Lets connect the damages verdict in Bossier to reinsurance, securitization via cat bonds and global finance

I sometimes pinch myself someone as financially sophisticated as Mr CLS posts with us on Yahoo Allstate. Before I get to his post there is one concept that must be understood in reinsurance. Under traditional reinsurance the ceding party (such as State Farm) gets to take a credit on their balance sheets for the risk transferred to the reinsurer for the amount of reinsurance purchased. A problem with Cat Bonds is the lack of specific attachment points in loss payments (unlike traditional reinsurance) means the collection of the cat bond trust proceeds is de-coupled from the amounts actually paid to the insureds for their losses making it possible for an unsavory insurer to both collect for losses via the Cat bonds and stiff their insureds.

So what happens when traditional reinsurance is then backed by Cat bonds for a homeonwers policy which was also bundled and sold via securitization (think life settlements)? Mr CLS asked that exact question this morning and as per usual he followed the money to Bermuda:

Securitization for HURRICANE risks ABOVE the Hurricane Storm Surge water line.

“If I couldn’t differentiate between wind and water, I could NOT pay”, said adjuster Matthew Thiele.

The final version said “When the investigation indicates that the damage was caused by excluded water and the claim investigation does not reveal independent windstorm damage to separate portions of the property, there is NO COVERAGE available under the homeowners policy.

So where is the “Transfer of risk” through securitization?

What was the “credit” taken on liability balance sheets or off balance sheets for this transfer of risk?

Would a balance sheet credit be taken (say in the securitized HO policy of Bossier) for:
a) $2,300 (the initial payment loss)
b) $93,480 (the supplemental payment 4 years later)
c) $650,000.00 (the full policy limits)

S&P rate Alpha Wind 2000-A Ltd’s $90 million

These HURRICANE securities provide $90 million of retrocessional coverage to ARROW RE, a wholly owned Bermuda reinsurance subsidiary of Goldaman, Sachs & Co. Arrow Re has reinsured a $100 million portion of an excess-of-loss treaty covering STATE FARM Group (State Farm) policies, primarily homeowners, in Florida. This securitization represents a 90% cession of that risk to the holders of the securities. Continue reading “Lets connect the damages verdict in Bossier to reinsurance, securitization via cat bonds and global finance”

News from the Cat House Part Deux: Bondage and Discipline sometimes missing from the equation

I’ve been sent several articles on the Cat Bond market of late, some very good and some not necessarily worthy of the publication in which they were printed. I’ll start with an article from The Banker Magazine which is not yet online which I read courtesy of Factiva. While the article is generally good the author, Edward Russell-Walling parrots some long discredited facts about Cat Bonds, such as their being non correlated with the broader financial markets which the financial crisis of last year exposed as pure BS and it is there we start:

In 2008, the annus horribilis, non-correlation did not prevent it slumping to $2.7bn. Some hedge funds, which had been prominent players in this market, became distressed sellers and depressed pricing. The situation was aggravated by the downgrade of four cat bonds exposed to Lehman Brothers which, as total return swap counterparty, was effectively holding the investors’ capital.

What the author neglects to mention was “the innovation” of stuffing issues full of subprime mortgages whose accompanying (illusory) high yields no doubt drastically lowered the cost to the issuer. Lehman, as the guarantor, is cited as a problem because of its insolvency but the fact is TARP and the United States taxpayers are what has propped up every such issue so structured as major guarantors like AIG and the other Wall Street investment banks were essentially insolvent meaning their financial guarantees were worthless. Without the Lehman guarantee for instance Allstate’s Willow Re, which defaulted on their interest payments to investors earlier this year, plunged to around 50 cents on the dollar or roughly about what the underlying subprime mortgages were worth.

