Posts Tagged ‘Allstate; Willow RE’
I’ve been sent several articles on the Cat Bond market of late, some very good and some not necessarily worthy of the publication in which they were printed. I’ll start with an article from The Banker Magazine which is not yet online which I read courtesy of Factiva. While the article is generally good the author, Edward Russell-Walling parrots some long discredited facts about Cat Bonds, such as their being non correlated with the broader financial markets which the financial crisis of last year exposed as pure BS and it is there we start:
In 2008, the annus horribilis, non-correlation did not prevent it slumping to $2.7bn. Some hedge funds, which had been prominent players in this market, became distressed sellers and depressed pricing. The situation was aggravated by the downgrade of four cat bonds exposed to Lehman Brothers which, as total return swap counterparty, was effectively holding the investors’ capital.
What the author neglects to mention was “the innovation” of stuffing issues full of subprime mortgages whose accompanying (illusory) high yields no doubt drastically lowered the cost to the issuer. Lehman, as the guarantor, is cited as a problem because of its insolvency but the fact is TARP and the United States taxpayers are what has propped up every such issue so structured as major guarantors like AIG and the other Wall Street investment banks were essentially insolvent meaning their financial guarantees were worthless. Without the Lehman guarantee for instance Allstate’s Willow Re, which defaulted on their interest payments to investors earlier this year, plunged to around 50 cents on the dollar or roughly about what the underlying subprime mortgages were worth.
That said Russell-Walling did give a good explanation of the concept of the “trigger” in these agreements and it is there we pick back up:
One important choice that had to be made was the nature of the trigger. An indemnity trigger is activated by the issuer’s actual losses. So if the cover is for $100m with an excess of $400m, the bond is triggered once claims exceed $400m. Non-indemnity triggers may be based on other mechanisms, such as modelled loss, insured industry loss or physical parameters such as earthquake magnitude or wind speed. Read the rest of this entry »
I love it when I hear that mental “click”! I’ve been squirreling away several important news links like pieces of a jig saw puzzle trying to figure out how to make them fit and be understandable to a broader audience. This post is partially in response to the recent guest column by Eli Lehrer of the Competitive Enterprise Institute that ran in the Sun Herald last Thursday. The S/H was no doubt attracted to the piece by Mr Lehrer’s use of scare tactics including yet more premium increases for our private/industry run insurer of last resort and it is with that incredible piece of propaganda that we start:
As it girds for the busy months of hurricane season, Mississippi has plenty to worry about. Homeowner’s insurance coverage remains difficult to find and expensive for those who have it.
If that weren’t enough, some members of Congress now want to change the tax law in a way that would drive already expensive coastal Mississippi insurance premiums even higher.
The proposed new tax will impact “offshore affiliated reinsurance” — a rather esoteric product that matters a lot in Mississippi. Explaining why requires some background. To begin with, all sizeable primary insurers — companies like Allstate, Farm Bureau, Nationwide and State Farm — buy insurance of their own, reinsurance, to help cover particularly large losses and diversify their own portfolios.
Particularly in high-hurricane-risk areas like the Gulf Coast, many companies find it advantageous to buy some or all of their reinsurance from a parent or sister company that they know won’t abandon them following a major storm.
Now we slabbers well know the reinsurance examples he uses have a grain of truth to them and indeed the domestic insurers Lehrer mentions sometimes use reinsurance but generally not the high priced kind used by our windpool. Allstate, for example, reported on page 35 of their last quarterly financial statement filed with the SEC, a mere $141 million of property and casualty reinsurance premiums for Q1 2009. (Considering Allstate measures it assets in billions of dollars $141MM is a very small amount). Readers interested in greater detail on the interplay of reinsurance and catastrophe payouts should start with this link, which I featured in this post. From there we have posts on the trend to and use of insurance linked securities in lieu of traditional reinsurance treaties (and the subprime problems contained therein) here, here, here, here, and here. Not to be out done by the people in Bermuda, State Farm, among others, created their own Bermudan reinsurance subsidaries to play the tax game.
