Gutter balls and geniuses

I'm confident that in times to come we'll look back and pinpoint this year as the one when it all started to go downhill, and fairly quickly too.

What a year for Cat writers - money simply grew on trees. Back in June, when I interviewed Don Kramer of Ariel Re, I remember him enthusing about the 2006 Atlantic hurricane season. "They were all gutter balls," said the great man, adding that in a market where nothing bad happens, everybody ends up looking like a genius. Well, 2007 has come and gone - guess what? More gutter balls and plenty more geniuses.

The Atlantic wind certainly did blow - just ask any of the 13,000 workers evacuated from Pemex's offshore oil installations in the bay of Campeche, or all of the television journalists massed in hotels in Cancun as Dean approached but it just didn't blow anything insured down.

A stormy time

We also had Kyrill, a European winter storm of some note, UK summer floods worth $6bn, Californian and Southern European wildfires, a terrible earthquake in Peru and another strong temblor in Chile, plus typhoons Sepat, Krosa, Wipha and Sidr. And let's not forget cyclone Gonu and the Martinique earthquake, that served to remind us that there are natural catastrophe exposures of all kinds almost everywhere, whether we recognise or rate for them or not.

This year we got financially lucky with few losses in the insurance-rich zone, next year it could be different.

It was a pretty good year for non-Cat too - fat was trimmed from rates but by and large we stayed in theoretically profitable territory. And it looks like casualty reinsurers may have dodged the big bad news story of the year in sub-prime (see page 25).

Results records were shattered everywhere as negligible Cat losses were mixed with improving underlying combined ratios, generally solid investment income and net reserve releases to produce an ambrosia-like profits cocktail that lifted even the most jaded underwriter's spirits.

This is the year we gave back some of the extra money we took in 2006. Some went back to our loyal customers, some to our shareholders in share buybacks and higher dividends, while some went to the shareholders of the companies we acquired at rich premiums to valuations in the US and at Lloyd's, (and let's not forget the Scor-Converium deal).

As ever, plenty of our money went on licences to do business from Bermuda, and plenty more to the land owners of that fair island in rent for employee accommodation and office space for our operations out there.

Brokers didn't have a great year financially. Any industry that earns so much in dollars but which has so many non-dollar costs is always going to start feeling the pinch when the greenback hits the skids. And slide it certainly has - back in 2000 you could buy a newly-minted Euro with just 82 US cents, but at points in 2007 you would have needed $1.50. More competitive pricing has added to the gloom, but a soft market always comes with the silver lining of the chance of attacking competitors' business and getting all sorts of new products and schemes off the ground.

The other plus point for the middlemen was that any capacity shortage there had been in even the hardest to place Cat zones abruptly disappeared as the year went on, so at least the physical job of getting business placed became a little easier, even if hanging on to your existing portfolio got a little harder.

The capital markets continued another rich new source of broker income, with the best connected big boys earning tasty fees from arranging and placing the latest exotica with the money men. As the sub-prime crisis began to spread, we looked anxiously at the performance of Cat bonds and breathed a collective sigh of relief as the market held and even prospered.

Here to stay

Just as back in 2005, and in 2006, we were lucky that a hard market in catastrophe reinsurance had coincided with a soft market in hedge funds, we were fortunate that in 2007 we had an investment market almost as desperate as the reinsurance market had been to diversify into non-correlating classes. While the markets still have capital, Cat bonds, sidecars, index-related trades and ILWs will be traded - what we learnt in 2007 is that they're all here to stay.

Regulators put their two cents worth into the debate this year, but mercifully spared us anything in the way of concrete action, apart from Florida's failed experiment in reinsurance monopoly. Ratings agencies got it in the neck over sub-prime, but the politicians were just point-scoring - they were probably just glad of somewhere to direct blame that wasn't at the door of their own financial regulators. The US collateralisation debate rumbled on fruitlessly as did a lot of hot air from the European Commission, which deeply misunderstood the nature of subscription markets. The TRIA extension looks certain to be hammered out before year end as the US upper and lower houses look to spare political embarrassment and strike a deal before expiry.

Aside from regulatory issues, one of the most entertaining intellectual debates of 2007 has been the one that has seen reinsurers defend their rating stance as their clients plunge into headlong competition for business. The argument has been that while their customers might be prone to the occasional bout of fisticuffs for market share, they will not be tempted to join them. "We're so much more sophisticated than that" say the reinsurers.

It is somewhat baffling to see reinsurers imply that they are more skilled than their customers, when their clients have become enormously more technically sophisticated in their own right. It must follow that if the highly sophisticated insurance markets of the developed world can be in a highly competitive state, there is no earthly reason why its reinsurers shouldn't start joining in the fun.

Those looking for a market signal should take note that in 2007 reinsurance litigation lawyers started to feel the pinch as the soft market failed to throw up any serious new disputes, and Equitas retreated into the long, long grass. So other than employment cases involving the poaching of key staff, there weren't any new big disputes coming onto the market. But hang on in there, guys and girls, in this business something always manages to turn up - you are the ultimate counter-cyclical bellwethers of our industry - a quiet year for you usually heralds the beginning of the end of good times for us.

However, on the other hand corporate lawyers had another wonderful year, floating on a rising tide of bond issuance and special vehicle creation, syndicate start-ups and mergers and acquisitions.

So, what of 2008? More of the same. A last-minute renewal season, more mergers and acquisitions as profitability peaks, more rate cuts, more dividends and buybacks, more capital market innovation, but probably no more start-ups, unless we have more than one major catastrophe. There will also be more but possibly better regulation as Bermuda tweaks its capital models and we will advance even further down the road of electronic placing, accounting and settling of risk and the notifying, negotiating and payment of claims.