That said Russell-Walling did give a good explanation of the concept of the “trigger” in these agreements and it is there we pick back up:

One important choice that had to be made was the nature of the trigger. An indemnity trigger is activated by the issuer’s actual losses. So if the cover is for $100m with an excess of $400m, the bond is triggered once claims exceed $400m. Non-indemnity triggers may be based on other mechanisms, such as modelled loss, insured industry loss or physical parameters such as earthquake magnitude or wind speed. Continue reading “News from the Cat House Part Deux: Bondage and Discipline sometimes missing from the equation”

Slabbed Daily July 22-24. Lets tie a few things together

ying-yangThere have been a good number of news tidbits that do not necessarily constitute a post here on Slabbed on their own but when taken together tie up several loose ends and lend context to a story that does merit it’s own post in Mike Chaney’s recent insurance forum held last Thursday and Friday here on the coast.  So let’s backtrack a week and shake us up slabbed insurance cocktail by beginning with Anita Lee’s coverage of day 2:

Gov. Haley Barbour joined the coastal insurance debate Friday, telling an audience he believes regional compacts would be the best way to regulate wind coverage in coastal zones from Texas to Maine.

Barbour introduced The Travelers Insurance Cos. president, Brian MacLean, to explain the company’s proposal for improving the coast insurance market. Insurers have pulled back from coastlines in recent years, leaving state-run wind pools to fill the void.

Wind pools were intended as insurers of last resort, but their market shares have grown to levels that experts agree are unsustainable. Insurance works by spreading risk, not concentrating it.

Haley has been conspicuously absent from the insurance scene refusing to comment on the litigation while offering cheap lip service to Gene Taylor’s multi peril bill. I suspect he and the State GOP has been searching for a way to throw a bone to the people on the coast that helped elect him while working hard to preserve GOP big business bonafides with the campaign money machine that is big insurance. Continue reading “Slabbed Daily July 22-24. Lets tie a few things together”

The Tangled Web Part Deux: Support your local TARP insurer and/or subsidize “the wealthy”

I love it when I hear that mental “click”! I’ve been squirreling away several important news links like pieces of a jig saw puzzle trying to figure out how to make them fit and be understandable to a broader audience. This post is partially in response to the recent guest column by Eli Lehrer of the Competitive Enterprise Institute that ran in the Sun Herald last Thursday. The S/H was no doubt attracted to the piece by Mr Lehrer’s use of scare tactics including yet more premium increases for our private/industry run insurer of last resort and it is with that incredible piece of propaganda that we start:

As it girds for the busy months of hurricane season, Mississippi has plenty to worry about. Homeowner’s insurance coverage remains difficult to find and expensive for those who have it.

If that weren’t enough, some members of Congress now want to change the tax law in a way that would drive already expensive coastal Mississippi insurance premiums even higher.

The proposed new tax will impact “offshore affiliated reinsurance” — a rather esoteric product that matters a lot in Mississippi. Explaining why requires some background. To begin with, all sizeable primary insurers — companies like Allstate, Farm Bureau, Nationwide and State Farm — buy insurance of their own, reinsurance, to help cover particularly large losses and diversify their own portfolios.

Particularly in high-hurricane-risk areas like the Gulf Coast, many companies find it advantageous to buy some or all of their reinsurance from a parent or sister company that they know won’t abandon them following a major storm.

Now we slabbers well know the reinsurance examples he uses have a grain of truth to them and indeed the domestic insurers Lehrer mentions sometimes use reinsurance but generally not the high priced kind used by our windpool. Allstate, for example, reported on page 35 of their last quarterly financial statement filed with the SEC, a mere $141 million of  property and casualty reinsurance premiums for Q1 2009. (Considering Allstate measures it assets in billions of dollars $141MM is a very small amount). Readers interested in greater detail on the interplay of reinsurance and catastrophe payouts should start with this link, which I featured in this post. From there we have posts on the trend to and use of insurance linked securities in lieu of traditional reinsurance treaties (and the subprime problems contained therein) here, here, here, here, and here. Not to be out done by the people in Bermuda, State Farm, among others, created their own Bermudan reinsurance subsidaries to play the tax game.

