Insurer wants Sifi label dropped but a looming regulatory vote could be close
Insurer wants Sifi label dropped but a looming regulatory vote could be close
After tumbling last week on concerns that between damage from Harvey and Irma, losses for the P&C space would be devastating, today the broader insurer space is breathing a sigh of relief after the Hurricane's damage reportedly underwhelmed, especially following some especially dire observations over the weekend from the likes of Torsten Jeworrek, member of the board of the German reinsurance giant Munich Re, who on Sunday said that Hurricane Irma is proving to be a “major event” for Florida and the insurance industry. As Reuters reported yesterday, Jeworrek and other insurance executives gathered in Monaco for an annual conference to haggle over reinsurance prices and strike underwriting deals. And even though Irma eventually skirted densely populated Miami, the Munich Re board member said that “Irma is still a major event for Florida and also a major event for the insurance industry.” When asked by journalists, Jeworrek also hazarded a rough guess for the insured losses for the global industry of Hurricane Harvey: he said that losses were estimated at between $20 billion and $30 billion, which would put the storm on a scale of Sandy. That number will likely prove to be overly optimistic, because as Goldman showed yesterday, many estimates of Harvey damages rose sharply during the first week after landfall; however, most have now settled in the $70-100bn range (Goldman itself assumes $85bn). While the uncertainty around these figures remains high, it seems clear that Harvey’s aftermath will be particularly severe. So with Harvey more or less quantified, the question then is what will Irma's damage be? And it is here that some initial commentary from Credit Suisse explains (and may have sparked) a broad rally across the insurer sector. In an overnight note from CS' Ryan Tunis, the Swiss bank analyst writes that even as Hurricane Irma barrels up Florida’s Gulf coast, "insured losses are now expected to be less than many feared with modeling agencies in general agreement of a sub $60b number." As a result, Credit Suisse's takeaway is that while Irma may be costly to reinsurer book values, the hurricane alone should not trigger the need for additional capital, and further expects tangible book value hits below 15% from Irma and Harvey combined. Of course, Tunis concedes that the capital raise conversation would likely be more pertinent should there be a "next catastrophe this year" or even another bad wind season in 2018. While projections for Hurricane Jose aren’t showing anywhere close to the amount of landfall risk that Irma had, but there are still a few projections of a potential threat to the US Northeast. The key thing that saved insurers, however, and which resulted in lower insured losses is the last minute western shift in Irma’s FL path: As destructive as Irma's path continues to be, we think that the path up the west coast of Florida is better from an insured loss standpoint than projections from mid last week and even Friday that involved a more direct hit of Miami. As of 5pm today (Sunday), the storm seems to have weakened to a cat 2 as it has moved over Fort Myers, FL. AIR Worldwide estimates that there is $1 trillion of coastal exposure along west coast up to Tampa, 30% less than the $1.5 trillion of coastal exposure in the Miami Tri-County area. A west coast landfall should also bring more of the insured loss burden onto the personal lines companies. For a Miami-Dade hit, Lloyds industry losses assume 49% are from residential property and 49% from commercial property (rest auto and marine). For the Pinellas county (next to Tampa), residential property losses make up 70% of losses, while commercial property are 29% of losses. Another question: how much flood is privately insured? According to Credit Suisse, it's unclear at this point what portion of the damage will be caused by storm surge flooding versus wind, but Tunis believes that it's a higher percentage than what the market was expecting on Friday. "The private insurance industry should be far less exposed to flood damage than wind, especially on the commercial side where we understand that private flood insurance is either rarely offered or heavily sublimited, which we would think would be even more true in flood prone spots. The vulnerability to storm surge to Fort Myers, Tampa and St. Petersberg has also been very well understood by the cat modeling services (Karen Clark cited Tampa as #1 most vulnerable city to storm surge in 2005). In this context, one of the debates in the coming weeks will center around how much of the homeowners flood damage is privately insured, especially since private flood insurance losses from Irma are likely to exceed that of Harvey. We understand that though standard home policies do not include flood insurance, high net worth home policies are often inclusive of flood protection. Because of the high insured values of homes in FL (see Figure 1), there are more homes with high net worth home policies which could include private flood insurance. Once the policyholder goes to the higher net insured value policy market – and we fear that many may in this case given high average property values of affected areas – we understand that policyholders have the option to purchase flood insurance. We have heard estimates that 50% of high net worth policy homes buy private flood insurance. Companies that may be exposed to this include AIG, CB, and Pure. What about reinsurers? It is here that much of the hit will likely be, as Barclays warned two weeks ago: [T]he reinsurers will be on the hook for the vast majority of privately insured losses. The most recent RMS report (Sunday afternoon) indicated that there is a 90% chance that the insured wind loss will be less than $60b which is down from the figure estimated Friday of 90% chance of sub $75b losses. That number does not include insured loss damage from flooding, the $10-15b of Irma damage in the Caribbean, business interruption losses in commercial insurance, or post event loss amplification issues such as demand surge. Offsetting this is our understanding that the Florida hurricane catastrophe fund (FHCF) may pay out around $15b of the total in a $40-60b loss scenario. Putting these revised estimates in context, Credit Suisse writes that at this point, this does not appear to be a 1-in-100 Atlantic Hurricane event. As a result, we are comfortable using company disclosed 1-in-100 year average loss disclosures as a worst case ceiling for individual company loss estimates. This number for the reinsurers (1-in-100 year US wind PMLs) appears to be 5-10% of tangible equity. If we assume 2-3% book value hits from Harvey, then this implies 7-13% hits to book value from both hurricanes. Reinsurers are believed to be relatively unscathed from Harvey, but one other incremental negative data point from this weekend was a new RMS estimate for Harvey losses which implies $18-25b of privately insured losses Harvey, which may be 30% higher than preliminary estimates perhaps leaving reinsurers more vulnerable. What this means for insurers is basically good news, as today's stock price reaction confirms: As we have noted, net exposures should be relatively limited for PGR, ALL, TRV and HIG either through avoidance of Florida property or heavy reinsurance purchase, which is still the case. The path of the storm and expected storm surge does bring a higher level auto losses into play, though likely not at the scope of Harvey with plenty of advanced warning for all Florida residents and businesses. Katrina may be the best comparison at this point, which resulted in $2.8b of industry auto losses in today's dollars and around $328mm for PGR. PGR reported $258.5mm ($328mm in today's dollar) of personal auto from Katrina, Rita, and Wilma. ALL reported $283mm ($359mm in today's dollars) of personal auto losses from Katrina, Rita, and Wilma. For ALL, the auto losses were about 8% of total Katrina losses. We note that PGR and ALL have 14%/10% market share of Florida auto physical damage (See Figure 4). PGR also has 16% of the commercial auto market in Florida. * * * Finally, adding fuel to the P&C surge was a similar analysis by Citi, according to which the cost of Hurricane Irma-related total estimated losses has been slashed to $50BN from $150BN. "While the hurricane season is only half way through, so that number could increase but, for now, P&C insurers and reinsurers have dodged a bullet" Citi analyst James Naklicki wrote. As a result, Citi projects U.S. insured loses of $20 billion. Furthermore, citi also expects less selling pressure on reinsurers as the risk of capital raising eases, and remains overweight Travelers and Chubb; underweight Axis, RenRe and XL, while upgrading Axis Capital Holdings to Neutral from Sell. End result: a surge in insurer stocks, more than undoing all of last week's Irma-related losses.
