s syndicates then — so what gives?

I don’t know — I’ll ask them and tell you what they tell me! I can speculate with the best of them that diversification is the name of the game this time around.

Come to think of it these days everyone is rediscovering the convenience and scalability of the Lloyd’s global platform.

One Bermudian comes to London to access the US – and in the same week another comes to London to access China via Shanghai – they sure as hell didn’t come for the weather!

What a triumph for us Brits — let’s hope we don’t mess it up this time. New syndicate formation in a softening market has heralded disaster in the past – late eighties, mid- to late nineties — just the thought gives me a dizzy feeling.

But let’s try not be negative — maybe it really is different this time.

Similarly there seems to be a mass flowering in the wider financial world — overnight it seems the cat bond market has hit critical mass. It’s a bit like the phenomenal success of social networking sites such as Myspace, YouTube or Facebook – out of almost nowhere it seems that suddenly everyone is at it.

Proof that I am a miserable cynic is that yesterday I was trying to explain to someone in the office what a CDO is and I found myself using the unfortunate analogy of a clown at the circus doing a balancing act with round tubes and planks of wood.

First the clown puts one tube down on the ground and puts a plank of wood on top, like a little seesaw — actually this is not as easy as it looks. Lets’ call this insurance.

Then he puts another layer on, and then another. Soon every wobble from below is amplified and distorted — the poor clown’s looking a bit shaky.

But just as you think that’s it, here comes the pièce de résistance.

The lights dim, the drums roll, the crowd hushes, then gasps — the clown has whipped out a unicycle and is juggling five fireballs on top of the wobbly stack!

Ta-dah! Drum roll and raucous applause.

And that’s a tiny bit what a CDO is like.

But how many balls does the average wobbly stack unicycle juggler have to drop before reaching a professional standard?

The buyer of a CDO bundle has no answers — he’s just having fun after all — and it seems simply everyone has asked for a unicycle this Christmas.

Yes, things are definitely different this time.

On to more history in the making. As Mark Twain said — it doesn’t repeat itself, but it sure does rhyme!

Dear friend

I must commend the high quality of a lot of regional US journalism.
Here’s a great piece from Florida Today all about the Cat fund.

This article implies that Mr Grist may have had second thoughts about taking the weight of the reinsurance world on his shoulders.

Much more likely is that the market has softened so quickly that it has taken him by surprise and his officials know that they could probably get a cheap Cat bond away on Wall Street while the going is still good.

Everyone I speak to says that Grist shouldn’t have messed with the market — natural competitive forces were ready to give him a big discount this year — until he stepped in!

And I love the bit about buying cover for 9 cents in the dollar and selling it on to insurers for 3 cents — to produce an average discount to Floridian consumers of only 10%!!!

It takes a politician to work that one out!