Suffice it to say Slabbed is calling bullshit on Eli Lehrer. Not only is his opinion piece propaganda of the type that would make Joseph Goebbels proud it is insulting he actually pretends to care what people here pay for wind premiums (or even know that people well off the beach pay huge amounts for wind insurance here). The CEI is working equally hard to insure HR 1264, Gene Taylor’s multiple peril bill remains DOA Continue reading “The Tangled Web Part Deux: Support your local TARP insurer and/or subsidize “the wealthy””

Slabbed Daily Weekend Edition: June 6/7. Catching up on insurance news.

I finished my first radio appearance a few minutes ago and thought the show went very well. Kevin Buckel was kind enough to call in explaining his public records lawsuit against the Commish as we covered a variety of insurance related topics from appraisal to the actual cost to insure a home here in the GO Zone. Now here is a months plus worth of insurance news with more to come. (H/t to Editilla and Alan Lange)

First up we have a trio of somewhat conflicting articles out of the Louisiana insurance market, which the Wall Street Journal editorial board held up as a stellar example of a well working state insurance market, while not mentioning Louisiana has some of the highest homeowner insurance rates in the country. I’ll start with the “good” news that Louisiana Citizens rates are dropping in Orleans Parish per the Times Picayune which cites “increased competition” as the reason:

As of May 1, homeowners policies in Orleans Parish will reflect a 9 percent decrease. The stripped down “dwelling” policies, which don’t include liability coverage, dropped 22 percent, said John Wortman, chief executive of the state-sponsored insurer of last resort.

“This is because the market rates have gone down and we follow the market place,” Wortman said.

Statewide, however, the average rate climbed 7 percent and homeowners rates also rose in St. Tammany and Jefferson parishes as well.

By law, Citizens must set its prices to match that of the most expensive insurer in each parish. Continue reading “Slabbed Daily Weekend Edition: June 6/7. Catching up on insurance news.”

Our good friend Mr CLS asks an interesting question

Ajax RE – named after the suicidal Greek warrior from Homer’s Iliad – were there sufficient funds to repay the bonds’ principle on maturity date of May 8th or just default dead money not talking?

We found Ajax’s achilles heel in early March. We too now wonder if the bagholders I mean bondholders were made whole or if they are suffering their losses in silence.

Meantime it is full speed ahead for USAA and their new Bermuda based SPE Residential Re.

sop

Slabbed finds Ajax’s Achilles Heel: Rock Mountain High or Just Stoned in Bermuda?

Special thanks to Chris Sposato. If memory serves there were a dirty (half) dozen “guaranteed” Cat Bond issues connected to Lehman. The second to come tumbling down belongs to Bermuda based Aspen Insurance Holdings, Ltd. and their special purpose entity Ajax Re Ltd. The associated ri$k to take a hit is covered earthquake damage in California. The story itself begs additional research as this deal sounds as if there might be Cat Bonds stuck inside Cat Bonds with a (subprime) Mortgage Backed Security twist. The list of players per the article is very convoluted as well.  The Royal Gazette has the Bloomberg story:

Ajax Re Ltd., a catastrophe bond sold by Bermuda-based Aspen Insurance Holdings Ltd., is likely to default on an interest payment this month, Standard & Poor’s said, the second such security hurt by Lehman Brothers Holdings Inc.’s collapse.

S&P said it may downgrade $100 million of debt issued through Ajax Re Ltd. to D, the lowest grade, from CC, citing an “imminent interest payment default”, according to a statement from the New York-based ratings company yesterday.

Aspen sold the bonds in 2007 to protect against claims from Californian earthquakes.

“The issuer has notified us that it will not have sufficient funds available in the collateral payment account to make the scheduled interest payment,” S&P said. “We anticipate the transaction will default.” Continue reading “Slabbed finds Ajax’s Achilles Heel: Rock Mountain High or Just Stoned in Bermuda?”

the arithmetic of reinsurance and the miscalculation of ambition, distraction, uglification, and derision following Katrina

Extraordinary level of cat loss don’t just happen overnight and CLS asked an important question about State Farm’s $10.4 billion drop in net worth.

