No ch

McClatchy DC’s Greg Gordon has done a bang up job dissecting Goldman Sachs’ huge profits after the bailout.  This topic represents the intersection of TARP, the Wall Street investment banks and the offshore reinsurance industry. With subprime mortgages stuffed inside insurance linked securities that were peddled both domestically and overseas, the securitized reinsurance contained a derivative based financial guarantee which was likely made good by TARP (my posts on Allstate’s Willow Re, which was not bailed out can be found here in general with my “bell cow post” here. With a tip of the hat to our good friend Mr CLS I can short cut the exhaustive written series of articles by Greg Gordon that focuses on bailed out Goldman Sachs with a recent Youtube interview he gave.

As an aside I continue to believe the collapse of this glorified pyramid scheme explains more on the recent volatility of the costs of RE than anything you’ll hear from the paid shills at their tradegroups (Ol’ Eli is so proud of his work there his Bio is access restricted). I think after a fair read of the information open-minded folks would tend to agree. Or put another way the tail risk associated with Hurricanes does change over time but not overnight. And those that could game the system made out like bandits. The Youtube embed is below the fold. Continue reading “No ch”

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”

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””

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.

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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?”