Tuesday, 29 April 2008

Credit Crisis Loss Review: Clash Cases Abound

In looking at the developing litigation database around subprime, Advisen tracks ‘clash’ cases, also called ‘related cases’ in a number of ways.

First, the classic related case, a single complaint that names multiple parties. In these cases, especially securities class actions, a company is sued and the complaint also names the auditors and/or lawyers for any malpractice and possibly underwriters related to any public debt offerings.

Advisen categorizes these cases by party and allegations made against that entity. A company is entered under Securities, the auditors/lawyers/underwriters are entered under Professional Practices. Losses are associated with the party that actual paid it, making it simpler to calculate D&O losses from E&O losses.

For the Subprime/Credit Crisis, we have 30 related cases as of April 28:
Related ID: 7561 Calamos Global Dynamic Fund 2008
Related ID: 7201 Deutsche Bank 2008
Related ID: 7182 Bank of America 2008
Related ID: 7181 Huntington Bancshares 2007-2008
Related ID: 7061 HSH Nordbank - UBS 2008
Related ID: 7041 Centerline 2007-2008
Related ID: 6982 Nomura 2008
Related ID: 6962 MBIA 2008
Related ID: 6961 Ambac Financial 2008
Related ID: 6941 National City 2008
Related ID: 6862 Morgan Stanley 2007-08
Related ID: 6841 Teletech 2008
Related ID: 6802 Tarragon 2007
Related ID: 6801 Impac Mortgage 2007
Related ID: 6781 E*Trade Financial 2007
Related ID: 6742 Luminent Mortgage 2007
Related ID: 6741 New Century Financial 2007
Related ID: 6321 Bear Stearns 2007 - 2008
Related ID: 6241 Sagittarius CDO 2007
Related ID: 6222 Thornburg Mortgage 2007
Related ID: 6181 UBS 2007
Related ID: 6003 Homebanc 2007
Related ID: 5981 Regions Morgan Keegan Select Bond Funds 2007
Related ID: 5661 Citigroup 2007
Related ID: 5603 Washington Mutual 2007
Related ID: 5283 Hovnanian 2007
Related ID: 5163 Beazer Homes 2007
Related ID: 5162 Countrywide Financial Corp 2007
Related ID: 5161 Fremont General Corp 2007
Related ID: 5021 American Home Mortgage 2007

Second, Advisen tracks cases that have a common initial trigger. Examples of this are Enron, the In Re: IPO cases and the Subprime and Credit Crisis cases.
Subprime & Credit Crisis: Related Case ID 4000 – Total Cases to date: 280; Losses to date: $87,156,390.
Clash cases that are sub-types to the Credit Crisis:
Related ID: 7503 Student Loans - Credit Crisis 2008 - Various cases as secondary to Subprime
Related ID: 7123 Credit Default Swaps 2008 - CDS failures re subprime crisis
Related ID: 7202 Auction Rate Securities 2006 - 2008 - Cases related to ARS, sales practices and credit crunch

Third, we track cases by type of remarkable risk. These types of cases filed by different parties and governmental entities around specific allegations. For example: anti-trust and price-fixing charges, market timing violations and the Foreign Corrupt Practices Act.
The example of this for Subprime/Credit Crisis cases is:
Related ID: 5923 Predatory Lending - Investigations from Mortgage Crisis

Subprime and credit crisis litigation is so pervasive that we now have to track the various strains of it.

Monday, 28 April 2008

Benefits of ECF

This month's Market Reform newsletter (here) offers a very good article by executives at Lockton detailing how use of ECF has allowed a higher degree of focus and execution on the complex tasks of broking claims while reducing the unnecessary overhead of handling routine claims matters. Here are some of my favorite quotes:

You can put together a package of, say, six claims, totalling no more than
€1000 in a matter of minutes. Previously these would have taken hours to walk
round the market.

The MI reports that the in house workflow system is now capable of producing
allow for a much more proactive approach to the working day....(which) allows us
to start to measure each stage of the process. This in turn means we can start
to set target turnaround times for each stage and flag up where these aren’t
met. This means that we can manage by exception and not just progress work in
strict order.

(Before ECF) claims staff were constrained by the hours that underwriters
were open to accept files

What brokers do and how they get paid

How do buyers of commercial insurance work with their brokers now? Since the Spitzer investigations rocked Marsh and others in the industry, have things changed? How has the fierce soft market impacted the way brokers are paid? Advisen and RIMS wanted to find out.

Today is the first day of the annual RIMS Conference and we announce the results of the Advisen / RIMS Broker Services and Remuneration Study — based on data gathered in February from 1,519 participants — which has found that insurance buyers are driving brokers to change their service offerings and the way brokers are compensated.