Microsoft (MSFT) is likely to benefit from the blockchain deal with Israel-based Bank Hapoalim, the first-of-its-kind for Israel.
Via SovereignMan.com In 1869, a 48-year old Jewish immigrant from the tiny village of Trappstadt in Germany’s Bavaria region hung a shingle outside of his small office in lower Manhattan to officially launch his new business. His name was Marcus Goldman, and the business he started, what’s now known as Goldman Sachs, has become the preeminent investment bank in the world with nearly $1 trillion in assets. They didn’t get there by winning any popularity contests. Goldman Sachs has been at the heart of nearly every major banking scandal in recent history. The company has settled lawsuits on countless charges, ranging from exchange rate manipulation, stock price manipulation, demanding bribes from their own clients, front-running retail customers, and just about every shady business practice that would put money in their pockets. Yet throughout it all, Goldman Sachs has been protected from any serious punishment by its friends in highest offices of government. Four out of the last eight US Treasury Secretaries, including the current one, have formerly been on the payroll of Goldman Sachs. Three current Federal Reserve Bank presidents are Goldman Sachs alumni. The current president of the European Central Bank and the current head of the Bank of England are both former Goldman Sachs employees. You get the idea. On its face, there’s nothing wrong with government staffing its departments with top executives from the private sector; taxpayers would probably rather have someone who knows what s/he’s doing behind the desk rather than some random guy off the street. But the consequent favoritism that results from this revolving door is blatant and repulsive. Case in point: in 2008 when the financial system was going up in flames and most banks were suffering enormous losses, the government orchestrated a sweetheart bailout deal, of which Goldman was the primary beneficiary. Goldman stood to lose billions of dollars from its bad investments in insurance giant AIG (which was going bankrupt). Instead, Goldman was repaid 100 cents on the dollar, courtesy of the US taxpayer. And that’s not an isolated case. The point is that Goldman Sachs is deeply embedded across the entire economy, nearly every major western government, and the most important financial markets in the world. So when the bank’s CEO says that financial markets are too expensive, it’s probably time to start paying attention. That’s exactly what happened yesterday at the Handelsblatt business conference in Frankfurt, Germany– Goldman Sachs’ CEO told the audience bluntly that world financial markets “have been going up for too long.” And it’s true. Many major stock markets around the world are near all-time highs. Bond markets are near all-time highs. Property markets are near all-time highs. Insolvent governments that have a history of defaulting on their debts (like Argentina) are able to issue bonds with maturity dates of ONE HUNDRED YEARS at laughably small interest rates. Companies which perpetually lose money are seeing their stock prices soar to continual new heights. Interest rates in many parts of the world are still negative. And whereas the average length of a ‘bull market,’ in which asset prices rise, is just over 5 years, the current bull market has been going for 8 ½ years. That makes it one of the longest in the history of financial markets. There are now legions of seasoned analysts, traders, and investment bankers working on Wall Street who have literally never experienced a down year. Little by little, a few prominent voices in finance have started to express concerns about the state of financial markets. Yesterday’s comments by Goldman’s CEO was only the latest. Though given his status as THE market and economic insider, his remarks are perhaps the most noteworthy. In fairness, no one has a crystal ball, especially when it comes to financial markets. Not even the CEO of Goldman Sachs. But if these guys are telling the world that the market is overheated, you can probably imagine they’ve already started selling.
American International (AIG) reported earnings more than a month ago. What's next for the stock? We take a look at earnings estimates for some clues.
Authored by Simon Black via SovereignMan.com, In 1869, a 48-year old Jewish immigrant from the tiny village of Trappstadt in Germany’s Bavaria region hung a shingle outside of his small office in lower Manhattan to officially launch his new business. His name was Marcus Goldman, and the business he started, what’s now known as Goldman Sachs, has become the preeminent investment bank in the world with nearly $1 trillion in assets. They didn’t get there by winning any popularity contests. Goldman Sachs has been at the heart of nearly every major banking scandal in recent history. The company has settled lawsuits on countless charges, ranging from exchange rate manipulation, stock price manipulation, demanding bribes from their own clients, front-running retail customers, and just about every shady business practice that would put money in their pockets. Yet throughout it all, Goldman Sachs has been protected from any serious punishment by its friends in highest offices of government. Four out of the last eight US Treasury Secretaries, including the current one, have formerly been on the payroll of Goldman Sachs. Three current Federal Reserve Bank presidents are Goldman Sachs alumni. The current president of the European Central Bank and the current head of the Bank of England are both former Goldman Sachs employees. You get the idea. On its face, there’s nothing wrong with government staffing its departments with top executives from the private sector; taxpayers would probably rather have someone who knows what s/he’s doing behind the desk rather than some random guy off the street. But the consequent favoritism that results from this revolving door is blatant and repulsive. Case in point: in 2008 when the financial system was going up in flames and most banks were suffering enormous losses, the government orchestrated a sweetheart bailout deal, of which Goldman was the primary beneficiary. Goldman stood to lose billions of dollars from its bad investments in insurance giant AIG (which was going bankrupt). Instead, Goldman was repaid 100 cents on the dollar, courtesy of the US taxpayer. And that’s not an isolated case. The point is that Goldman Sachs is deeply embedded across the entire economy, nearly every major western government, and the most important financial markets in the world. So when the bank’s CEO says that financial markets are too expensive, it’s probably time to start paying attention. That’s exactly what happened yesterday at the Handelsblatt business conference in Frankfurt, Germany– Goldman Sachs’ CEO told the audience bluntly that world financial markets “have been going up for too long.” And it’s true. Many major stock markets around the world are near all-time highs. Bond markets are near all-time highs. Property markets are near all-time highs. Insolvent governments that have a history of defaulting on their debts (like Argentina) are able to issue bonds with maturity dates of ONE HUNDRED YEARS at laughably small interest rates. Companies which perpetually lose money are seeing their stock prices soar to continual new heights. Interest rates in many parts of the world are still negative. And whereas the average length of a ‘bull market,’ in which asset prices rise, is just over 5 years, the current bull market has been going for 8 ½ years. That makes it one of the longest in the history of financial markets. There are now legions of seasoned analysts, traders, and investment bankers working on Wall Street who have literally never experienced a down year. Little by little, a few prominent voices in finance have started to express concerns about the state of financial markets. Yesterday’s comments by Goldman’s CEO was only the latest. Though given his status as THE market and economic insider, his remarks are perhaps the most noteworthy. In fairness, no one has a crystal ball, especially when it comes to financial markets. Not even the CEO of Goldman Sachs. But if these guys are telling the world that the market is overheated, you can probably imagine they’ve already started selling. Do you have a Plan B?
