From Kate Mackenzie, former Alphavillain and current climate-finance think-tanker
Warren Buffett’s annual letter last week badly lets down any reader hoping to understand the implications of climate change for the general insurance and reinsurance sector.
If Buffett had said climate change impacts are not a problem for ‘his’ insurance companies, because his managers are managing the risks thusly, that would be fine. It’d also be a fascinating read, if it went into some detail — unlikely though, because that would reveal competitive information.
Unfortunately he chose to apply it to all of the insurance sector: Read more
This guest post is from Camp Alphaville speaker Themis Themistocleous, who is head of the European Investment Office at UBS Wealth Management
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A weather update. February was a good month for US wind, but less so for hail, according to KBW.
How to tell that serious investors are yet to take the Morgan Stanley robot car wonderland seriously? Insurance companies still have value.
The point is this: where we’re going we’ll still need roads, but there won’t be (much) call for car insurance.
Moreover, insurers are going to be the agents of their own demise. They have no choice, the logic of robots is just too compelling, and the process has already begun. Read more
Banks are interconnected, and carry systemic risk to the economy. One doesn’t need the experience of a crisis to know this, it’s just intuitive.
On a similarly intuitive basis, are insurers systemically important? Read more
Should insurers use the history of Greek bond prices as a benchmark for holding capital against holdings of sovereign debt?
You might well ask. Read more
Behold — what could be the largest natural catastrophe bond ever:
That’s S&P’s ratings doc for Everglades Re Ltd. It’s a bond to transfer some of the hurricane risk that a state-backed Florida insurer will face from writing policies for coastal homeowners. Losses from a Hurricane Andrew-level storm would wipe out the principal, according to modelling in the ratings doc. Read more
There is dystopian financial innovation and there is financial innovation for dystopia.
Here’s an idea from an Asian Development Bank study into dealing with costs from climate-induced migration (H/T Artemis). The future costs of millions moving from affected areas, infrastructure damage estimates, etc, remain highly uncertain. So…
The marine insurance market is heading for a shake-up in the wake of the Costa Concordia disaster as underwriters reconsider whether they want to provide cover for ever-larger vessels, according to industry executives. Insurers say the incident has highlighted the risks of a recent scale revolution not only in passenger liners but also in the more numerous container ships and carriers of dry-bulk commodities such as iron ore and coal, writes the FT. As underwriters come to terms with one of the costliest marine accidents, some insurers are questioning whether they still want to provide cover in a fiercely competitive market from which many struggle to turn a profit.
The UK’s financial regulator has acknowledged for the first time that new European capital rules for insurers are now likely to come into force in January 2014, a year later than expected, the FT says. However, it stopped short of saying UK insurers would avoid running two sets of capital models and reporting standards in parallel during 2013, when the Financial Services Authority runs its triennial capital adequacy test of the industry. European political authorities are expected to delay the full implementation of Solvency II, the new capital regime for insurers, by 12 months to the start of 2014 to give more time for many countries’ regulators and local industries to prepare for the rules.
Solvency II (insurers) and Basel III (banks).
Both add fresh minimum capital requirements to their respective industries. Similarities generally stop there. The very definition of capital is different, so are risk-weighting and accounting regimes… Read more
How do you make insurance interesting?
Admiral Group, the FTSE 100 motor insurer, chose to theme its interim results this week around the work of spaghetti western director Sergio Leone. Read more
American International Group, the insurer that almost failed in the 2008 crisis, could now withstand a severe downturn, its chief executive said after a market sell-off that presents a variety of challenges for the company, the FT reports. In second-quarter results published on Thursday, AIG reported net profits of $1.8bn compared with a net loss of $2.7bn in the same period last year. “Our crisis is over. It’s done,” said Robert Benmosche, chief executive. Mr Benmosche said the company – which is 74 per cent-owned by the US Treasury – was transformed following the 2008 crisis and had a much better liquidity profile after shedding most of the notorious financial products division, which brought the company to the brink of collapse by bad bets insuring toxic securities. “If the S&P went to 923 [from 1,200] and at the same time we get a hurricane or natural disaster that far exceeds Katrina, we’ll be on the edge,” he said. “We’ll make it but we’ll be on the edge. We want to be sure not to make a boo boo.
Transatlantic Holdings and Switzerland’s Allied World Assurance Company agreed to merge in a $3.2bn deal that creates a reinsurer with operations in 18 countries, the FT reports. Allied will exchange 0.88 of a share for each Transatlantic share to create TransAllied Group Holdings AG, with Transatlantic’s shareholders owning about 58 per cent of the combined company, the insurers said on Sunday in a statement. Insurance Business Review says upon completion of the merger, the combined entity company named as TransAllied Group Holdings will have total invested assets of $21bn, total shareholders’ equity of nearly $7bn, and offer specialty insurance and reinsurance products and services via two brands -Transatlantic Reinsurance and Allied World Insurance.
