naked capitalism

RK says:

WHOOPS! Misread who gets paid.

George says:

I fail to see how any of this “limits the damage” for failing insurers. What it may do is stave off the inevitable receivership for a little while longer.

“Commutations” are quite common in the reinsurance industry. Generally they are a way to get cash up front when the downstream liabilities are clear and there is only a slight risk of deterioration. However, another reason for entering into such commutations is when the counter-party is known to be financially weak. Better to get some cash up front than less down the road.

All of this talk of posting collateral and accelerating obligations seems very interesting in this context. We are dealing with insurance here folks, not finance. There is enormous risk poised on the back of these entities with precious little capital underneath. Furthermore, this is a state regulated entity. The NYDOI has great leeway in handling the run off of this entity once it goes in the tank.

Once the entity goes in the tank, none of this stuff matters. The DOI has full control over all assets and liabilities. This is not Federal bankruptcy court with all of its preferences, etc. This is a state regulated insurance entity. The Commissioner controls it with the blessing of the New York courts. I know there are ways of getting some edge over other creditors but it is not as easy and straightforward as regular bankruptcy.

I fail to see how any of this will help anyone. The injurers need to pony up cash up front. The supposed “insureds” will need to recognize the loss up front if they are taking a discount on the claim. How this even helps maintain the insurers solvency, let alone allows them to write business going forward, is beyond me. It will just crystalize the loss that is already there.

Ginger Yellow says:

“Once the entity goes in the tank, none of this stuff matters. The DOI has full control over all assets and liabilities. This is not Federal bankruptcy court with all of its preferences, etc. This is a state regulated insurance entity. The Commissioner controls it with the blessing of the New York courts. I know there are ways of getting some edge over other creditors but it is not as easy and straightforward as regular bankruptcy. “

Indeed. The CreditSights research makes exactly this point, with considerable evidentiary support. Their fundamental message is that if the NYSID takes over one or more monolines, they’ve got enormous leeway to decide what happens to the CDS holders, and nobody can know what will happen.

Anonymous says:

“So the policyholders should be willing to pay something to get out of the policies to save future payouts.”

Yves, I think you and others are missing the point. Commutation involves the insurer paying the policyholder, not the other way around. As the FT article states: “To commute an insurance contract, the policyholder usually receives an upfront payment in exchange for agreeing to tear up the policy.”

Future payouts are the least of the policyholders’ concerns. Recall that these insurance policies via CDS were not very expensive to begin with (they cost basis points relative to the notional value of the CDO tranche being insured). If the insurers are indeed solvent, those policies are worth way more than what the banks are paying for them (when the policies were written, both the banks and the insurers thought it very unlikely that they would ever see a claim). The only reason the banks would accept a payment to terminate the contracts is because of the risk that the insurers may become insolvent and fail to pay on the policies.