The results are part of the 2008 RIMS Benchmark Survey™ book available here.

While virtually all survey respondents continue to use brokers to place insurance programs, the majority agree that brokers are shifting from commissions to fee-based compensation. With this shift towards fee-based pricing, respondents note a broker trend towards supplementing dwindling commission income with added services.

It's an incredible tool for buyers to benchmark the value for money received from their brokers and for management at brokerage firms to benchmark the level of services they offer as compared to their competition.

Wednesday, 23 April 2008

The other half of return

Insurance companies make their earnings from underwriting profit and investment profit on the premiums collected. I haven't really covered that angle to date.

While the big story has been the bond insurer subsidiary (SCA), and subprime exposure, yesterday's XL's earnings announcement (here) talks about the hit from investment return.

The Finance Director of Lloyd's gave some comments to assure the markets that the Lloyd's Central Fund is well tended to - see coverage here.

The subprime bodies are buried in both areas and upcoming earnings announcements will show further evidence of what we at Advisen are seeing, an end to the soft market in one important market sector (Directors & Officers and Errors & Omissions insurance for Financial Institutions), although the imbalance of supply and demand is too great to change the overall market dynamic. For more on the topic, click here.

Return of the Anecdotal Jedi

Just as I had posted about the significance of empirical data in analyzing premium rate trends in the commercial insurance marketplace, CIAB comes out with an announcement that proves my point clearly. See here for coverage including the following:
three-fourths of the agents and brokers reporting that renewal premiums for
their small and medium accounts were down 1-20 percent compared with fourth
quarter 2007.
I'd like to see how a broker could be taken seriously using data so imprecise. See www.rims.org/benchmark for precision.

Thursday, 17 April 2008

Empirical strikes back

A lot of one, one of the other.

Many journalists are running stories on the soft market and are using surveys as the base of their articles. There are two types of surveys data: anecdotal and empirical. There are a lot of anecdotal surveys while the RIMS Benchmark Survey produced by Advisen is the only one based on empirical data.

Today we announce the publication of the 2008 RIMS Benchmark Survey book which details the 2007 buying year for Risk Managers in North America (get your copy here). Just as our quarterly results showed, the soft market gained momentum across the board, including falling property rates for the first time since the 2005 hurricanes.

The annual book goes deeper than premiums and analyzes the total cost of risk (TCOR) including the retained losses and the expense of risk administration (salaries, etc.).

Anecdotal data comes from questions of brokers such as "do you think rates will continue to fall?" or "will they fall between 5 and 10%?" Instead, Advisen collects data right from risk managers on their buying of all commercial lines insurance coverages and with over 1,000 corporations reporting in 2007, the data set is the largest available.

While the overall picture is of a free-fall in premiums, this amount of benchmarking data enables comparison by industry, size of company, and other combinations to find any aberrations. For instance, changes in TCOR were not evenly distributed across industries and the book lists 14 industry groups for peer comparison.

Importantly, we also include the first installment of an annual survey about broker compensation. Risk managers provide a clear indication of how they compensate their brokers (general fee / placement commission); how much they compensate their brokers; broker market share by product; which services are currently included in their fees and which additional services risk managers would like to buy from their brokers.

It's an incredible benchmarking tool for corporate risk managers to demonstrate their relative sophistication in insuring their risk as well a road map for brokers to develop additional products and services for clients and prospects.

To buy your copy of the RIMS Benchmark Survey book including the full results of the broker survey click here. Discounts apply to RIMS members.

Tuesday, 15 April 2008

Subprime propaganda

Greg Flood is on a concerted campaign to reverse the soft market. Today Advisen Front Page News carried an article by AM Best in which the Ironshore underwriter explains the magnitude of the claims from subprime on the D&O and E&O markets. See the story here.

Last week Greg was quoted in Post magazine (story here) talking about how he sees insured loss from subprime surpassing $8b.

IronPro is new to the market, is well-rated, and doesn't have legacy subprime exposure to force high reserves. In other words, Greg has been sitting on the sidelines waiting for the right time and apparently he believes the time is now:
“We’re taking excess layers that are very high. We’re looking to reestablish
insurance for companies that are looking to get it.”

Chalk this up as another indicator of the bottom, the end of the soft market, at least for the specific buying of D&O and E&O for Financial Institutions. Greg says his competitors are seeing 30-40% increases in D&O and he wants in. Data from the RIMS Benchmark Survey and from retail and wholesale brokers do not show this type of increase, but we won't be surprised if the next batch of renewals did.

Thursday, 10 April 2008

Subprime Updates

Fitch published an estimate of $3-4b in D&O losses from subprime. See press coverage here. Echoing what Advisen published long ago and agreeing with Advisen's stated opinion that losses will be felt by a handful of large underwriters, Fitch said they didn't see a change in overall premium rates.

