Joe, I am sure that you are better off with a random draw.
Interesting article on insurance industry:
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March 17, 2003
HEARD ON THE STREET
WARREN'S WORD
• Buffett Letter Raises Concerns on Reinsurer Claim Payments1
03/11/03
Reinsurers Face New Scrutiny
On Delays to Claim Payments
By CHRISTOPHER OSTER and CHARLES FLEMING
Staff Reporters of THE WALL STREET JOURNAL
No insurance company that wants to stay in business would ever admit to being slow to pay claims, or to not paying legitimate claims. But now one insurance executive -- one by the name of Warren Buffett -- has gone and accused another insurer of doing exactly that.
Whispers of reinsurance companies delaying payments have circulated for months, but Mr. Buffett's claim in Berkshire Hathaway Inc.'s annual shareholder letter -- that "one of the world's largest reinsurers ... has all but ceased paying claims" -- turns a spotlight on a growing problem for property-casualty insurers: an industrywide slowdown in the payment of billions of dollars in reinsurance claims.
Reinsurers, in short, act as insurers to insurance companies, providing a vital means of spreading risk. They make it possible for insurers to write very large policies, because they agree to pay some of the claims arising from the policies. If the reinsurer doesn't pay, the insurer remains on the hook. So few things are more crucial to an insurance company's bottom line than a reinsurer's ability -- and willingness -- to pay.
Other insurance executives say Mr. Buffett's assertion may be self-serving -- an attempt to highlight the strength of Berkshire Hathaway's own triple-A-rated reinsurance companies -- and exaggerate the severity of the problem. But these executives generally do agree that big changes have occurred in the reinsurance sector in the past few years, all of which point to reinsurers paying claims more slowly than at any point in the recent past.
Some reinsurers have been weakened by huge claims stemming from the terrorist attacks on the World Trade Center, with the wobbly financial markets adding to their pain, and stretching out claims payments enables them to make a few more bucks in important investment income. Perhaps more significant, however, is a change in reinsurers' willingness to pay, insurance brokers say. For years, the reinsurer-insurer relationship was a collegial one; reinsurers generally paid claims promptly and legal disputes were few. Now, however, insurance brokers see a notable uptick in hardball claims' tactics by the reinsurers.
The upshot is that investors now have something new to worry about: the ability of insurers to fully collect on a type of receivable known as a "reinsurance recoverable." Such receivables are no small thing: anywhere from tens of millions at midsize insurers to billions at the biggest ones.
When Bermuda insurer Ace Ltd. announced in January that it was setting aside $2.2 billion in reserves to pay for asbestos-claims liabilities, it said $1.86 billion of that would come from reinsurers. When American International Group Inc. boosted its claims reserves in February, it said $700 million would come from reinsurers. Chubb Corp., as of the end of last year, had billed its reinsurers $655 million for losses from the Sept. 11, 2001, terrorist attacks and had collected $355 million. Of the remaining $300 million, $70 million was more than 90 days overdue at year's end. Chubb said $24 million of the overdue amount had been collected as of Feb. 28.
"Clearly, reinsurance recoverables are becoming more of an issue," says Rod Fox, chief executive of reinsurance broker Benfield Blanche. "In general, we're seeing a slowdown in claims payment. It's particularly true in some high-profile cases."
In years past, reinsurers tended to average respectable long-term rates of return on their capital as they worked with their insurance clients through thick and thin, compensated over time for being there, insurance brokers and analysts say. But in recent years, insurers began shopping around for the best prices, eschewing the relationships that previously had dominated the business. The resulting reinsurance competition came back to haunt the reinsurers over the past two years, as they lost billions of dollars.
The tougher stance on the part of reinsurers comes as many insurers, themselves, face tough times. Many still hurt from an estimated $50 billion in losses from the terrorist attacks, seemingly endless asbestos liabilities and a 1990s price war that dramatically drove down rates. The day after Mr. Buffett's letter appeared, shares of AIG, Ace and CNA Financial Corp. fell 5.3%, 3.7% and 3.5%, respectively, compared with a 2.6% drop for the Standard & Poor's 500-stock index. For the year, AIG, Ace and CNA shares are down 15%, 9.3% and 7.8%, respectively, while the S&P 500 has fallen 5.2%.
