Ponzi Schemes

This week the Insurance Insider wrote about D&O insurance exposure in Lloyd's and the London insurance market to the ponzi schemes in the US.

Quoting from the recent Advisen report on Securities Litigation and the D&O Market, the article lists the proliferation of 2009 litigation (433 Madoff and 9 Stanford not to mention another 70 subprime and credit crisis-related cases). You can buy a list of this litigation here.

Apparently the law firm which represented Enron in its bankruptcy made almost as much as Milberg who brought the class action. This means both sides are racking up big legal bills before even getting to a judgment on the merits of the case.

Therefore these cases are going to lead to use of D&O coverage for mounting legal fees and when merits are judged, it's more likely that significant E&O or Professional Indemnity claims are paid. Core D&O claims are less likely to be paid as the losses were so "systemic" - how could any D or O be more culpable?

Similarly with the ponzi schemes, if you're bringing a case against the Ds&Os, where's the money to go after? Ruth Madoff only has so much jewelry and the rest of the Madoff business isn't worth $50b. Instead and in addition, go after the funds and pros that fed Madoff.

On this point, I remember a ponzi scheme that raced through UVM while I attended. The guys at the top of the pyramid fully knew that it would collapse under its own weight but that so long as they got out at least twice they would be playing with other people's money until the inevitable collapse.

While I'm happy to see Madoff's staff and family (was there really a distinction?) getting indicted like his accountant (all of these people had to be in on it), I am waiting to see how the scheme can be unwound to find the people who gave Madoff money at the beginning of the Ponzi scheme. These are the crooks Madoff is pleading guilty to protect.

On the insurance coverage of ponzi litigation, there could be negligence in due diligence on the part of feeder funds and investment professionals who put their clients into Madoff recently, and that could be covered under E&O insurance. But criminal charges will be overwhelming when they unearth Madoff's true accomplices - those with Madoff at the top of the pyramid. I doubt any insurance company would honor their E&O.

Who covers Bear Stearns?

The Insurance Insider does it again, see their story here which lists Chubb as writing the first $15m above Bear's retention of $25m with XL on the next $15m and HCC the last $15m and AIG writing a $25m excess of $50m Side A.

Capital Markets & (Re)Insurance - Unstoppable Momentum?

Some further data highlighting how the convergance of the capital markets and the (re)insurance industry is picking up steam:

According to today's edition of Trading Risk, 2007 Catastrophe Bond issuance was 49% above 2006 issuance and 251% above 2005 issuance.

Also in the news today, Lehman Brothers, which reports (here) 70% market share in issuance of US Life Insurance, Reg XXX/AXXX/Embedded Value insurance linked securities and claims to be the "leading trader of catastrophe bonds in the secondary market", hired Stephen Matanle from Marsh.

Steve was very senior at Marsh and had a long and distinguished career of 32 years with Marsh including (from the press release) "the role of Global Placement Leader. He had previously been Chairman and CEO of Marsh Global Broking."

Last fall Lehman launched Libero Ventures which markets itself as leading the charge in "Reinsurance Financing" which it defines here. The main points of differentiation are in the structure (cedants can opt for multi-year deals and take an equity stake in the Notes created by Lehman) and the origination (Lehman Re acting as principal to speed the process).

As Michael Spencer, ICAP's founder and CEO, pointed out in Trading Risk, the secondary market for these instruments must become more liquid, but tapping Matanle and his proven deal-making ability is big news for Lehman and the whole new issue market of insurance-linked securities.

Brokers & Cycle Management

My earlier post (here) talked about risk managers reacting to the furious soft market (isn't there a term for an modifying adjective that contradicts the object and is my grandmother rolling over in her grave to get her ruler to rap my knuckles?).

See images of the soft market above - the first is rates for Directors & Offices (D&O) cover showing 4 years of declining premiums. The second is the rate of change for every quarter in the past 4 years - note that the 11% decline in Q4 2007 is the 2nd biggest in these 4 years - meaning the soft market is showing no signs of abating.

I have posted many times now about underwriters managing the cycle through "underwriting discipline" (see here and here and here).

In looking at developments in the broker market, Jardine Lloyd Thompson's (JLT) results today (here) showed top-line and bottom-line growth. This is noteworthy because most brokers fees are a percentage of premium and as the soft market erodes premium, the broker looks for other ways to grow. JLT did a lot of right-sizing to achieve these profits.

What are brokers doing?