For the first time in two years, the owners of the Dow Jones Industrial Average have changed the benchmark’s divisor, the number used to determine how moves in the share prices of individual Dow components affect the level of the index. The new divisor is now 0.145233969 from 0.146021281. With the new divisor, a $1 price move in any Dow component will translate to a swing in the level of the Dow between 6.8854 and 6.8483 points. MarketWatch reminds us, is a price-weighted index, which means its level is decided by the absolute price changes in its component shares, not percentage-point swings like other indexes. Here’s a more in-depth explanation of how the divisor works, from MarketWatch. “The so-called divisor, or in this case multiplier, is the figure used to determine the influence of any of the 30 components that make up the price-weighted Dow industrials. The Dow isn’t exactly an average of its components, as its name might imply; instead, the value of the Dow is determined by calculating the sum of the prices of its components using a divisor that factors when a company splits its shares. Stock splits can swing the balance of influence for any one blue-chip component.” The latest change in the divisor was made to accommodate the merger of Dow Chemical Corp. and DuPont Co., the latter of which is a Dow component. Shares of the new entity started trading Friday under the name DowDuPont, which is now a component of the blue-chip index. Before this, the most recent change came in December 2015 after Nike finished a 2-for-1 stock split. S&P Dow Jones Indices said the change was meant to not “cause any disruption in the level of the index.” S&P Dow Jones Indices is a joint venture of S&P Global and CME Group. Here’s a rundown of when previous divisor changes have occurred, courtesy of MarketWatch: Jan 1, 2002: 0.144521 June 3, 2002: 0.14445222 Aug. 21, 2002: 0.14418073 Nov. 19, 2002: 0.14585278 Feb. 18, 2003: 0.14279922 Aug. 20, 2003: 0.14249417 Sept. 30, 2003: 0.13500289 April 8, 2004: 0.14090166 June 6, 2004: 0.13561241 Nov. 15, 2004: 0.13532775 June 13, 2005: 0.13033708 July 14, 2005: 0.12560864 Oct. 3, 2005: 0.12493117 Nov. 20, 2006: 0.12482483 April 2, 2007: 0.123051408 June 13, 2007: 0.123017848 Feb. 19, 2008: 0.122834016 April 1, 2008: 0.122820114 Sept. 22, 2008: 0.125552709 June 8, 2009: 0.132319125 July 2, 2010: 0.132129493 Aug. 13, 2012: 0.12914682 Sept. 24, 2012: 0.130216081 Sept. 23, 2013: 0.155715905 March 19, 2015: 0.14985889 July 1, 2015: 0.149677273 Dec. 24, 2015: 0.146021281 Sept. 1, 2017: 0.145233969 * * * While the archaic index construction of The Dow never fail to fill us with folly, we are reminded of the detailed breakdown/explanation that Wim Grommen provided previously about the "hoax" of the Dow Jones Industrial Average... The Dow Index was first published in 1896 when it consisted of just 12 constituents and was a simple price average index in which the sum total value of the shares of the 12 constituents were simply divided by 12. As such those shares with the highest prices had the greatest influence on the movements of the index as a whole. In 1916 the Dow 12 became the Dow 20 with four companies being removed from the original twelve and twelve new companies being added. In October, 1928 the Dow 20 became the Dow 30 but the calculation of the index was changed to be the sum of the value of the shares of the 30 constituents divided by what is known as the Dow Divisor. While the inclusion of the Dow Divisor may have seemed totally straightforward it was – and still is – anything but! Why so? Because every time the number of, or specific constituent, companies change in the index any comparison of the new index value with the old index value is impossible to make with any validity whatsoever. It is like comparing the taste of a cocktail of fruits when the number of different fruits and their distinctive flavours – keep changing. Let me explain the aforementioned as it relates to the Dow. The False Appreciation of the Dow Explained On the other hand, companies in the take-off or acceleration phase are added to the index. This greatly increases the chances that the index will always continue to advance rather than decline. In fact, the manner in which the Dow index is maintained actually creates a kind of pyramid scheme! All goes well as long as companies are added that are in their take-off or acceleration phase in place of companies in their stabilization or degeneration phase. On October 1st, 1928, when the Dow was enlarged to 30 constituents, the calculation formula for the index was changed to take into account the fact that the shares of companies in the Index split on occasion. It was determined that, to allow the value of the Index to remain constant, the sum total of the share values of the 30 constituent companies would be divided by 16.67 ( called the Dow Divisor) as opposed to the previous 30. On October 1st, 1928 the sum value of the shares of the 30 constituents of the Dow 30 was $3,984 which was then divided by 16.67 rather than 30 thereby generating an index value of 239 (3984 divided by 16.67) instead of 132.8 (3984 divided by 30) representing an increase of 80% overnight!! This action had the affect of putting dramatically more importance on the absolute dollar changes of those shares with the greatest price changes. But it didn’t stop there! On September, 1929 the Dow divisor was adjusted yet again. This time it was reduced even further down to 10.47 as a way of better accounting for the change in the deletion and addition of constituents back in October, 1928 which, in effect, increased the October 1st, 1928 index value to 380.5 from the original 132.8 for a paper increase of 186.5%!!! From September, 1929 onwards (at least for a while) this “adjustment” had the affect – and I repeat myself – of putting even that much more importance on the absolute dollar changes of those shares with the greatest changes. How the Dow Divisor Contributed to the Crash of ‘29 From the above analyses/explanation it is evident that the dramatic “adjustments” to the Dow Divisor (coupled with the addition/deletion of constituent companies according to which transition phase they were in) were major contributors to the dramatic increase in the Dow from 1920 until October 1929 and the following dramatic decrease in the Dow 30 from then until 1932 notwithstanding the economic conditions of the time as well. Dow Jones Industrial Index is a Hoax In many graphs the y-axis is a fixed unit, such as kg, meter, liter or euro. In the graphs showing the stock exchange values, this also seems to be the case because the unit shows a number of points. However, this is far from true! An index point is not a fixed unit in time and does not have any historical significance. An index is calculated on the basis of a set of shares. Every index has its own formula and the formula gives the number of points of the index. Unfortunately many people attach a lot of value to these graphs which are, however, very deceptive. An index is calculated on the basis of a set of shares. Every index has its own formula and the formula results in the number of points of the index. However, this set of shares changes regularly. For a new period the value is based on a different set of shares. It is very strange that these different sets of shares are represented as the same unit. In less than ten years twelve of the thirty companies (i.e. 40%) in the Dow Jones were replaced. Over a period of sixteen years, twenty companies were replaced, a figure of 67%. This meant that over a very short period we were left comparing a basket of today’s apples with a basket of yesterday’s pears. Even more disturbing is the fact that with every change in the set of shares used to calculate the number of points, the formula also changes. This is done because the index, which is the result of two different sets of shares at the moment the set is changed, must be the same for both sets at that point in time. The index graphs must be continuous lines. For example, the Dow Jones is calculated by adding the shares and dividing the result by a number. Because of changes in the set of shares and the splitting of shares the divider changes continuously. At the moment the divider is 0.15571590501117 but in 1985 this number was higher than 1. An index point in two periods of time is therefore calculated in different ways: Dow1985 = (x1 + x2 +..