And today’s UK small cap disaster is…
Millions of consumers are set to share in the largest UK compensation pay-out in almost a decade, after the banking sector lost a High Court challenge over the sale of controversial loan insurance, the FT reports. In the latest twist in a long-running dispute over payment protection insurance, the court dismissed an appeal brought by the banks against regulatory changes that would force them to refund past policies worth billions of pounds.
UK regulators will focus resources only on the largest insurers in their efforts to assess new capital models before a January 2013 deadline, in effect leaving smaller groups to fend for themselves, reports the FT. Julian Adams, the Financial Services Authority’s head of insurance, revealed the two-tier approach to companies preparing for the incoming European capital regime, known as Solvency II, at an industry conference on Monday.
The downgrades are starting to rain down on CPP, the credit card and identity theft insurer that’s attracted some unwanted regulatory heat.
Joint broker JPMorgan has cut its forecasts and is worried the FSA probe revealed late on Monday could land CPP with a large fine, while the company’s other adviser, UBS, has put its rating under review. Elsewhere, Citigroup has removed its buy rating on CPP and Canaccord Genuity is simply advising clients to sell. Read more
Here’s a chart to ponder from the peer review of residential mortgage practices, just published by the internationally-coordinated Financial Stability Board:
Here’s a useful breakdown of who pays for what after Japan’s massive earthquake:
Which might help explain (some) of why Japanese government bonds are sliding on Wednesday. Japanese insurers could well be selling some of their bonds to help cover losses in their stock portfolios, just as the outlook for Japan’s finances might worsen. Read more
A guest post in two parts by Paul J. Davies, the FT’s insurance correspondent. This is part one.
There are two big questions for reinsurers following the Japan quake. Number one: will it put a floor under the weak pricing for catastrophe risk of recent years and even lead to sharp increases? Number two, if there is a market turn, how long will it last? Read more
We ♥ John Hempton.
So we thought we’d present the Australian hedge fund manager’s latest thoughts on the financial fallout (no pun intended) from Japan’s devestating earthquake: Read more
This is not your typical Japanese government bond post.
After Friday’s almighty earthquake, Japanese government bond futures rallied (the cash market was closed immediately after the event), reportedly on safe haven demand. But there’s still plenty of JGB bearishness around too — with worries that new liquidity measures and the cost of rebuilding could eat into Japan’s finances. Read more
Recent exchange action between the Japanese yen and the US dollar:
Fresh from Standard & Poor’s — news that Friday’s whopping Japan earthquake won’t impact six natural catastrophe bonds exposed to, erm, Japan earthquake risk:
Here’s a timely discussion following the Vix smashing through the 20 level.
It comes via Euromoney columnist, Theo Casey, and it concerns a 2010 paper by Eckhard Platen, professor of quant finance at the University of Technology, Sydney. Read more
The US government is planning to sell up to $20bn worth of shares in AIG in May, after giving up on attempts to begin reducing its 92 per cent stake in the insurer next month, the FT says, citing people close to the situation. The news came as AIG announced a surprise $4.1bn increase in reserves against future property and casualty losses that is likely to push its 2010 results, to be revealed on February 24, into the red. NYT DealBook reports the bulk of the charge relates to four of AIG’s businesses: asbestos, excess casualty, excess workers’ compensation and primary workers’ compensation.
US insurer AIG has chosen Taiwan’s Ruentex Group as the preferred bidder for its Taiwan life-insurance unit, Nan Shan Life Insurance, reports the WSJ. Ruentex, a conglomerate with interests in textiles and real estate, offered more than $2.15bn, said a person close to the deal, more than if AIG had succeeded last year in selling the Taiwan unit to a consortium of Primus Financial and Hong Kong-listed China Strategic Holdings. Taiwan regulators blocked that deal in August, citing concerns about China Strategic’s financial strength and commitment to Nan Shan. AIG’s second attempt drew bids from Taiwanese firms including Chinatrust Financial, Cathay Financial, Fubon Financial, and a consortium comprising Primus, Taiwan Secom and Goldsun Development & Construction.
FT Alphaville has been researching the issue of so-called ‘liquidity transfers’ ever since we first came across the matter in Life & Pension Risk in October.
As Risk noted at the time, there’s been an increasing trend for banks to swap their illiquid Asset-Backed Securities (ABS)-style assets for much more liquid securities held by pension and insurance funds via extremely long repo arrangements. Read more
Jeff Horowitz at American Banker has a cool story to add to the mortgage servicer conflict-of-interest meme. It’s all about — wait for it — forced-place insurance.
This is the stuff that banks foist onto mortgage borrowers (to protect mortgage investors) if the borrowers don’t take it out and pay for it themselves. Sounds reasonable, right? And it is, except that the opportunity for profiteering does exist. The hint is in the “forced” bit of the forced-place insurance name — synonymous with “selected by your bank”, which may or my not own its own insurance biz. Read more