This very well could be the most important Slabbed post of the year…

And it has nothing to do with Jefferson Parish Political Corruption.

For literally years our good friend Mr CLS has been methodically hammering away at the complexities surrounding insurance securitization and the implications of such for each and every one of us, especially those of us on the coast being price gouged for wind coverage. So suppose you’re a reporter with insurance beat responsibilities like Becky Mowbray, Anita Lee, Jeff Amy, Paige St John, Beatrice Garcia or a national outfit like Bloomberg that has done some quality coverage on insurance issues that is ready to kick it up a notch in terms of understanding.  What is now coming to light with Bank of America’s alleged forced placed insurance fraud is a must read as more turds float to the surface in the global insurance finance cesspool.

Some of the very same problems could very well exist in other facets of the securitized insurance market; problems the folks at U Penn Wharton School no doubt did not conceive of when they were pioneering insurance linked securities such at Catastrophe Bonds not long ago as the reasons for the lack of market transparency in the global insurance markets come into sharper focus.

Don’t look for the political shoe shine boys for big insurance such as the coast’s own Steven Palazzo or Commish Mike Chaney to say much on this.  Both men, despite paying lots of lip service to the topic of insurance, remain firmly, purposely ignorant of the any fraud perpetrated by their big business buddies on Wall Street.

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Is it possible Berkshire Hathaway is insolvent? Warren Buffett, Oracle of Omaha and Media Darling, Welcome to Slabbed

A market economy creates some lopsided payoffs to participants. The right endowment of vocal chords, anatomical structure, physical strength, or mental powers can produce enormous piles of claim checks (stocks, bonds, and other forms of capital) on future national output. Proper selection of ancestors similarly can result in lifetime supplies of such tickets upon birth. If zero real investment returns diverted a bit greater portion of the national output from such stockholders to equally worthy and hardworking citizens lacking jackpot-producing talents, it would seem unlikely to pose such an insult to an equitable world as to risk Divine Intervention.

How Inflation Swindles the Equity Investor by Warren E. Buffett, Fortune May 1977

As the current CDO/MBS meltdown manifests itself in varying ways throughout our financial system we’ve seen Mr Buffett’s name with increasing regularity in the financial press. His recent 2008 shareholder letter was widely cited early last week in the press for instance, especially the paragraph that attempts to put current events in a historical perspective. I was drawn to the paragraph two above that one:

This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation. Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.

I immediately wondered what he meant by ‘They”. “They won’t leave willingly”. And is this the same “they” that brought us this disaster? Did anyone at CNBC, the Wall Street Journal or the New York Times read Buffett’s letter with a critical eye? I’ll warn our readers now this will be a long post by necessity.

First we’ll start with a blog entry from Seeking Alpha that appeared yesterday on our Hartford Bankruptcy Watch RSS feed. The entry and commentary, which we will explore in some detail, is stunning in both detail and human psychology. I don’t buy the author’s conclusions as a closer look at his data suggests something entirely different but let’s start with the numbers which are indisputable: Continue reading “Is it possible Berkshire Hathaway is insolvent? Warren Buffett, Oracle of Omaha and Media Darling, Welcome to Slabbed”

Slabbed Lets the Cat out of the Bag: Is Allstate’s Reinsurance Program Worthless? Ask the Weeping Willow tREe.

Cat bonds that is and certainly they have been topical this week here on slabbed. Let’s begin by taking a trip back in time to the Bloomberg story we linked on Willow Re, an Allstate SPE (special purpose entity) earlier this week:

The issuer has notified Standard & Poor’s that it will not have sufficient funds to make the scheduled interest payment,” S&P analyst Gary Martucci in New York wrote in the statement.So-called cat bonds have gained popularity as a way for insurers to protect against natural disasters, and buyers demand outsized returns because they risk losing their entire investment to the insurer if the catastrophe is large enough. With Willow Re and other bonds backed by Lehman, investors are on the verge of losing a portion of their stake because of a financial calamity instead of a natural one.“The market was already pricing Willow Re in the area of 50 cents,” said Christophe Fritsch, head of insurance-linked securities at Axa SA in Paris. “New deals will improve dramatically. Investors will make sure that they will only be exposed to insurance risk and won’t take credit risk.”

Returns Guaranteed

Willow Re is one of four catastrophe bonds that used contracts sold by Lehman to guarantee returns on collateral backing the notes and to make interest payments. Lehman’s collapse in September nullified the guarantees, leaving the securities open to market value losses on the collateral. Continue reading “Slabbed Lets the Cat out of the Bag: Is Allstate’s Reinsurance Program Worthless? Ask the Weeping Willow tREe.”

Ah-rump (kiss kiss) Kamp Re

The Insurance King with the big nose ring snake-king-2
was protected by Kamp Re
And every night by the pale moonlight
It sounded like this to me…

Ah-rump (kiss kiss), Ah-rump (kiss kiss)
Ah-rump, Ditty-aye-dee-a-a-a
Ah-rump (kiss kiss), Ah-rump (kiss kiss)
Ah-rump, Ditty-aye-dee-a-a-a

As the years went by like one, two, three
Kamp Re still held the money.
And every night by the pale moonlight
It sounded like this to me…

Ah-rump ma-ma, Ah-rump, ma-ma
Ah-rump, Ditty-aye-dee-a-a-a
Ah-rump ma-ma, Ah-rump, ma-ma
Ah-rump, Ditty-aye-dee-a-a-a

As the years went by like one, two, three
Kamp Re had 36 monthly options
And every night by the pale moonlight
It sounded like this to me… Continue reading “Ah-rump (kiss kiss) Kamp Re”

Cat scratch fever strikes insurance industry – State Farm has bad case

If you been reading the comments to the post about the Louisiana Legislature chances are you won’t be suprised the story Business Insurance News linked as Cat bond activity levels off. (Large H/T to Editilla at the Ladder)

It seems the cats scratched the subprime market a lot deeper that earlier reports suggested and now the cat bond market is suffering from cat scratch fever.

