It’s a ‘Bermudan’ day in the neightborhood…Paige St John at the Herald Tribune exposes why ‘buying Bermuda’ is like being hooked on crack.

Is Paige St John at the Herald Tribune a member of the Slabbed Nation?  Let them eat cake indeed Mikey.

The new Florida norm are carriers like ACA Home, a tiny St. Petersburg home insurer started after 2005 with funding in part from a Bermuda reinsurer.

ACA Home has no employees and pays an affiliate, American Strategic, to run its business.

Financial filings show reinsurers take 86 cents of every premium dollar ACA collects – $9 million of the $10.5 million it collected in 2009.

The cost for turning over almost all of its risk is high. ACA pays as much as 33 cents for $1 of protection against the most likely kind of storms, the equivalent of paying $66,000 a year to insure a house worth $200,000.

The Herald-Tribune found more than half a dozen Florida insurers paying more than 50 cents for a dollar of hurricane coverage, reinsurance rates brokers say are the highest in the world.

It’s a beautiful day in this neighborhood,
A beautiful day for a neighbor,
Would you be mine?
Could you be mine?

And now that your sucked into the Bermudan reinsurance habit what comes next? The blood sucking that’s what:

The change in how Florida’s largest insurers handle risk is most dramatic. A state report noted State Farm, Allstate, Universal Property and American Strategic in 2002 spent only 7 percent of their premium on reinsurance.

In 2009, the Herald-Tribune found, the burden was 54 percent.

Annual financial reports show more than 28 Florida insurers devote more than half their premium to external coverage, some to the point of extinction.

“Nobody can stay in business spending that,” said Lara Mowery, vice president of Guy Carpenter & Co., one of the chief brokers of Florida reinsurance contracts. “That can’t be a sustainable business plan.”

It’s OK folks, Jimbo the Clown and Mikey the Cook says don’t worry, be happy.

It’s a neighborly day in this beautywood,
A neighborly day for a beauty,
Would you be mine?
Could you be mine?

There is a perverse tendency for the reinsurance industry to hope for disaster.

The cost of calamity coverage is determined mostly by supply and demand. Big disasters can temporarily dampen quarterly profits and even kill a few unlucky reinsurers, but they drive up demand and draw down capital, shrinking supply.

The result is record profits made on the back of the world’s biggest catastrophes – Hurricane Andrew, 9/11 and Hurricane Katrina.

The macabre sentiment pervading Monte Carlo in 2008 was parodied a few mornings later at the Cafe de Paris, where reinsurance brokers massed 20-deep for preliminary negotiations on the hurricane contracts for which Floridians would pay the next year.

“Industry mourns the passing of Gustav,” joked a headline in the Rendez-Vous edition of the normally sedate Insurance Day.

By missing New Orleans, the trade journal quipped, the hurricane had “failed to destroy billions of dollars worth of energy infrastructure and make millions of uninsured poor people homeless.

So this is the free market espoused by Mikey the Cook, Jimbo the Clown and Steven Palazzo? Indeed:

I have always wanted to have a neighbor just like you,
I’ve always wanted to live in a neighborhood with you.
So let’s make the most of this beautiful day,
Since we’re together, we might as well say,

But the risk of a hurricane accounts for only a fraction of the price reinsurers charge. The majority of the cost is driven by how much profit investors demand, and whether insurers are desperate enough to pay those rates.

“It’s like a game of poker,” John DeMartini, vice president of risk for Towers Watson, a national broker of reinsurance contracts, told the Herald-Tribune.

The game is uneven.

Florida insurers are particularly needy buyers, hence they have little choice to refuse what reinsurers demand to be paid.

“It is a diabolical situation insurers find themselves in,” DeMartini said.

On average, the Herald-Tribune calculated, reinsurers charge five times more than the actuarial risk of loss.

The translation for Florida property owners: For every $1 in hurricane risk to their home, they pay another $4 for the reinsurer’s profit. In other words, if a reinsurer determines a home is likely to sustain $2,000 in damage in a year, it will charge $10,000 to cover that home.

U Penn? Here at Slabbed we wipe our ass with U Penn and their unquestioning ways. Paige surely must be a Slabber no?:

Would you be mine?
Could you be mine?
Won’t you be my neighbor?

In reinsurance, such math is unquestioned. It is not “undue profitability” but “the cost of capital,” concluded an industry-funded study by the vaunted Wharton Risk Center at the University of Pennsylvania.

“Insurers need considerable capital to supply this insurance and the cost of that capital is included in the premium,” they note.

After Hurricane Katrina, some of the highest rollers providing $33 billion to recapitalize the reinsurers of Bermuda included Lehman Brothers and Goldman Sachs, and private investors recruited by Jeff Greenberg, son of former AIG chairman Hank Greenberg.

These new players demanded paybacks equal to or better than the heady profits rolling off mortgage-backed securities. They sought return percentages from the mid-teens to high 20s, Mike Millete, a managing director of Goldman Sachs, told reinsurance executives during a 2006 industry forum in Bermuda.

In the end, Bermuda reinsurance investors saw a record return on equity, according to a Guy Carpenter analysis. Greenberg had a 26 percent return on Validus Holdings. Lancashire Re gave its New York private equity fund investors a 33 percent return. And in 2009, the largest reinsurer of Florida carriers reported a 38 percent return.

Being in Bermuda, the profits were tax-free.

Not to worry folks our attempts to tax these tax free profts is being met with stiff opposition from folks like Mikey the Cook and Jimbo the Clown who just adore shipping our money offshore to tax havens like Bermuda.

Won’t you please,
Won’t you please,
Please won’t you be my neighbor?

As insurers spend more on reinsurance, they have less money to set aside for future storms.

Called policyholder surplus, this stash represents the first line of defense for hurricane claims.

To the alarm of industry watchers, it is weakening.

The surplus held by Florida-based insurers in 2003 was $2 billion. It is now about $2.4 billion – an increase that has not kept pace with the amount of property these companies insure.

In 2003, Florida insurers had 65 cents in the bank to back every dollar of brick and shingle they insured.

Now it is 42 cents.

The decrease is all the more alarming because it occurs during a lull in hurricane activity, when Florida insurers should be building capital to withstand future storms.

I don’t think I want these vulture capitalists in my nieghborhood. They do more damage to the community than the local corner drug dealer IMHO. Y’all feel free to rip Jimbo and Mikey in the comments.

sop