BOW WAVE 259

Bow Wave Issue 259--Lengthy Edition

news and views on trade, insurance and risk

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(c)2004 WavyLine.com	Issue No 259 08 Nov 04
Published free of charge to Readers
Editor: Sam Ignarski
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In this issue:

1. Welcome
2. Quarterpoints Column
3. The Month of October in Marine
4. Institute of Chartered Shipbrokers Annual Dinner Dance
5. In the Wake--The Views of Gray Page for November
6. And Finally...

1. Welcome

This week saw your editor at the IMIF Forum's dinner held at the Radisson Hotel in Portman Square under the aegis of Jim Davis. There is really only a handful of individuals whose qualities draw people in the industry together wherever they go and there were even few of them were seated at one or another of the tables. A perfect evening, not in the least starchy and great fun to see the variety of people assembled by Jim and IMIF having such a jolly time in each other's company.

New Readers this week include:

RFA Captain William Walworth of the Fort Victoria Helle Gleie of BIMCO Courses
Peter Headland of Energex International Insurance Brokers Nigel Inglis of lawyers Blake Dawson Waldron in Brisbane Robert Mooney of RMA Marine Services in Florida
Mark Brownell in Fremantle

News of Readers

Didier Jouin's new e-mail address is:-

cd.chatjouin@noos.fr

Readers Write

From Dave Sharpe:-

Congratulations on your use of "role ambiguity." (Bow Wave Issue 257) For years I have been flogging a distinction, that conflicts of interest call for management, but that conflicts of role call for avoidance. People who cannot distinguish between interest and role are dangerous people.

Second, in respect of your poem in the same edition here's one I wrote years ago:-

Trees

Willows wave and palm trees beckon
If you like trees, that's fine, I reckon;
But trees don't stir me, I confess,
Like a big blonde girl in a little black dress.

Contact him at:-

DSharpe855@aol.com

From Alex Polglaze

Re your item on Big Waves (Bow Wave Issue 258) There was a great article in The Bulletin 12th October 2004 entitled Sea Monsters. It was written by John Carroll former First officer of the QE2.

http://bulletin.ninemsn.com.au/bulletin/site/articleIDs/6701AD449EB79C22CA256F0A002041BD

From John Sandercock in New York:-

Re your item on Marsh v Spitzer (Bow Wave Issue 257), here are some answers to the questions you posed:-

>What, in the ever increasing world of insurance regulation, >is a public prosecutor doing forcing root and branch reform >on the global insurance industry?

From your perspective in the UK, it may look different, but insuranceregulation has not been increasing in this country. More to the point,insurance regulators in the US are cash- starved parochial bureaucrats answerable to state governors who are more interested in keeping auto insurance rates low than in keeping the corporate insurance markets honest. The Economist had a good leader on this point last week.

>Where does this leave the work product of all those legions >of insurance regulators which have grown up in the major >insurance centres all over the world?

The regulators do important work, just as do the local police. They need to continue that work. We didn't fire the Houston police because they didn't uncover the fraud at Enron.

>How can the world's largest insurance broker, with employees >numbering >over 60,000 souls, be frozen in the headlights of >financial scrutiny and lose nearly half its financial value >in a week?

Good question. Maybe much of that value was overstated, or dependent on clients' good will. I think that some of that value will come back,perhaps not all of it, but much of it. Marsh is full of good people, and it doesn't have much real competition in this country.

>And is it merely the malign forces of chance which have >settled upon the house of Marsh?

No, Marsh was the market leader and deserved the scrutiny. But Aon is going to feel the heat soon.

>Apart from being the largest, were there any propensities >visible which might have made the present nadir more likely? >Is the firm any more likely to play the bully, push its >weight around, take the main chance, trouser the loot, >neglect its customers' interests and generally by reason >of size, arrogance, corporate culture or tradition >prevail where it is not such a good idea to prevail?

Marsh was always something of a bully. It built its reputation on market muscle, as opposed to client service. Marsh brokers were more likely than others to tell underwriters what the premium had to be. Perhaps they were only being more direct than the other brokers, but it was a distinctly different approach. (Not every Marsh office acted that way.)

Having said that, the clients are responsible for much of this mess. They stopped seeing insurance as just a service, and started looking at it as an investment vehicle or even a profit center. This attitude led to the demise of many traditional insurance markets (with their arcane structure and rules), and caused brokers to form alliances with new capital providers who were unfamiliar with market rules. Of course, many of the brokers were happy to play at being investment bankers, so we can't let them off entirely.