Would that have included litigation cases from cat losses in “2005″ not signed, settled and sealed until 2008? Delay, Deny and Deceive shows up on your balance sheets sooner or later.

Because State Farm is a mutual company, it has escaped most everyone having conversations about reinsurance and Katrina other than CLS and our Sop.

The rest of us, at one time or another, probably have moments in this wonderland of numbers that make us think It would be so nice if something made sense for a change. Maybe that’s why I identify with Alice and her effort to make sense of an illogical story.

Carroll’s use of symbolism in the text of his work is not a recent discovery.  However, that it is thought to include the symbolic representation of mathmatical concepts is something I just noticed – and with that said, we take a closer look at the relationship between reinsurance and “extraordinary level of cat loss” State Farm announced last week and the associated miscalculation in the “branches of arithmetic” .

Reeling and Writhing, of course, to begin with, and then the different branches of arithmetic – ambition, distraction, uglification and derision. (Carroll)

As CLS has frequently pointed out in his comments, there is money to be made when an insurer uses the strategy of delay, deny, decieve. His theory was given unexpected support in Playing the “float” and the wisdom of Warren Buffett. Continue reading “the arithmetic of reinsurance and the miscalculation of ambition, distraction, uglification, and derision following Katrina”

Responding to Extraordinary Loss – Reeling and Writhing, of course, to begin with, and then the different branches of arithmetic — Ambition, Distraction, Uglification, and Derision.

It would be so nice if something made sense for a change.

Was there any other way to do the arithmetic?  Expedited Claim Handling Process

Would that have included litigation cases from cat losses in “2005” not signed, settled and sealed until 2008? Delay, Deny and Deceive shows up on your balance sheets sooner or later. (CLS)

If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn’t. And contrary wise, what is, it wouldn’t be. And what it wouldn’t be, it would. You see?

What would really be interesting to know is what was said (not written) to the WYOs about the process. We may find out is some of the litigation still pending on the coast. I guess my point is, if standards were “relaxed”, did the gummint really want the WYOs to go through a lengthy battle of what is wind and what is flood?(Sampson)

I can’t explain myself, I’m afraid, Sir, because I’m not myself you see.

Sampson, I wondered what was said, too.  In fact, before I could write the scheme in its published form, I had to create a connection.  Obviously, I didn’t intend to publish it; but, since I have the keys to this place, I can lock it back up.

August 29, 2005. almost daylight. somewhere…Someone had started fresh coffee and anyone who had slept in their chair began to move as the smell filled the air and the rest of the group starting coming into the room.

His head was still down on the table but he’d opened his eyes and could see one set of hands working quickly to remove the remains Continue reading “Responding to Extraordinary Loss – Reeling and Writhing, of course, to begin with, and then the different branches of arithmetic — Ambition, Distraction, Uglification, and Derision.”

News from the cat house……

Time is short so I’ll not offer much analysis and what analysis I offer is in the form of the questions I asked myself while reading it?

  • What money “made the market” and how and to whom are the bonds placed (ie sold)? See this lengthy post I did a week or so back to understand why that question is important.
  • What role is TARP playing in financing this deal? Inquiring minds in policymaking positions what to know. (See first bullet point)
  • Who are the players making money from the act of doing the deal and how is it structured to avoid past mistakes?

Reuters has the story:

LONDON, Feb 27 (Reuters) – Standard & Poor’s has assigned a preliminary BB rating to U.S. insurer Liberty Mutual’s planned $200 million catastrophe bond, to be issued via special purpose vehicle Mystic Re II, the credit rating agency said.

In a pre-sales report published late on Thursday, S&P said Mystic Re II’s Series 2009-1 notes will transfer some potential losses by Liberty Mutual and affiliates from U.S. hurricanes and earthquakes to capital markets investors. Continue reading “News from the cat house……”