Suffice it to say Slabbed is calling bullshit on Eli Lehrer. Not only is his opinion piece propaganda of the type that would make Joseph Goebbels proud it is insulting he actually pretends to care what people here pay for wind premiums (or even know that people well off the beach pay huge amounts for wind insurance here). The CEI is working equally hard to insure HR 1264, Gene Taylor’s multiple peril bill remains DOA Read the rest of this entry »
More on $enator Chri$ Dodd’$ Relation$hip with AIG and Countrywide’$ Angelo Mozilo. Liddy educates WaPo readers on contract sanctity
I noted Time Magazine has come out with a list of the guilty in their 25 People to Blame for the Financial Crisis. This topic is special to me in a personal way and I’m reminded of a conversation I had with a reporter Tuesday as we discussed the now locally infamous Shred-it Trucks that became parking lot fixtures at the local State Farm offices in the spring of 2006. Steve took pictures but not for this blog as we had no concept of slabbed in those days. Rather he gave the pictures to former SKG lawyer Zach Butterworth. In that sense we feel some ownership for that piece of news, no doubt the same sense of ownership felt by the Rigsby sisters who saw from the inside what was being fed into the shredder.
Similarly Russell, Steve and I feel a similar ownership on that subprime thang as we were posters on the Countrywide Yahoo board at that time. It was Katrina that landed the company on my radar screen as I was surprised to learn some friends that had their mortgage with them could not get their insurance money released so they could repair their house. In fact Countrywide (CFC) was holding far more of their insurance money than they owed on their mortgage. I’m a sucker for this type of stuff so I alerted Steve and Russell and the cyber attack began. We made short work of CFC that day and my friend had their insurance money back the next day. Others saw those posts and one reporter asked some questions. Two weeks later this story appeared on page C-1 of the Wall Street Journal. Evidently someone at LSU thought enough of the article to copy it to a word doc where it resides today for all to see (it is still in the WSJ archives and a PDF I kept as well) and it is there we’ll begin as we explore what kind of company Senator Chris Dodd keeps:
Hurricane Victims Battle Banks — Gulf Coast Residents Complain Lenders Hold Insurance Money While Demanding Late Payments
The Wall Street Journal
April 27, 2006
By Valerie Bauerlein
AS HOMEOWNERS along the Gulf Coast try to recover from the devastation of hurricanes Katrina and Rita, some say mortgage lenders are refusing to turn over insurance proceeds while demanding immediate payment on overdue loans.
Hurricane victims in Louisiana and Mississippi have filed nearly 1,000 complaints with state regulators claiming mistreatment by mortgage lenders. About 800 of the complaints have been resolved, often as a result of mediation initiated by regulators.
Jim Wolf of Pass Christian, Miss., a DuPont Co. technician currently living in a company trailer, for example, wanted to use proceeds of an insurance settlement for a down payment on a new home. On Dec. 10, he sent his $40,000 insurance settlement check to giant Countrywide Financial Corp. to pay off $5,000 remaining on the mortgage of his destroyed home, expecting to get $35,000 back. He said he called Countrywide, based in Calabasas, Calif., every business day for a month, spoke to a dozen representatives and couldn’t get the balance returned. Read the rest of this entry »
Russell emailed me the answer and as is typical of what Russell digs up on complex securities and derivatives the answer is not only fascinating but begs additional questions. First let’s do a quick refresher on why this question is topical here on Slabbed by starting with the then breaking news that Allstate’s special purpose entity Willow Re’s cat bonds were facing “imminent default“, followed by my explanation of the events that brought about the then imminent default (subprime mortgages backing the bonds). Then we linked a Reuter’s story reporting the actual default:
Willow Re and three similar deals used a unit of Lehman Brothers as total return swap counterparty, contracted to ensure the collateral backing the bonds was sufficient to meet interest and principal repayments, and to make up any shortfall.
When it collapsed, investors were left with direct exposure to market losses on assets held as collateral. S&P had said on Oct. 9 that it believed payments on Willow Re were at risk.
The default will not trigger a termination of the underlying reinsurance agreement between Allstate and Willow Re, meaning the bonds could still pay out to Allstate in the event of a severe windstorm in the northeastern United States. In that case, the exact payment received by the insurer would depend on the value of the collateral pool.
The loss of Lehman Brothers as the counterparty to the embedded total return swap is the direct cause of the Willow Re cat bond price plunge as the above story indicates. We can also reasonably infer the market “perceived” the value of the Lehman Brothers financial guarantee was around 50 cents on the dollar and the logic for that inference is straightforward because after Lehman imploded the value of the bonds went from around 100 to 50 (as in 100% of par value to 50% of par value). Is the implied value of the Lehman financial guarantee also a signal that Lehman was in for some troubled times? Read the rest of this entry »
Time is very short. I’ll update this post with further analysis later.
We’ll begin with this story via Reuters:
A catastrophe bond sold by U.S. insurer Allstate Corp (ALL.N) is in default after special purpose vehicle Willow Re failed to make in full an interest payment that fell due last week.