+x30) / 1 Dow2014 = (x1 + x2 +.. + x30) / 0.15571590501117 In the 1990s many shares were split. To make sure the result of the calculation remained the same both the number of shares and the divider changed. An increase in share value of 1 dollar of the set of shares in 2014 results is 6.4 times more points than in 1985. The fact that in the 1990s many shares were split is probably the cause of the exponential growth of the Dow Jones index. At the moment the Dow is at 16,437 points. If we used the 1985 formula it would be at 2,559 points. The most remarkable characteristic is of course the constantly changing set of shares. Generally speaking, the companies that are removed from the set are in a stabilization or degeneration phase. Companies in a take off phase or acceleration phase are added to the set. This greatly increases the chance that the index will rise rather than go down. This is obvious, especially when this is done during the acceleration phase of a transition. From 1980 onward 7 ICT companies (3M, AT&T, Cisco, HP, IBM, Intel, Microsoft), the engines of the latest revolution and 5 financial institutions, which always play an important role in every transition, were added to the Dow Jones. Changes in the Dow, stock splits, and the value of the Dow Divisor after the market crash of 1929 Figure 2 Exchange rates of Dow Jones during the latest two industrial revolutions. During the last few years the rate increases have accelerated enormously. Overview from 1997 to 2013 : 20 winners in – 20 losers out, a figure of 67% September 23, 2013: Hewlett – Packard Co., Bank of America Inc. and Alcoa Inc. will replaced by Goldman Sachs Group Inc., Nike Inc. and Visa Inc.?Alcoa has dropped from $40 in 2007 to $8.08. Hewlett- Packard Co. has dropped from $50 in 2010 to $22.36. Bank of America has dropped from $50 in 2007 to $14.48.?But Goldman Sachs Group Inc., Nike Inc. and Visa Inc. have risen 25%, 27% and 18% respectively in 2013. September 20, 2012: UnitedHealth Group Inc. (UNH) replaces Kraft Foods Inc.?Kraft Foods Inc. was split into two companies and was therefore deemed less representative so no longer suitable for the Dow. The share value of UnitedHealth Group Inc. had risen for two years before inclusion in the Dow by 53%. June 8, 2009: Cisco and Travelers replaced Citigroup and General Motors.? Citigroup and General Motors have received billions of dollars of U.S. government money to survive and were not representative of the Dow. September 22, 2008: Kraft Foods Inc. replaced American International Group. ?American International Group was replaced after the decision of the government to take a 79.9% stake in the insurance giant. AIG was narrowly saved from destruction by an emergency loan from the Fed. February 19, 2008: Bank of America Corp. and Chevron Corp. replaced Altria Group Inc. and Honeywell International.?Altria was split into two companies and was deemed no longer suitable for the Dow.? Honeywell was removed from the Dow because the role of industrial companies in the U.S. stock market in the recent years had declined and Honeywell had the smallest sales and profits among the participants in the Dow. April 8, 2004: Verizon Communications Inc., American International Group Inc. and Pfizer Inc. replace AT & T Corp., Eastman Kodak Co. and International Paper.?AIG shares had increased over 387% in the previous decade and Pfizer had an increase of more than 675& behind it. Shares of AT & T and Kodak, on the other hand, had decreases of more than 40% in the past decade and were therefore removed from the Dow. November 1, 1999: Microsoft Corporation, Intel Corporation, SBC Communications and Home Depot Incorporated replaced Chevron Corporation, Goodyear Tire & Rubber Company, Union Carbide Corporation and Sears Roebuck. March 17, 1997: Travelers Group, Hewlett-Packard Company, Johnson & Johnson and Wal-Mart Stores Incorporated replaced Westinghouse Electric Corporation, Texaco Incorporated, Bethlehem Steel Corporation and Woolworth Corporation. Real truth and fictional truth Is the number of points that the Dow Jones now gives us a truth or a fictional truth? If a fictional truth, then the number of points now says absolutely nothing about the state that the economy or society is in when compared to the past. In that case a better guide would be to look at the number of people in society that use food stamps today – That is the real truth.
Hurricane Harvey was supposed to be a "1 in a 1000" year storm, in terms of damage. Well, just a few days later we have another "monster" storm to account for, and according to Barclays' analyst Jay Gelb, Hurricane Irma's insured damage in Florida could equal that inflicted by Hurricane Katrina in 2005. Actually scratch that - according to the just released note, Irma’s insured damage in Florida could be the largest ever in the US" with some estimating a repeat of the 1926 Miami hurricane which could result in $125-130bn of insured damage. According to Barclays, "in a worst case scenario, catastrophe modelers AIR Worldwide and Karen Clark and Co. have estimated a repeat of the 1926 Miami hurricane could result in $125-130 billion of insured damage", which is substantially higher than the insured damage expected in Texas as much of the damaged property was not covered by flood insurance. This explains why insurer stocks are in freefall today as traders shift their attention from potential damage by Harvey to potential damage by Irma. With winds topping 180 mps, Hurricane Irma has now been classified as the strongest Atlantic hurricane on record. And as Barclays writes, "this potentially devastating hurricane could directly impact southern Florida early next week. Given the potential magnitude of this storm as well as the potential to impact a highly populated area, we think Irma’s insured damage in Florida could be the largest ever in the US perhaps equivalent to Hurricane Katrina in 2005 ($50bn on an inflation-adjusted basis). In a worst case scenario, catastrophe modelers AIR Worldwide and Karen Clark and Co. have estimated a repeat of the 1926 Miami hurricane could result in $125-130bn of insured damage." "We would view Irma as more of a risk to the traditional reinsurers as well as third-party providers of reinsurance capital than the primary commercial insurers and personal lines insurers based on the industry’s long-standing view that Florida poses substantial windstorm risk. Of the companies we cover, reinsurers expected to have among the largest exposures to a Florida hurricane could include RE, XL, VR, RNR, and AHL. Among primary commercial insurers, we would expect AIG to have among the largest exposure." The reinsurance companies cited by Barclays have seen their stocks fall over 5% today, with Validus down the most at 6.5 percent. XL Group was the single worst performer in the S&P 500, down 6 percent The good news is that Gelb believes the net exposure (including reinsurance protection) of commercial and personal lines insurers such as CB, TRV, HIG, and ALL should be comparatively limited. Companies with large personal and commercial auto exposure in Florida which could be storm-exposed include Berkshire Hathaway’s GEICO unit as well as PGR. Notably, Berkshire has largely exited the property catastrophe reinsurance market due to weak pricing. He adds that the possibility also exists for mandatory assessments on insurers from the state’s Florida Hurricane Catastrophe Fund which would add to insurers’ costs, making the hit to equity even worse. "From the insurance industry's perspective, we would expect a substantial hurricane possibly impacting Florida as well as just after Hurricane Harvey to possibly halt further reinsurance price declines for the first time in many years," concluded the Barclays analysts. "However, insurers' earnings and book values would also be expected to suffer a large hit." And then, once Irma passes, there is Jose to worry about...
A number of factors like a competitive property and casualty insurance market and other macro factors are weighing on the stock of American International Group (AIG).