The COO of a London market broker told me he'd taken out all of the cost he could and growth would need to come from new revenues. His Board was looking at consulting services to provide clients wth even greater advice in enterprise risk management.

Going back to JLT, our friends at the Insurance Insider wrote (here) that they felt JLT and competitor Thompson Heath and Bond (THB) were looking for new revenue by launching underwriting divisions. See press releases for JLT here and THB here.

It's going to be very interesting to follow these developing stories - will Thistle Underwriters (JLT) and Unicorn Underwriting (THB) be soft-market panaceas or more disruptive innovations for the industry. Advisen Front Page News will follow this story - subscribe here.

Subprime investigator finds an informant

The Insurance Insider's coverage of Advisen's survey results yesterday (story here) included a mention to a story I hadn't seen:

Clayton Holdings, which provided due diligence to banks on some of the home
loans they turned into bonds, has agreed to co-operate with Andrew Cuomo in
exchange for immunity from prosecution.

Clayton describes itself on its website as "an information and analytics company serving lenders, loan buyers & bond issuers, servicers and fixed income investors in mortgage-related loans and other debt instruments".

According to an article in Advisen "Sources say one key issue AG Cuomo is looking at is underwriting "exceptions" granted by project managers working for Clayton on Wall Street accounts." Despite a share price drop of 87% since the beginning of the subprime crisis (see chart below), we are not aware of any lawsuits against Clayton.

The majority of subprime cases as tracked in Advisen's large loss database deal with not adequately disclosing and/or misrepresenting the nature of loans and CDOs. Evidence that firms knowingly did so would be a major boost to plaintiffs in subprime cases and increase the potential exposure for the D&O industry. This will certainly be tracked in the news including Advisen Front Page News.

Scoop Hastie does it again

Q: Which trade magazine broke the story about the Spitzer investigations into the US insurance industry?
A: Peter Hastie of the Insurance Insider here in London.

Peter's innate talent as a journalist has him constantly ahead of his competition and in 2007 the Insurance Insider has owned the story of the convergence of the capital markets and the (re)insurance industry.

This is an important development that will continue to grow in significance. Just recently Goldman Sachs and Bank of America have funded Lloyd's underwriting syndicates and the trading volumes of Insurance Linked Securities (ILS) increases every quarter.

Peter has covered this story as segments of his existing publications and has now announced the launch of a dedicated bi-monthly publication. See the announcement below.

Advisen has worked with equity analysts for years and counts many brokerage firms as customers including Goldman Sachs and Bank of America. We see this development as a further opportunity to provide all players in commercial insurance with the information and analytics they need to make more informed decisions.

Peter's announcement:

New publication TRADING RISK tackles reinsurance convergence

Tackling the increasing convergence between the banking and reinsurance worlds is a new specialist publication, Trading Risk, which is launched this month.

Aimed at market professionals and investors in the two sectors, Trading Risk is launched by Insider Publishing, the UK-based publishers of The Insurance Insider and IQ magazine, on the 15 January.

The new publication comes at a time when the two sectors are increasingly coming together in the way risks, such as losses from natural catastrophes like hurricanes, are being financed.

Dedicated to this convergence, Trading Risk will examine and analyse major transactions such as insurance linked securities (ILS), exchange and OTC traded risk, loss warranties, sidecars and all non traditional forms of risk transfer.

Trading Risk is a bi-monthly printed publication, together with regular email bulletins sent to an audience of market professionals. It will also host two events in 2008 in London and New York where attendees will discuss and debate key issues with leading industry figures.

The editor of Trading Risk is Rebecca Bole, a former Lloyd’s underwriter and senior news reporter on The Insurance Insider, Insider Publishing’s main title. The publishing editor is Peter Hastie, the editor of The Insurance Insider.

-ends-

For further information on Trading Risk, please contact:
Amber Bates
Sales & Marketing Manager
amber@insuranceinsider.com
+44 (0)20 7397 0619

America's Next Export: Class Action Suits?

Advisen co-founder and head of market research Dave Bradford recently reported on the trends towards plaintiffs ability to bringing security class action suits in Europe.

Global underwriter Zurich produced a tremendous conference to educate its customers on the subject of insuring Directors & Officers globally. If you haven't spoken with panelist Francis Kean, a Partner in the Insurance practice of law firm Barlow, Lyde & Gilberg, you are missing a unique combination of smarts, perspective & sociability.

In explaining how the UK is moving faster than most countries in adopting US-style class actions, Francis explained the ramifications of the new Companies Act and in particular Section 172. See an article in today's Insurance Insider for more.