The transaction is among four catastrophe bonds guaranteed by a unit of Lehman Brothers that were downgraded by credit rating agency Standard & Poor’s following the U.S. investment bank’s Sept. 15 bankruptcy filing.
Allstate confirmed late on Monday that Willow Re had not made the payment, due Feb. 2, within the five-day grace period. Read the rest of this entry »
Given the current financial mess that resulted from unsound and ill advised financial practices my total amazement at certain of the state insurance regulators for allowing insurance companies to count such silly things as deferred income taxes in their capital computations is mind boggling. Anyone else remember the industry meme the past 6 months repeated by paid insurance industry shills like Robert Hartwig of the Insurance disInformation Institute that this was a bank problem and that insurers were financially strong? Financially strong enterprises don’t spend time getting regulatory blessing to cook their books. In fact I’ll go a step further and publicly advise what I’m telling my paying clients, If your bank or insurer counts silly things like their net deferred tax asset as capital, run don’t walk for the door. Simply put it means they are in severe financial distress. In Allstate’s case details have emerged in the national media as to the extent of their problem. We begin at the WaPo:
Allstate, the big insurer, last week declared that despite unprecedented trouble in the markets, it remains financially strong.
But tucked deep inside a company report is evidence that Allstate changed its bookkeeping last year in ways that improve its financial appearance.
One accounting change added $347 million. Another delivered a year-end boost of $365 million.
Allstate’s actions illustrate a broader risk to investors, policyholders and people looking for insurance. Insurers have been asking regulators to let them operate with thinner financial cushions or to pad those cushions with assets they could not otherwise count. For anyone trying to assess the companies’ financial strength, the changes can cloud the picture. That could make it harder for people to make sound decisions when buying policies or annuities to protect their families.
This next blurb caused me to shake my head, in the small business world such slack is rarely cut a borrower or small town bank that’s insolvent but then again the guys and gals in small business don’t have armies of high priced lobbyist or revolving door employment arrangements with these state regulators: Read the rest of this entry »
Yep just a timestamp. Go long the broad index, short the issue/sector. (JMHO)
Finally, it was surreal to listen to such a grim panel after the swank reception welcoming the attendees, courtesy of McGraw Hill. A variety of groups were given invitations (mine came via the New York Financial Writers Association) to attend at no charge and hear the panelists offer their views, with the function arranged by Columbia University’s Knight-Bagehot Alumni Committee (a scholarship program for business journalists).
We were on the 50th floor of the McGraw Hill, offering a breathtaking view of midtown Manhattan. There was a multitude of delicious finger foods, washed down by top-shelf booze from an open bar–with single malt, 12-year-old scotch the drink of choice for many, including yours truly.
The room buzzed, and for a moment it didn’t feel like we were all traveling on a sinking ship. But once the program began, I felt a bit like I’d been drinking champagne after the Titanic hit the iceberg. Might as well enjoy whatever good times remain while they last, right?
Play it again Sam, truer words have never been spoken. Bankruptcy is not only for the best, it represents the long term cure. Also a big Slabbed welcome to the folks at McGraw Hill. I heard the construction version of the McGraw Hill 2009 economic sing-a-long in NOLA. Bleak picture no?
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.”
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. Read the rest of this entry »
A. M. Best now puts Lehman Brothers linked cat bonds on credit watch. The bonds in question are:
WILLOW RE Ltd
Ajax Re Ltd
Carillon Re Ltd
Newton Re Ltd.
As the guarantor of the swap counterparty has become bankrupt that technically means the swap agreements are terminated.
Willow weep for me, bend your branches down along the ground and COVER me.
Of course this all begs the question, who is covering Allstate’s Hurricane exposure? Was today’s commentary by AM Best on Allstate’s financial strength a bit premature? Perhaps leave out something? The good folks at Bloomberg tell the what and it is HUGE:
A catastrophe bond sold by Allstate Corp. faces “imminent” default following the collapse of Lehman Brothers Holdings Inc., Standard & Poor’s said. It would be only the second such security to fail in a decade.
New York-based S&P downgraded $250 million of debt sold by Allstate’s Willow Re Ltd. to D, the lowest grade, from CC, according to a Jan. 30 statement. Northbrook, Illinois-based Allstate set up Willow Re as a means of selling the bonds in 2007 to protect against claims from hurricanes, and investment losses by Willow Re aren’t tied to Allstate’s own portfolio.
“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. Read the rest of this entry »