Submitted by Shant Movsesian and Rajan Dhall MSTA from fxdaily.co.uk After another 'interesting' non farm payrolls report, we start the week on a quiet note as the US observes the Labour Day holiday and Canada day speaks for itself. Plenty of volatility to expect thereafter though, as it is the ECB's turn to manage market expectations, which so far show little sign of moderating as EUR longs are keen to hold positioning into a much expected tapering signal. After the weaker US jobs report, which we will cover (briefly) later, we saw a well timed news report that the ECB are in no rush to make a decision next week and that plans for adjusting the APP may not be ready until December. There is no questioning the fact that the governing council want to temper the EUR rally, as they observed the 'FX overshoot' in their last meeting minutes. Since then, the spot rate has been ramped up past 1.2000 but with limited hang time above here, and the US data induced return higher was stopped short of this psychological level before the news-wires hit. Back under 1.1900, it looks to be another reluctance pullback, and one which now depends largely on the USD, as EUR proponents can only see one way for policy to go from here and do not seem to be too concerned as to where entry levels are! We have however seen some moderation in EUR/GBP, where those looking for parity will have to wait a little longer. Again, once we saw sentiment on the Pound turn in the wake of the last BoE meeting, it was one way traffic vs the EUR, but GBP resilience is developing once again - also to be covered lower down. As for US employment over August, it was a disappointing result, but much of the weakness attributed to seasonal factors were well communicated ahead of the release. So with the USD under pressure into the announcement, there was little fresh weakness to note, and USD/JPY and USD/CHF ended up on the day. This also points to exhaustion in the bearish USD flow, which also saw mid curve yields basing out, and likely waiting for liquidity to improve - usually after US Labour day - before deciding on how much further to push the USD in the interim. There are plenty of negatives one can cite for lower levels, but our focus is on value relative to time frame and these have clearly been stretched in recent weeks and months. Given the Fed's intent on sticking to the normalisation plan, balance sheet reduction is still expected to be announced later this month, but given its size, the details to date show they are merely scratching the surface, so rate hikes are what will add solid support to the USD. As of yet, the odds for another 25bps onto the Fed funds rate this year remain near the recent lows, and currently fluctuate in the 25-35% range. At this stage, and with more data to cover into year end, a move back to 50/50 is not unreasonable to believe, and this should be enough for the USD to at least correct a little more. Indeed, perhaps this what the ECB is banking on. Certainly if the market has a little more conviction towards further Fed tightening this year, spreads can be held and the aggressive bid tone in EUR/USD will be relieved to some degree. Pullbacks will find buyers again however, but depending on data levels and sentiment, the base from here could be anything from 1.1700 to 1.1450-1.1500. Ahead of the ECB meeting this week we get Q2 GDP out of Europe as a whole, with retail sales also out. In Germany, industrial production and trade stats will also be eyed, but the focus is on president Draghi's press conference on Thursday. Out of the US, there is little that can shake off the bearish bias on the greenback other than fresh news on tax reforms. On Friday, chief economic adviser Cohn tried to revive some hopes by stating a lowering of corporate taxes would generate wage growth, but the market has had its 'fill' of talk. Action required. From the data, only Wednesday's ISM non manufacturing PMIs look to offer any possible drive to the greenback, with factory orders on Tuesday of modest interest and Thursday's productivity and labour costs overshadowed by ECB focus. North of the border, the BoC are also meeting next week to deliver their take and policy response on the Canadian economy. Q2 GDP was measured at an annualised 4.5% to send the rate hawks into a frenzy, with some banks suggesting another 25bp move up this week. We saw 1.2400 taken out after the potential base in front of this suggested a little move correction in USD/CAD, but 1.2000-1.2200 is the longer term target here and the release of the growth stats gave the market little reason to wait. The BoC are likely to be little more cautious, and the majority, rather than consensus is for them to stand pat for now. Some of the more recent data argues for a wait and see approach, and Jul trade data just ahead of the rate call and Aug payrolls on Friday will either see a test of the key support zone into 1.2300 (if we are still above here by Wednesday) or back above 1.2500 for some fresh consolidation. The AUD would have also faced similar prospects for fresh upside were it not for the strong component readings (construction work and CapEx) pointing to a strong GDP number on Tuesday, but forecasts are for a 0.8% rise in Q2 vs 0.3% for Q1. This comes after we get the latest RBA rate decision, and while there is little or no expectation of a move on rates, Gov Lowe has been erring on the side of the next move being up. We know how keen the market is to jump on soundbites, so communication will need to be calculated and measured unless they want to see the spot rate back above 0.8000 again. AUD/NZD has already made good ground through 1.1000 now - above 1.1100 - but the first target at 1.1200 may be a good place to bank profits with the short term metrics looking overstretched ahead of the data and event risks in Oz. More data on Thursday just in case the markets haven't had enough, when we get the Aug AIG construction index, trade and retail sales both for Jul. Not much out of New Zealand other than the Fonterra Dairy auctions, which have offered little incentive to drive NZD trade one way or the other, but the currency has been at the bottom end of the G10 list in recent weeks, and could take a breather for now. In the UK, UK services PMI is the one to watch, and after a healthy manufacturing may have helped the Pound to stabilise, a rise here from 53.8 will also be welcome. Industrial and manufacturing for Jul as well as trade of note for Friday. Nothing fresh to look to from last week's Brexit talks as the UK-EU divide shows little sign of contracting any time soon, with not only the exit bill a point of contention but also EU citizens' rights. We thought the latter could have seen some convergence in views at the very least. Even so, the market looks to have developed some composure over the lengthy talks ahead, and as noted above, has recouped some ground against the EUR as the Cable rate has played catch up with the USD. In the background, UK and German businesses have been allied in their appeals for a swift and fair negotiation, and this would and will swing the balance of sentiment towards the UK for now. Plenty of data out in Japan, headlined by the Q2 GDP readings early Thursday, but we need to see some real traction developing here as the BoJ stick with their inflation target of 2.0% despite calls to revise this in some way. Foreign investments in Japanese stocks will be interesting given talk of attractive (relative) valuation levels. In China, trade data on Thursday is expected to see the surplus widen out again, but all eyes on the component import and export figures. Focus in Scandinavia is on the Riksbank meeting here we expect another no change call despite some of the strong data releases to date. This should see some of their overly cautious rhetoric tempered to some degree and could prompt a break out in the NOK/SEK rate, but USD/SEK looks stretched on the downside. Given the above risks to the single currency, EUR/SEK is already looking to retest the lows seen at the start of the year and this week the central bank may provide the catalyst to achieve this.