Activity in the markets for industry loss warranties and catastrophe bonds has lessened in 2008, after several years of rapid growth.

Cat-bond activity, in particular has taken a knock, as competition from a softening reinsurance market and waning interest from investors have taken their toll.

After a record year for industry losses in 2005, there were three record years in terms of catastrophe-bond issuance…

Corporate-bond markets now offer more opportunity and so demand for insurance-linked securities has fallen…Cat-bond issuers—namely insurance and reinsurance companies that seek coverage from capital market investors— are in competition with other issuers of bonds, in particular issuers of corporate debt—where credit spreads have widened…This means that the cost of insurance-linked securities has risen as investors now require higher interest payments than in the past to entice them into buying cat bonds…

A number of cat bonds have been devalued…because the investment-banking counterparties were thought to be exposed to subprime exposures. (emphasis added)

State Farm has been in a different kind of cat fight since Hurricane Katrina and this report suggests its running a pretty high fever – otherwise the delusional views cited in the story are just more of the examples of State Farm spinning allegations as fact. Continue reading “Cat scratch fever strikes insurance industry – State Farm has bad case”

Free Unregulated Markets: Monday Evening Lagniappe for Taxpayer

Demand for the can’t miss paper fueled poor lending. Mozilo made a fortune and the taxpayer get stuck with the bill. Behold the results of a largely unregulated financial market. Does this inspire great confidence in the securitization of insurance risks?

The trick here is to grab your wallet and hold on tight when big business claims to be looking out for the taxpayers.

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A Couple of Odds and Ends

First off we’ve been negligent in not mentioning the ground zero equivalent of blog a palooza in the Rising Tide Conference to be held this week in New Orleans. From the looks of the promo this event will be attended by all the finest cyber movers and shakers including our good friend Editilla from the Ladder.

Speaking of Editilla he spoiled us by finding and posting links to several more articles on Cat Bonds today including this entry from the Bull Bear Trader Blog which describes their growing popularity. Now that mortgage backed securities are out of style it seems hedge funds have found the latest investing fad:

For those unfamiliar with catastrophe bonds, they are similar to normal bonds in that you invest a principal in return for periodic coupons. Once the bond matures, you receive your principal back – hopefully. As with other bonds you have the risk of losing your principal, but for cat bonds it is less about credit risk, and more about catastrophic risk. In most cases this is a binary proposition. If there is no event, you get all your money back. If there is an event, you do not get anything back. In return you get a nice coupon to compensate for the risk you are taking. Cat bonds have returned over 33% from 2005 to this May, ahead of the 19.1% offered by the Lehman High Yield Corporate Bond Index over the same time frame. After Hurricane Katrina one cat bond tranche was offered by Swiss Re with an annual coupon of near 40%. An additional benefit of cat bonds, beyond the high yields, is that their returns are often uncorrelated with the returns of other equity or fixed income investments, providing another vehicle for diversification. Continue reading “A Couple of Odds and Ends”

A Must Read Courtesy of Editilla

Let’s climb the Ladder and find out more about insurance linked securities European style and how Cat Bonds may be coming to a mutual fund near you soon.

Since its inception in 1996 the insurance-linked securities market has witnessed worldwide issuance of $38bn and has more than remained stable throughout the credit crunch. According to AM Best, the catastrophe bond market grew from $1.99bn to $4.69bn between 2005 and 2006, and Swiss Re predict that the wider ILS market will follow suit by growing to $1trln over the next decade.

Investors recently raced to buy a $260m catastrophe bond designed to protect East Japan Railway against earthquake damage. Rodrigo Araya of Moody’s Investors Service says, “The market has grown at a scorching pace in the last three years. We will probably see about $8bn in new issuance this year.”

At the end of August, catastrophe bonds returned 3.4 percent since May 31st according to data provided by Swiss Re, the world’s largest reinsurer and bigest underwriter of cat bonds. The average corporate bond declined 0.3 percent and asset-backed debt fell by 3.3 percent during the same period according to data provided by Merrill Lynch and Co. Continue reading “A Must Read Courtesy of Editilla”

Like a cat chasing its tail…

Little did I expect researching catastrophe bonds could leave one feeling like a cat chasing its tail – but that’s exactly how I felt when I discovered something known as Solvency II.

…the European Union Commission has now released the first draft directive of Solvency II – the most far-reaching change to the framework governing insurance companies in the EU for over 20 years.

However, Solvency II is not only a far-reaching change to the framework governing insurance – it’s an entirely different frame that’s had considerable influence on the discussion taking place in this country.

Solvency II is the updated set of regulatory requirements for insurance firms that operate in the European Union.

The rationale for European Union insurance legislation is to facilitate the development of a Single Market in insurance services in Europe, whilst at the same time securing an adequate level of consumer protection.

Solvency II will be based on economic principles for the measurement of assets and liabilities. Continue reading “Like a cat chasing its tail…”