Summary: The real story here will be if Crystal Credit closes per its current terms and conditions. Will capital market investors buy under-priced credit risk, originated by P&C (re)insurers, except at a big discount? Will Swiss Re shareholders happily accept a "haircut" as the price of a "marquee" for management? Fortunately, potential investors don't have to labor over all this. Crystal Credit is nothing new. If it doesn't stack up to comparable deals already in the market--Steer Clear!

Last Thursday, December 8, 2005, the Wall Street Journal reported in an article titled Swiss Re Steps up Risk Shift that Swiss Re, the world's largest reinsurer, is now in the market with a Euro 252 million bond issue, to securitize its trade credit insurance policies.

Despite the announcement, Swiss Re is being cagey. The reinsurer "has been assessing investor interest in the issue…[and] declined to comment on its plans, but investors [who have been approached, expect the issue]…to be closed by the end of the year". And no mention, whatsoever, about pricing.

Anyway, you have to ask why they seek publicity about a private placement [?] that is still under negotiation [??]. Perhaps, new management is setting the stage for a "marquee deal" announcement [???].

Some observers characterize Crystal Credit as an innovative, insurance-linked securitization (ILS), that expands and breaks new ground in the tiny--mere $6.5 Billion outstandings after nearly 10 years--ILS market. However, the issue has absolutely nothing to do with "conventional" Property & Casualty insurance risks (e.g. earthquake, hurricane, auto) that have been ILS'ed, before.

The article begins:

Insurance companies for years have been buying insurance policies for themselves that are akin to the product at the center of a criminal investigation into whether American International Group Inc. helped a cellphone distributor manipulate its earnings. Critics say the policies are sometimes insurance in name only. That is because the premiums or other payments are so big that the seller assumes little or no risk, making them like loans that help buyers smooth their earnings and shore up their stock price. The reason: Insurance proceeds count as income and offset losses, while a loan must be counted as a liability -- a debt that must be paid off over time.

I'm posting all of this to my new weblog because I'm planning to do a follow-up blog post on the issue, now that nearly a year has gone by. Stay tuned.

Insurance (let alone Reinsurance) is "that industry...over there" to the overwhelming majority of us. Say you meet a random character in town. He tells you "I work in aerospace (or energy, or banking, or whatever)" and you have a broad idea of what goes on there, whether he's a travel agent or airline CEO (hmmm...maybe on his way to a meeting arranging D-I-P financing). However, with insurance, you really don't know (...must be actuary, or....oh oh!..."look--I don't need anymore insurance, nice to meet ya, have to run!").

Then, Insurance insiders reinforce this perception. "We don’t know our Cost of Goods Sold until AFTER we sell the product", they say. Some of the industry is highly regulated, in the US--by states. Product lines employ specialized underwriting techniques, actuaries and their own technical jargon. Further, Property & Casualty ("P&C") Insurance is bought and sold in opaque and illiquid markets. However, P&C Insurers, as a group, generate a low 6% historical average return on equity (!) which is well below the rest of industry--and which helps explain why it's "different". Whether this low return is due to low inherent risk--or questionable commercial practices--in the P&C industry remains a topical issue today.

In Other Words... will be a dialog "on insurance issues" between YOU, our visitors, and someone who has "been there, done that" (me). I'll start with a piece giving my take on a topical issue, say every 1-3 weeks or so, more or less often as events occur. In addition, I'll keep an eye on the financial media and offer comments on "newsy" developments. I'll focus on P&C Insurance, initially--since the industry remains in the spotlight of New York State Attorney General Elliott Spitzer and SEC investigations.

In Other Words... will assist "financial" visitors unfamiliar with the insurance industry. You are skilled in your line of work, be it banking, hedge fund portfolio management, corporate treasury, government regulation, commercial law, business media--but you want to cut through the jargon and fluff and discover what is going on in this arcane industry. Alternatively,.....

In Other Words... will assist "industry insiders" who need to make a compelling case, in Plain English, for their business model to outsiders, be they prospective investors, lenders, regulators--or other "reasonable persons".

In Other Words... Throughout all this, I want and need your views--but you'll have to be a PRMIA member to comment.

Perhaps together, we can make sense of this "opaque and illiquid" market?

I have been a corporate banker, reinsurer, business start-up manager and portfolio manager, at major institutions and boutiques in the financial services industry, in the US and emerging markets, for more than 20 years. I hold degrees from Columbia (MBA) and Cornell(BS).

As Managing Director at GE Insurance Solutions (ERC), the reinsurance arm of GE Capital, I focused their Insurance/Capital Markets convergence strategy and started-up a credit enhancement business, including processes of asset origination, underwriting and portfolio metrics, surveillance and team building.

I had global responsibility for developing and managing a $3 billion portfolio of investment grade and B-I-G credit risks embedded in P&C products that had the highest ROI of any business line. I built a Web-based internal underwriting service to control distribution and identify problematic risk exposures for remedial action.

My "credit" skills have few equals, anywhere. As a direct result of my efforts, GE Capital:

• Avoided "Enron". And $200 million + losses and resulting high-profile litigation that embroiled nearly every major reinsurer.
• Curtailed "Finite Insurance" sales. Virtually alone in the industry, I flagged these controversial products, long before prosecutions made headlines that destroyed reputations at the highest executive levels. Today, per WSJ (5/3/05), ERC "earns less than 1% of global premium from finite insurance" sales.
  
  
• Controlled broker distribution. My Web-based internal advisory service processed 300+ proposals, across multiple product lines, avoiding inadequately structured transactions, broker conflicts and upgrading documentation.
  
  
• Avoided Argentina. Right before Peso/$ parity ended, I led the due diligence team that identified flaws in the model of a surety insurer, recommended against acquisition and prevented losses of $30 million +.

• Control distribution
• Integrate product silos
• Upgrade systems
• Uniform credit risk management for Assets and Contingent Liabilities

EDWARD J. GREBECK
P. O. Box 112
New Canaan, CT 06840-0112
_________________________________________

Tel: 203-329-1539
Mobile: 203-326-0177
edgre@optonline.net