Here’s one more example of how central banks’ global coordinated monetary stimulus in the wake of the financial crisis has increased systemic risk in the US: According to an analysis conducted by BlackRock, insurers are more vulnerable to a market downturn now than they were ten years ago. The reason? Ultralow interest rates have forced insurers to venture into markets with higher yielding assets, forcing them to stomach more risk along the way. Whereas insurers once tended to adhere to only the safest types of fixed-income products – typically highly rated government and corporate debt – they’re increasingly buying exposure to risky high yield and EM products, along with illiquid private equity funds, to try and boost their earnings back to pre-crisis levels. These products carry a potentially higher reward for insurers, but heightened risks are also omnipresent. In a downturn similar to the 2008 crisis, BlackRock estimates that US insurers' holdings would drop by 11% - even more than they did during the crisis. Such a drop would be tantamount to $500 billion in losses. “The world’s largest money manager mined regulatory filings of more than 500 insurance companies and modeled their portfolios in a similar downturn. Their stockpiles - underpinning obligations to policyholders across the nation - would drop by 11 percent on average, according to its calculations. That’s significantly steeper, BlackRock estimates, than the group’s “mark-to-market” losses during the depths of the crisis. The reason is simple. Insurers needed to make up shortfalls after the crisis. But in a decade of low interest rates they had to venture beyond their traditional holdings of vanilla bonds. They now own vast amounts of stocks, high-yield debt and a variety of alternative assets - a bucket that can include hard-to-sell stakes in private equity investments, hedge funds and real estate.” Even as interest rates rise, Zach Buchwald, head of BlackRock’s financial-institutions group for North America, said that the insurers’ appetite for riskier assets will remain because “many of the allocations are hard to reverse.” ‘There is more risk being put into these portfolios every year,’ Zach Buchwald, the head of BlackRock’s financial-institutions group for North America, said in an interview. And such shifts may become permanent, especially because many of the allocations are hard to reverse, he said.” Which is a problem because, even though insurers claim they’re offsetting risk by “diversifying” into different types of risky assets, big losses can accrue if all of these assets were to drop at the same time – as one might expect during a “risk off” flight to quality. “The new diversity should provide a huge benefit, according to Buchwald. After all, it was concentrations of investments in mortgage-backed securities and certain equities that proved the biggest pitfalls during the crisis, a study by the Organization for Economic Co-operation and Development found. But even piles of investments that appear diverse can suffer big losses if care isn’t taken to ensure the assets won’t drop at the same time.” The BlackRock study was an attempt to market its new “Aladdin” analytics software. “BlackRock examined the insurers’ holdings as it pitches a service called Aladdin. It’s trying to sell the companies analytics and advice, helping them test how complex portfolios may perform under various conditions, so they can design them to withstand catastrophe.” According to Bloomberg, the study has been published at an “interesting time” for markets. “The assessment comes at an interesting time. With U.S. stocks trading near record highs and the Federal Reserve starting to unwind years of extreme measures, there’s a raging debate on Wall Street over whether a big correction is looming - and if so, whether unforeseen faults in financial markets might crack open, as they did a decade ago.” Mohamed El-Erian, chief economic adviser at German insurance conglomerate Allianz, warned that “non-banks” are increasingly reaching for high-yield bonds without regarding the risks. “The strong ‘quest for yield’ remains visible in non-banks,” Allianz SE Chief Economic Adviser Mohamed El-Erian said in a Bloomberg View column this month. The group, which typically includes insurers, has pushed into asset classes “including what most deem to be a stretched market for high-yield bonds.” Some insurers, like Athene Holding, have bragged about the outsized returns from their riskiest investments. “Athene Holding Ltd., an insurer that leans on Apollo Global Management to oversee investments, is wagering on complex, hard-to-sell debt. Its alternatives portfolio, representing about 5 percent of total holdings, posted a 12.3 percent return on an annualized basis in the second quarter. It’s among a handful of insurers backed by private equity firms betting they can earn better returns than peers focusing on traditional investments. But even MetLife Inc. and Prudential Financial Inc., two of the oldest and largest life insurers in the U.S., have said they’re pushing into commercial property bets and private market debt in search for yield.” When insurers invest in illiquid products like a private equity fund, they need to hold more capital on their books to offset the risk – money, that, as Bloomberg points out, “isn’t free.” After adjusting for the reverse capital, BlackRock found that the high-flying PE returns weren’t as spectacular as some insurers believed. “BlackRock’s study showed that the industry’s forays into alternative investments haven’t always delivered yields on par with what the underlying money managers project. Insurers have to hold large amounts of capital against the investments they make -- money that isn’t free. When adjusting for those charges, private equity returns are generally less than 4 percent, whereas they would have been above 6 percent. That, according to BlackRock, indicates insurers would probably earn more on investments in mezzanine real estate debt and high-risk equity investments in global real estate and other real-asset financing.” Since the crisis, insurers have increased PE investments by 50%, despite the lower risk-adjusted returns highlighted by BlackRock. Maybe some of them SHOULD consider buying the asset-manager's new software… “After experimentation with different assets, some insurers have shifted wagers. By the end of last year, the industry’s funds held in private equity had soared 56 percent to $56 billion from 2008. That trend is leveling off, Buchwald said. Real estate investments, meanwhile, hit a seven-year high in 2015, then dropped by $7 billion the next year to $42 billion. Hedge fund holdings spiked to $24 billion in 2015, only to drop to $18 billion the next year. MetLife and American International Group Inc. were among those that began changing strategies. The key is to find “other, more predictable income generators,” Buchwald said, ‘things like infrastructure and real estate.’” Whatever their risk tolerance, a growing number of market strategists believe that the next sharp downturn in markets could begin as soon as this year. This would mark the first real test of insurers’ capital cushions since the crisis. And, particularly if it triggers a wave of defaults in the high-yield sector (or even among European sovereigns), a market rout could wipe out trillions of dollars worth of insurance company holdings. Let’s hope that – for their sake - when the other shoe drops, insurers are ready. With Republicans controlling the White House and both chambers of Congress, failing insurers likely won’t receive the same type of bailout that AIG did during the crisis.
Hurricane Harvey has unleashed unparalleled devastation on southwest Texas, flooding Houston, the fourth largest city in the US, and many towns along the Gulf coast from Galveston, to Port Lavaca and beyond. But even Harvey’s 130 mph winds aren’t strong enough to threaten the ironclad balance sheets of America’s largest insurers, which have amassed a “fatter-than-ever” capital cushion capable of absorbing any payouts related to what looks to be, by several measures, one of the worst hurricane in US history, according to the Wall Street Journal. Insurers have benefited from years of moderate damages from natural disasters in the US, which have kept payouts to a minimum. “The damage from the Category 4 storm, which hit the Texas coast on Friday, is far from being tallied. It is the first major hurricane to make landfall in the U.S. in more than a decade, and torrential rain will continue this week to cause widespread flooding. Harvey’s timing is good for insurers and insurance customers from one perspective: Personal and commercial insurers have record levels of capital, the money they have on hand that isn’t required to back obligations. With insurers’ overall strong capital position, Harvey is unlikely to cause extensive damage to the industry’s financial strength, though it could hurt quarterly earnings for those carriers with blocks of business in hard-hit areas.” Residential flooding typically isn’t covered by private-sector insurers; instead, it’s the responsibility of the US government’s National Flood Insurance Program. Because of this, Bloomberg estimates that insurers will llikely only pay out claims equal