I have written about the imbalance of broad market supply and demand (here) as too great for even several multiples of the $3.6b estimate insured loss. Next up for Advisen is update this estimate and to include Errors & Omissions losses.

Meanwhile back at the plaintiffs bar ranch, Advisen is tracking 269 subprime and credit crisis-related lawsuits, of which 62 are Securities Class Actions used in modelling insured D&O losses. This count continues to climb.

Wednesday, 9 April 2008

Show me the data

According to an article I just read covering the World Insurance Forum in Dubai, discussing whether the financial market turmoil will impact underwriters' willingness to pay claims, Martin Sullivan, CEO of AIG,
pointed out that the recent profits reported by the insurers are not commonplace. He said that the U.S. insurance industry had only made a profit in three out of the last 30 years.

1 in 10 years? For now, I am filing this in the "how is this correct" file.

I have been in this industry for nearly 6 years and I have yet to see a real debate about claims payments except those that involve attorneys. Typically they are characterized by marketing professionals who purport to run claims departments talking about claims being their "shop window".

Tuesday, 8 April 2008

Q1 2008 Premiums: No broad market impact by subprime

Advisen released the results for Q1 2008 of the RIMS Benchmark Survey. See the press release here. The picture continues to be good for buyers and not helpful to broker earnings nor the long-term profit picture for insurance underwriters.

The cycle has not found bottom despite incredible financial market turmoil. My post yesterday discussed how Lloyd's is not concerned. Advisen clients I speak with are of mixed minds - those that are in the market for professional lines insurance (e.g. directors & officers, errors & omissions, crime) to financial institutions (lenders, investment banks, funds), those guys are not comfortable with what they have written and are looking forward to the influx of claims that will shake up who writes what and how this volatility will increase pricing in this space quickly.

We have to wait and see how litigation progresses - currently we are tracking 259 cases, including 62 securities class actions related to subprime and the credit crisis. The potential is for the concentric circles of loss to mount into something that has ripple effects within the markets far beyond D&O for financial institutions. See a recent post about this here.

The results have been picked up in the trade press already with an additional quote by Advisen's Dave Bradford in a story by Financial Week here.

Mr. Bradford said financial services and investment businesses, which have been
hit hard by the subprime mortgage meltdown, will see directors and officers’
liability insurance rates rise because of the increase in claims they face. But,
he added, there will be a steady decline in rates for most companies not exposed
to mortgage losses. “It wasn’t until the first quarter that underwriters pushed
through significant rates increases for financials. But it hasn’t spread beyond
that fairly narrow group.”

Monday, 7 April 2008

Lloyd's Profits up, subprime concern down

Lloyd's reported record profit of GBP3.85bn for 2007, up from GBP3.66bn in 2006 (enough to give CEO Richard Ward a 46.5% pay raise).

Despite growing fears in the market about the impending losses from subprime and other market turmoil, Lloyd's brushed off an anticipated GBP 100m in such losses as not material and "
within the normal course of business".

Ward highlighted the job ahead (and perhaps why Rolf Tolle earns slightly more than Ward) as "
to manage the cycle, focus on underwriting discipline and focus on underwriting for profit".

See the full story here.

In other Lloyd's news, the search for Lord Levene's successor is apparently on and the bar is set high - see a full detail of Levene's career path here (including how he, like me, roots for Chelsea).

Friday, 4 April 2008


CEO in town week is always action-packed. Some of the highlights of movements around London:

Advisen has been added to the committee for PLUS Europe. Tom Ruggieri is on the main committee and I am on the Working Group, chaired by Tom Sheffield of Aon. PLUS has built a solid franchise for networking and learning in the Professional Lines industry and we are pleased to help them take the Europe chapter forward under the leadership of Andrew Newman of RK Carvill.

Interestingly, Tom Sheffield practiced law for a firm in Chicago in defense of insurance companies in D&O cases, and Aon has made a very shrewd move in hiring Tom to lead their Technical Practice. With his deep experience on the way the product works, Tom is a leading expert on how wordings and structure can be tailored to respond as imagined by a client.

On the subject, I loved this quote from Matthew Allen of London law firm Eversheds:

Insurance is not like a betting slip you just collect on, it's a living,
breathing organism that you have to manage with careful expertise to ensure it
responds when you need it.

Steve McGill was at the PLUS dinner, having just left as leader of XL's Professional Lines in Paris to head up a similar team for Catlin US, based in Los Angeles.

There will be another PLUS Europe Symposium in London in October 2008 dealing with the impact of the financial markets turmoil on the D&O and PI / E&O industries with Advisen leading a panel.