Insurance fraud was his spiritual calling, the Chicago minister insisted. “I let the Lord lead me and this is the way He instructed me,” [the Rev. Roland] Gray said.
This is the new coat of arms for the Institute and Faculty of Actuaries, the UK organization resulting from the merger of the Faculty of Actuaries and the Institute of Actuaries.
Because you can’t fight August……..
Fairfax Holdings spent about $175 million this year, betting that prices won’t rise much over the next decade, and has already made $100 million on the deal. WSJ has details (sub. req.):
Fairfax paid $174 million in upfront fees to protect $22 billion of its investment portfolio against the possibility of deflation over the next decade. In exchange, Fairfax will receive a payment amounting to the drop in CPI below 2%—the level of inflation when Fairfax bought its contracts—multiplied by the $22 billion.
If deflation averages 2% annually over the next 10 years, Fairfax’s contracts would rise in value the equivalent of 4% of $22 billion, or $880 million, each year over the next decade, according to traders familiar with Fairfax’s trades.
In that scenario, if Fairfax holds on to its investments during the 10-year period, it would reap nearly $9 billion from its $174 million investment.
The company wouldn’t get anything for its bet if inflation turns out to be higher than 2% over the next 10 years.
The whole story sounds like the company is betting on deflation – prices actually falling. Even the excerpt above contradicts itself. And betting that prices will actually fall across an entire decade is pretty risky. Even Japan only had six years in the last 19 where inflation fell below 0%.
But a bet on low inflation at the start of this year makes a lot more sense, as 10-year Treasury yields were rising and the consensus held that government overspending would force prices to take off. Fairfax was playing the contrarian.
Now the 10-year is around 2.5%, and more investors are concerned about deflation. So Fairfax’s position has already netted it $100 million in capital gains.
The move is portrayed as protection on Fairfax’s investment portfolio, but I have trouble seeing that. Much of Fairfax’s investments is tied up in property-casualty reserves, which are a natural hedge against deflation. The method of P&C reserving <wonk> loss triangles </wonk> have long-term inflation built into them. So deflation between now and the date claims are paid would reduce your ultimate loss from what you thought it would be. Anybody smart enough to short the CPI would know that.
What this really sounds like is a clever play on Fairfax’s $1 billion asbestos and environmental exposure. (See pages 147 and 49 of the 2009 annual report.) That money won’t be paid out for years and years and years. Asbestos cases take forever to settle. It’s like Bleak House in slo-mo. Just this week, Travelers won a $262 million judgment on a case that’s 17 years old. And the loser is appealing. Who knows when that cash will change hands?
Putting 20% of your A&E reserves into a contrarian derivative would be odd and daring, but, so far, profitable.
Update: Hard to tell what kind of derivative Fairfax bought, but it behaves somewhat like an inflation swap.
Several baseball teams have seen their financials leaked to deadspin.com and the Associated Press, creating embarrassing times, particularly for the Pittsburgh Pirates. The same week the franchise set a U.S. sports record by locking in its 18th consecutive losing season, financial records indicate the company made $29.5 million in 2007 and 2008.
So what does this have to do with insurance? Cue the New York Times:
……..Major League Baseball was focusing its investigation on insurance companies that do business with clubs, said two baseball executives who were not authorized to speak publicly.
The companies under investigation sell liability insurance for top-level team executives and directors, not players. One of the executives said, on the condition of anonymity, “A couple of teams are very unhappy because the feeling is M.L.B. didn’t have to provide detailed, individual team financials for this type of insurance.”
So the prime suspects appear to be D&O writers. This makes sense, because D&O insurers like to see an insured’s financials. A financially troubled company is far more likely to be sued by unhappy investors.
But enough of that. Continue reading
Dragging the health industry into the third millennium. Quoth HHS secretary Kathleen Sebelius in Kaiser Health News:
Major insurance companies, provider groups, doctors, hospitals, and patients announced that they will team up to support so-called “meaningful use” regulations – guidelines that doctors and hospitals will have to follow to earn incentives for moving from paper to electronic medical files.
Imagine! No more faxing a Xerox of your insurance card to your doctor! Soon, doctors’ offices will be as efficient as the corner mechanic!
The drive comes from last year’s federal stimulus money: By adopting records, providers can get $44,000 from Medicare or $64,000 from Medicaid. Hospitals get millions in reimubursement costs. Good to see at least some of the stimulus money will be well-spent.