Swimming naked?

We leave the industry in rude good health as 2007 draws to a close, but let's finish on a Warren Buffett-ism: "It's only when the tide goes out that you get to see who has been swimming naked." First, let's hope the tide doesn't go out, lest we be exposed, but let's all try and make sure we've got our kit firmly on - the sight of a middle-aged reinsurer in the altogether is not a pretty one - and the reputational journey from genius to dunce can be remarkably swift.

2007 HEADLINES

JANUARY

- Ironshore commences underwriting after $1bn fund raising

- Advent Re given licence to trade

- Property reinsurance rates "falling modestly" says Willis

- Marsh establishes $1bn sidecar

- CastlePoint in $50m IPO

- UK support behind Lloyd's record capacity

- Greenlight latest class of 2005 member to seek IPO

- RAA calls for single US reinsurance regulator

- Partner Re sees 10% decline in renewable premium

- Swiss Re calls for claims index to boost European ILS market

- AIR puts Kyrill damage at $5bn to $10bn

- EC raises questions over common reinsurance practice

- Florida $4bn premium 'nationalisation' piles pressure on Bermudians

- RAA slams Florida "gambling" on Cat risk

- Bank of America with $65m Lloyd's casualty start-up

FEBRUARY

- Scor discloses a 32.9% stake in Converium as bid battle hots up

- Munich Re unveils record $4.55bn profits

- Caribbean Cat fund launched

MARCH

- Aon and Benfield reach $19m settlement over defecting brokers

- Argonaut reverses into PXRE's Bermudian shell

- Kiln to open $325m reinsurer and redomicile group in Bermuda

- Flagstone Re reveals bumper year in IPO prospectus

- Worst-ever hurricane season forecast from TSR for 2007

- Beaton, Foreman & Bonnar float $222m Ark at Lloyd's

- PXRE wins back rating as Peleus Re gets an A-

- $5.7bn reinsurance deal completes Berkshire's Equitas buyout

APRIL

- Max Re finalises US Specialty deal

- Alea accepts $300m offer from Fortress

- Integro confirms swoop for GC Fac duo

- Arch Re sets up property Fac unit

- Allianz launches flood risk Cat bond

- $600m Pentelia reinsurance venture launched in Bermuda

MAY

- Talbot sale to Validus completed

- Repeat of 1927 flood could cost $160bn

- Silverstein and insurers agree $2bn 9/11 settlement

- Charman loses appeal against $97m divorce settlement

- III puts latest 9/11 paid loss at $37bn

- Ren Re announces formation of Starbound II

JUNE

- DE Shaw buys James River, to merge with Bermudian operations

- Aspen Re chooses Zurich for new European hub

- State Farm to place Jumbo $4bn Cat bond

- Paris Re sets date for IPO

- ABI predits $2bn losses from flood claims

JULY

- Willis Re sees heavy competition in 1 July renewals

- Lloyd's to wield stick over reform

- Alien reinsurers increase share of US market to 53%

- Ariel Re to buy Atrium for $380m cash

AUGUST

- Guy Carp chair defects to Aon

- Montpelier buys US excess and surplus insurance shell

- RMS puts total Dean bill at $0.75bn-$1.5bn

- First cat option transacted on Gallagher Re NYMEX contract

- RAA half-year combined ratio plunges to 90%

SEPTEMBER

- Global Cat market rates drop 6%

- Special risk unit launched by Munich Re

- Marsh chief Storms out

- EC enquiry pulls punches on subscription market practices

- Maiden plans $500m IPO

- Ariel Re to buy 47-state US insurance platform

- Munich Re opens Malaysian retakaful office

OCTOBER

- Marsh assembles jumbo $425m US property facility

- Flagstone wins Dubai approval

- Connecticut AG alleges price fixing on Guy Carp facilities

- Munich Re in $1.3bn US specialty buy

- RMS estimates up to $1.6bn losses from Californian wildfires

- Indie bosses get 14 years

- Reinsurance giant boosts Lloyd's presence with UK acquisition

NOVEMBER

- Ironshore buys US admitted shell

- Goldmans enters Lloyd's with $135m Arrow syndicate for 2008

- Swiss Re in $1bn credit crunch loss

- Aurigen launches $500m Canadian life reinsurer start up

To be continued ...

TRENDS, FASHIONS AND MANTRAS

The wind may blow, or it might not, but nothing ever stays the same

2007 was the year that we ...

... Kept going to Bermuda

See Ironshore, Advent, Argonaut, Kiln, Pentelia, Canopius, Maiden, Aurigen Capital, Hardy

Bermuda, others and new money kept coming to Lloyd's ...

See Montpelier, Validus, Ariel, Banc of America, Goldman Sachs, Munich Re, Antares, Ark

... and Zurich ...

Aspen Re, Flagstone Re, Montpelier, Paris Re, (and does Scor-Converium count?)

... and don't forget Dubai, Dublin, Luxemburg, Singapore, Brazil, China or Qatar!

... invested in US specialty/excess and surplus

Hiscox, DE Shaw, Kiln, Omega, Montpelier, Ariel Re, Max Capital, Ironshore, Munich Re, QBE, Endurance

... carried on securitising

... kept cooking up new business models

Gallagher Re - Nymex contracts Carvill - CME contracts Insurance Futures Exchange (IFEX) Libero

... acquired each other

QBE-Praetorian Scor-Converium DE Shaw-James River Fortress-Alea Endurance-Armtech Insurance Services Munich Re-MSP Underwriting & Midland

... and settled disputes

Benfield and Lloyd's - Central Fund Silverstein and various - World Trade Center Aon and Benfield - Elliot Richardson and others Guy Carpenter and Integro - GCFac defection.