After Mr. Buffett's letter appeared last week, insurance investors scrambled to discover which company he meant. For his part, a spokeswoman for Mr. Buffett said the Berkshire chairman doesn't comment on his investor letter until the company's annual shareholder meeting, which this year takes place in early May.
In the letter, Mr. Buffett wrote that the reinsurer in question "owes many billions of dollars to hundreds of primary insurers who now face massive write-offs." Most analysts pointed to Germany's Gerling Global Re, a unit of Gerling Holding. William Yankus, an analyst at Fox-Pitt, Kelton, noted that, at the end of 2001, Berkshire's Geico automobile-insurance unit was owed $47 million by Gerling, more than any other reinsurer. Mr. Buffett's letter separately noted that Geico was owed money by "deadbeat reinsurers."
Gerling Holding spokesman Christophe Groffy dismisses market rumors that the group's reinsurance arm, Gerling Global Re, isn't paying out on contracts. "We have paid and will pay all obligations, but we don't comment on specific clients or transactions," he says.
However, Mr. Groffy also acknowledges that Gerling's property-and-casualty arm, Gerling Konzern Allgemeine Versicherungs AG, which earlier this week published its 2002 results, had set aside a €110 million ($118.2 million) allowance for money owed to it by Gerling Global Re that may be uncollectible. He explains that the property-and-casualty unit's auditors had requested this measure as "a cautious procedure," in view of the fact that the reinsurance business isn't selling any new policies. Asked what amount of the total owed to the property-and-casualty unit by the reinsurance unit the €110 million represented, Mr. Groffy says it is "a considerable proportion."
Luc Malatre, general manager of Paris-based reinsurance brokers Gras Savoye Re, says he hasn't detected any problems in payments by Gerling Global Re to clients. But Gerling's own provision "raises the question whether anyone who does business with Gerling Global Re shouldn't be making similar provisions," he says.
Other reinsurance buyers say they are getting paid. A spokesman for insurance behemoth AIG says the company "has not experienced any significant slowdown in payments by reinsurers, including Gerling." Donald Kramer, vice chairman of Ace, says the company hasn't seen a slowdown in payments and notes a big chunk of what Ace will collect in the future will be paid by a Berkshire subsidiary. CNA Financial said last week it had about $600 million of reinsurance receivables due from Gerling as of Dec. 31, and that it continued to collect payments from Gerling "in the normal course." CNA said all but $170 million is supported by collateral.
Among insurer-reinsurer disputes currently pending, Chubb is fighting with one of its reinsurers over property claims stemming from the Sept. 11, 2001, terrorist attacks. The unnamed reinsurer, according to Chubb's most-recent regulatory filings, disputes, among other things, Chubb's adherence to its underwriting guidelines. In the filing, Chubb said it was optimistic the dispute would be resolved in Chubb's favor.
For those insurers with collateral, the question may be how long it takes to access it, says Mr. Yankus. If a reinsurer chooses to contest a claim presented by an insurer, the insurer doesn't have the option of immediately accessing the collateral.
Clearly, some reinsurers are struggling. Just last week, Moody's Investors Service downgraded France's Scor SA, bringing to 18 the number of reinsurers downgraded since the start of 2001. Those downgrades include former triple-A reinsurers Swiss Reinsurance Co. and Muenchener Rueckversicherungs-Gesellschaft AG, or Munich Re.
One area where claims disputes are likely to arise: asbestos. Several insurers have put up billions of dollars in additional reserves for asbestos claims that, in some cases won't be paid for 20 years or more. Steve Dreyer, managing director at Standard & Poor's insurance-ratings group, says insurers haven't "accounted fully for the likelihood that these claims might be disputed by the reinsurers." The insurers, however, insist that their risks are manageable.> |