to about one-third of the storm's total cost. The NFIP also sells coverage to small businesses and people who are renters, according to WSJ. Early RMS estimates for wind losses, which would typically be covered by both personal and commercial policies, are in the low-single-digit billions. It would take $100 billion or more of losses during a 12-month period to seriously threaten insurers’ balance sheets, according to WSJ. Hurricane Katrina in 2005, the costliest hurricane in US history, caused nearly $50 billion in insured losses in 2016 dollars. By comparison, US property-and-casualty insurers had $709 billion in surplus in the first quarter of the year, a record high, according to trade group the Insurance Information Institute. According to WSJ, that means the industry had $1 in surplus for every 75 cents of net premiums. “‘You would need to see a significant level of insured losses to have an impact on the excess capital of the industry [and] have a material impact on the pricing environment,’ said Elyse Greenspan, an analyst at Wells Fargo Securities last week.” While the damage in Houston looks to be extensive, the storm missed other population centers in southwest Texas that would've lead to an "extremely high level of losses," according to an analyst roundup published by Bloomberg: First, here's Wells Fargo: Insurers "dodged what could have been an extremely high level of losses," as Harvey hit a less populated area that’s less insured than some large Texas cities, though flooding may add to losses for commercial lines insurers. Initial insured loss estimates have been around $1b-$6b, though this doesn’t include flooding; estimates may be increased since many were made when Harvey was a category 3, but they will still likely be below those from Hurricane Ike, which led to $14.1b of losses. For there to be a "significant breach of reinsurance attachment points," there would likely need to be mid-single digit billions of insured losses; impacted reinsurers could include ACGL, AXS, RE, RNR, VR, SREN VX, MUV2 GY, HNR1 GY, SCR FP. There would need to be substantial insured losses for the industry’s pricing trajectory to change. Meyer Shields of KBW said damages will likely be higher than the low-single-digit-billions that insurers had anticipated as of Friday. Insured losses will likely be higher than the low-single-digit billion dollar estimates from Friday, with flooding generating substantial losses for insurers covering personal and commercial auto and commercial property. Harvey’s upgrade to a category 4 on Friday "highlights the significant uncertainty inherent in hurricane modeling"; Friday’s "relief rally" was premature. Watch losses at primary carriers including ALL, PGR, BRK/A, TRV, CB, AIG, HIG, and AFSI; watch losses at reinsurers including ACGL, AXS, RE, RNR, VR, and XL. Morgan Stanley's Kai Pan, said shares of P&C insurers might face pressure in the near term as nervous investors dump shares rather than countenance the uncertainty while final damage totals are being tallied. P&C insurers may be pressured in the near-term given loss uncertainty; extensive flooding may cause more insured losses than wind causes, impacting commercial insurers more than personal insurers. HIG and TRV are the top Texas commercial insurers, while ALL, BRK/B and PGR are the biggest personal insurers; impacted reinsurers may include AXS, RE, RNR and XL. Insurance carrier stocks usually underperform immediately after major catastrophes but outperform 3-6 months afterward as loss estimates come in and rates stabilize; insurance brokers typically outperform immediately after catastrophes. Sandler O'Neil analyst Paul Newsome said Allstate and Travelers could see a bottom-line impact of between 10 and 40 cents a share. ALL may see 20c-39c per share in losses; TRV may see 10c-20c; CB may see 4c-8c; PGR may see 2c-4c; AIG may see 1c-2c; MET may see 1c. These estimates don’t include any offsetting reinsurance coverage; Sandler’s 3Q estimates generally include elevated catastrophe losses. XL, NAVG and CB may have large additional losses from their reinsurance operations; EMCI and CINF losses may be surprising, as they have small reinsurance operations with unusually big exposure. Initial stock declines are often reversed over time, and investors should use short-term pullbacks to invest insurance stocks they already find attractive; Sandler still has buy ratings on ALL, CB, PGR, AIG, and MET. Finally, RBC's Mark Dwelle cautioned that the final tally of damages could be higher than expected, noting that initial damage estimates for Hurricane Katrina were $10-$15 billion, when the final total was $70 billion. Final damages may vary widely from initial estimates; initial loss estimates after Hurricane Katrina were $10b-15b, and the final number was $70b. At this stage, it’s impossible to reliably estimate insured losses, but most insurers will likely be impacted; all major auto insurers will face losses since they cover flooding, and reinsurers will likely face meaningful losses. Watch losses at ALL, PGR, TRV, AIG, CB, XL. $2b-$6b seems reasonable for wind losses; $10b may be a "good starting point" for flood losses. Harvey isn’t likely to be "significant price firming event." BRO may be a "winner," as it manages flood claims for the U.S. National Flood Program. According to Bloomberg's Lisa Abramowicz, natural disasters caused approximately $210 billion of economic losses worldwide last year and only 26% was insured. Natural disasters caused approximately $210 billion of economic losses worldwide last year & only 26% was insured: Aon Benfield — Lisa Abramowicz (@lisaabramowicz1) August 28, 2017 After climbing on Friday, shares of property and casualty providers lead the S&P supercomposite insurance index lower on Monday. Travelers was down as much as 3.2%, its biggest intraday drop since the day after the election. XL Group was down as much as 3.4%, while Progressive was off as much as 2.9%. Allstate was down as much as 2.4%. All except one of the members in the Bloomberg Intelligence global P&C reinsurance index was falling, with XL Group as the biggest laggard, followed by Everest Re Group, Aspen Insurance Holdings, Axis Capital Holdings Limited and Validus Holdings Ltd. Meanwhile, shares of insurance brokers were climbing, with all but one of the stocks in the S&P supercomposite insurance brokers index trading higher. Brown & Brown rose as much as 2.2% to its highest since January. According to Bloomberg, the Hartford and Travelers are the top commercial insurers in Texas, while Allstate, Berkshire and Progressive are the biggest personal insurers. The top homeowners’ insurers in Texas are State Farm, Allstate Corp. and Farmers Insurance, according to ratings agency A.M. Best. A spokesman for Allianz told Bloomberg it's "too early" to comment on the scope of storm-related damaged. “As the natural catastrophe event is still unfolding, it is too early to comment on the exposure and the potential impact,” Allianz spokeswoman Sandra Matl says in emailed statement. “The AGCS Loss Event Taskforce is closely monitoring and analyzing the situation.” Spokespeople for Munich Re and Hanover Re said it's too early to provide an exact assessment of damages, though they noted that the storm didn't hit as many population centers as analysts had feared, which should help keep payouts to a minimum. “The damages caused by Harvey are mostly due to flooding. Thus far, the storm has mostly hit a relatively sparsely populated area with comparatively little objects of value,” says Ernst Rauch, head of Munich Re’s Corporate Climate Center. Ultimately, the worst storm-related losses might be borne by holders of catastrophe bonds, which are becoming increasingly popular with investors searching for higher yields. “Hurricane Harvey could cause losses for holders of catastrophe bonds. So-called cat bonds are sold by insurers or by large entities seeking insurance, like transit agencies. Investors receive interest payments, but they lose their principal if certain disasters like hurricanes occur. Catastrophe bond issuance hit a record high in the second quarter, according to reinsurance broker Aon Benfield. More than $26 billion of cat bonds were outstanding as of June 30. At the same time, economic losses from disaster events have totaled just $44 billion globally in the first half of 2017, compared with the 10-year average of $120 billion during that period, reinsurer Swiss Re said in an estimate this month. Even if Harvey leads to losses, appetite for cat bonds is expected to remain strong because they offer diversification to pension plans and other large investors. ‘We don’t see [Hurricane Harvey] as a disruptive type of event’ in the cat-bond marketplace, said Paul Schultz, CEO of Aon Securities.” Right now, damages from the storm are expected to total tens of billions of dollars, with current estimates range from $20 billion to $40 billion. And with much of Houston under water, the flooding disaster may rank as one of the most, if not the most, expensive natural disaster in US history. With a final tally of the damage still months, if not years, away one thing is clear: regardless of the strength of their balance sheet, insurers will be dealing with the fallout from this storm for a long time.
