Dignitas, or ‘the Glacier option’

Welcome to the last editi on of IQ in 2010.

The passing of another year is always a fitting time to look back at the highlights of the preceding 12 months - and so our office talk turned to what we thought the most significant event of the year for the global P&C industry.

Naturally, there were some who thought the Chile earthquake a worthy contender and, as the largest ever insured cat loss outside the US, it has a strong claim.

One would also imagine that those in our sector unfortunate enough to be holding a disproportionate share of the loss would be inclined to agree that the multi-billion dollar hit should register as the year's most significant event.

And what of the resurgence of M&A?

The Max-Harbor Point tie-up to form Alterra was no small deal. And here on Lime Street the Apollo swoop for Brit has heralded new speculation that marauding hordes of private equity funds loaded with institutional money are scoping the sector, keen to pick up bargains trading well below book value.

The twice-rebuffed Beazley bid for Hardy is further evidence of this. And new permutations and combinations swirling around fellow potential bid targets Novae, Omega and perennial Lloyd's bridesmaid Chaucer are coming thick and fast, like tornadoes peeling off a landfalling hurricane.

2010 also saw the global financial tragicomedy move into a third act. The original liquidity crunch has passed though the banking solvency problem and into a sovereign debt panic.

"Here is that rare bird - a turkey who votes for Christmas... Glacier has chosen to put itself out of existence rather than risk destroying precious capital"

Who would bet against the global government bond crisis meal that started so modestly this year with an hors d'oeuvres of Greek meze developing into a five-course Michelin-starred affair with a Spanish paella for main course and perhaps even a Italian tiramisu for dessert in 2011?

Aside from Greek tragedy, Irish dirges, and the soulful Iberian mourn of Fado and Cante Hondo aside - we think one of the most significant events to occur this year actually passed the industry by with little more than a collective "so what" in response.

It was Glacier Re's decision to go into voluntary and solvent run-off.

The Swiss-based firm may have won few friends in its brief five-year existence, but its end is a towering monument to common sense.

Its shareholders will be thankful that for the first time in history - well, it feels that way even if it's not strictly true - an underwriter has decided to cut his losses and retire from the table when he sees that the game is against him, rather than soldier on through the night, squandering his last chips until a cold dawn brings an abrupt and sorry end to proceedings.

Here is a firm that has put its backers first and, calculating that it is worth more dead than alive, has chosen to put itself out of existence rather than risk destroying precious capital.

Here is that rare bird - a turkey who votes for Christmas.

But death, however nobly executed, is perhaps a little extreme? There is always the more humane cycle management option.

CEOs love to boast of sending underwriters to the golf course when market conditions are unfavourable. However, we know that in practice they seldom stump up the green fees.

Glacier folded because buyers wouldn't pay its intrinsic worth. And they wouldn't pay its intrinsic worth because they thought that over the medium term it was likely to destroy value rather than create it. Our investors simply know us too well.

In today's climate "the Glacier option" might be the best way of preserving credibility. For what jaded investor wouldn't want to back a CEO prepared to make the ultimate sacrifice?

The question of 2011 might be - does anyone else want to declare with dignity rather than retire hurt?

Yours sincerely,

Mark Geoghegan, Editor

This article was published as part of issue Winter 2010

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Dignitas, or ‘the Glacier option’