Several years ago, the International Swaps and Derivatives Association, or ISDA, lost much of its credibility when during the peak of the Eurozone debt crisis, it first refused to determine that CDS on Greece had been triggered (i.e., that an event of default had taken place) only to eventually concede - following substantial outside pressure - that Greece had, in fact, defaulted (if only on bonds not held by a certain central bank), but not before penning a "petulant" blog post in which it claimed amusingly that the "credit event/DC process is fair, transparent and well-tested". The fiasco prompted many, this site included, to dub sovereign Credit Default Swaps as "Schrodinger's CDS", contracts which may or may not pay out in case of a default, depending on which way the political winds were blowing at any given time. Fast forward to today when not only is ISDA in hot water again, but the entire corporate CDS market has been roiled by another indecision by ISDA, which said "it was unable to determine" if Singapore-listed Noble Group, formerly Asia's largest independent commodity trader was in default or not, creating a vacuum similar to what happened with Greece 5 years ago, and which, according to the FT, has resulted in mass confusion in the corporate bond and CDS market. What is more striking, however, is that this is "the first time ISDA has dismissed a question of default without making a ruling either way." Specifically, on August 9, ISDA ruled the following: The AEJ Determinations Committee (DC) has discussed over the course of a number of meetings the question as to whether a Restructuring Credit Event has occurred in respect of Noble Group Limited (Noble). The AEJ DC considers that it currently does not have sufficient information that is public or that can be made public to determine the Restructuring Credit Event DC Question one way or the other, in particular the AEJ DC has not been able to obtain the underlying documentation in respect of the Borrowing Base Facility (and amendments thereto) and Noble’s guarantee in respect thereof (the Relevant Documentation). Noble Group, of course, had for the past two years been one of the best advance indicators of stress in the Asian commodity markets, as noted here back in 2015. Since then the company's acute troubles intensified, leading to its repeat near-insolvency, profit collapse and accelerated asset liquidation meant to stave off an inevitable default. Last month, Bloomberg summarized Noble's woes best: Noble Group has been in crisis for more than two years, marked by vast losses, mounting concern it will default and accusations it inflated the value of some contracts, which it’s denied. In an effort to raise funds, placate investors and pay down debt, the company has been selling businesses. With billions of dollars of borrowing outstanding, JPMorgan Chase & Co. said in a note that a coupon payment due July 29 on its 2020 bonds is now a key event to track. The Noble salvage process culminated most recently with an extension to Noble’s loan repayment terms, an event which many CDS buyers, if not sellers and creditors, said amounted to a debt restructuring. And, as the FT adds, "the dispute rippled through debt markets in London and Asia last week after banks and funds served notice to sellers of CDS protection." This is when the problem first emerged, because "earlier this month the ISDA committee responsible for deciding on the status of Noble’s debt said it was unable to determine if the Singapore-listed commodity trader was in default or not, creating a vacuum that allowed bilateral claims to proliferate across the market. It is the first time ISDA has dismissed a question of default without making a ruling either way." But since there is more than $1.2 billion of CDS written on Noble’s debt, it means that some of the biggest names on Wall Street would likely be involved. They were indeed, and in a potential confrontation for the generations, the fate of Noble's default status has pitted some of the biggest names against each other. According to the FT, on one hand we have Goldman Sachs, Nomura and hedge funds who bought CDS protection on Noble and would profit if ISDA determined that a CDS trigger event had taken place as they would then be paid off by the sellers of protection; these entities, however, are facing off against JPMorgan, BNP Paribas and other traders who sold the protection. As a result, more so than even the fate of Greek CDS, what happens to Noble, a pure-play corporate name, "is shaping up to be an important test for reforms made to the $10tn CDS market a decade after it was widely blamed for exacerbating the financial crisis." Meanwhile, as ISDA unexpectedly decided to play coy, the market had already moved on with the first claim filed early last week, forcing a chain reaction of claims and counterclaims that spiralled through the market, with one source saying 12 institutions had triggered notices of default. The net total owed by sellers of CDS protection on Noble could be up to $157 million. “Notices were flying all around the city,” said one hedge fund trader involved in the CDS market. “They wanted to be below the radar on this but the banks receiving the notices were obviously freaked out.” The issue, however, is that without a formal determination by ISDA, Noble CDS remains untriggered and no payouts are actually due. And while in the case of the Greece CDS trigger, ISDA was facing massive political pressure by the European political (and central bank) class, in the case of Noble the lobbying interests are more nuanced and all reside within Wall Street. JPMorgan and BNP Paribas, which are said by traders in the CDS market to stand to lose in the event of a Noble default, have now filed questions with ISDA to move the process back in front of the industry body’s so-called determinations committee, which will meet on Tuesday. Goldman Sachs, Nomura, JPMorgan and BNP Paribas all declined to comment on their CDS positions. ISDA also declined to comment. As a reminder, ISDA introduced the determinations committee system eight years ago in response to the chaos that credit derivatives caused in the financial crisis, after the mass triggering of protection linked to subprime mortgage bonds had to be settled between financial institutions bilaterally at the peak of the crisis. The most prominent example of cascading default triggers was of course the $85bn bailout of AIG by the US government after the insurer almost collapsed due to CDS exposure. And so, until the ISDA D/C finds either way, "banks and funds that have bought or sold Noble CDS are essentially flying blind, with no precedent to follow, except how the market operated pre-2009." “It’s like the whole last 10 years of market development have been put to one side,” said Nigel Dickinson, a derivatives lawyer at Norton Rose Fulbright. “Because the ISDA determinations committee mechanism was supposed to avoid problems like this — market participants would ideally not need to trigger credit protection bilaterally.” To be sure, there have been other ISDA controversies involving CDS trigger event: more recently, the collapse of Spain's Banco Popular sparked a dispute over the payout on CDS due to a dispute over legal claims against the bank. Then there is the whole issue of deeply rooted conflicts of interest: The ISDA determinations committee has also faced criticism for being made up of representatives of the same banks and investors that stand to lose or benefit from their decisions. There is a simple solution: ignore ISDA and let counterparties agree among themselves bilaterally whether there has been a default trigger event. Alas, that now appears impossible, even though the sum that would ultimately exchange hands is relatively modest. Furthermore, as the FT notes, "going back to the old system of bilateral settlements raises the prospect of more disputes and expensive court cases. Senior bank CDS traders say there is little appetite for a return and are looking for ISDA to make a call." “The CDS market has made a lot of enhancements over the years,” said one person familiar with the business. “Moving to a determinations committee framework has definitely been a positive move.” Except when ISDA itself is deadlocked and can't decide, of course. In any case, the showdown between JPM on one side and Goldman on the other should be decided tomorrow, following repeat submissions of determination by both JPMorgan and BNP Paribas, both sellers of protection, which have pressed the ISDA DC to find whether... a Credit Event Notice, delivered on or prior to 4pm London time on 23 August 2017, valid (and therefore will settlement obligations apply with respect thereto), if that Credit Event Notice indicates a Restructuring Credit Event on Noble Group Limited without the Unavailable Documentation, or without further relevant evidence (evidence unavailable to the DC) confirming the occurrence of a Restructuring Credit Event with respect to an Obligation of Noble Group Limited? For the decision (hopefully) due tomorrow, which can be found here when it hits - which will inevitably displease either Goldman or JPMorgan - check back in 24 hours.