If the traditional insurance products are of no use to anyone, perhaps the rules have to change. But most companies still need to buy traditional forms of insurance, and for that, they should have an unconflicted broker.

More on this at:

http://www.johnsandercock.com/group/bribery.html.

A really full edition this week, much longer than we like to run, but we hope the quality will alibi the width just this once.

Enjoy.

2. Quarterpoints Column

Your editor's most recent column in Lloyd's List visits the issue of contingent commissions in the light of what this means as between the offices of intermediaries. One of the results of the current crisis may be to put the great centralisers of the industry back into an appropriate place and to remind us all that in a people business it is values which in the end shape our worth just as surely as financial results.

The pay-off line for brokers -- think globally and act locally

IT HAS been a very hard few weeks for the insurance industry, which has been caught by a very modern species of change. We expect changes to be either sudden or gradual.

What we are less ready to expect is disjunctive change, a process under which changes take place out of sight, behind a parapet, which gradually undermine the status quo until the day when there is a loud crack and the whole position slides down rapidly.

In my life, the most graphic instance I have seen of this kind of change was the meltdown of the communist system of government.

The second most graphic, I have to say, has been the sudden and rather unexpected collapse of the way the insurance industry has been rewarding the services of brokers via the payment of Management Services Agreements, which might be better and more easily called contingent payments. These are payments over and above the payment of brokerage, which are payable to brokers on the grounds of the profitability of all the business brought to an insurer, or the size of the broker's entire placement of business.

Peter Hastie, the editor of Insider Week, has, in recent days, pointed out that the industry has become rather habituated to this form of income. He has compiled a compelling table which shows how the big three broking houses have become dependent on contingent commissions.

For Marsh the $845m in 2003 equated to 12% of revenues and 48% of profits. For Aon the first nine months of 2004 showed contingent commissions forming 4.5% of revenues and 32% of earnings. For Willis the $160m anticipated for 2004 amounts to 7.1% of revenues and 37.6% of earnings.

Further down the table, the figures for JLT are less eye-catching but real money all the same: $15m earned in 2003 amounted to 1.9% of revenue and 9% of the the JLT Group's trading profit. For Heath Lambert, the $2.8m earned was 1% of earnings and 13.7% of broking profits.

Whatever the merits of this form of compensation, it is fair to say that they have been swept aside in the sudden changes in public sentiment ushered in by the
investigations of Mr Spitzer, and the more egregious revelations which are bound to follow the unraveling of the current practices will no doubt consign them to long-term oblivion.

But, although the list of brokers who have announced that they will no longer use this form of remuneration is nearly full, brokers will not want to do their work for nothing and they will want to be paid.

There are some hard choices ahead for them and for the industry. I can think of a few of them already.

The fate of the profit centre doctrine. Large distributed broking operations which have many thousands of people located in hundreds of different offices home and abroad struggle to make their services coherent and co-ordinated.

At worst they can be a collection of warring houses, reluctant to co-operate and extremely averse to sharing brokerage. One wag recently described one of the largest brokers in the world as an organisation which housed 30,000 sole traders. And I have seen the practical effects of this kind of tension in the less than harmonious workings of retail brokers and wholesale brokers belonging to the same firm. Indeed I remember very well during a time in my life when I worked in the East Asian branch of an insurer which had decided to distribute its underwriting to various regional offices.

Leading brokers of their day went so far as to give their local offices instructions to eschew dealings with our infant operation and to insist on business being placed back in the traditional centre in London via the "head office", whose costs had to be covered in all events. This was not necessarily in the best interests of their customers, we felt at the time.

The easiest shore to navigate by is to always bear in mind the broker is the agent of the buyer, even though in many cases the broker is paid by the insurer. This lies at the heart of some of the long-term problems of the industry, for there are many occasions when a buyer's agent is just not the most appropriate medium for a supplier to distribute his wares to the world.

Insurers and underwriters whose distribution channels are entirely dependent on the agents of buyers can find themselves in something of a fix. This is why I have always believed that the key to modernisation and progress in insurance depends upon the insurer/suppliers having means of distribution at their disposal which do not entirely depend upon buyers' agents.

In some quarters such organisations are known as crusading underwriters, and certainly going out into the world, into the territories of promising markets, is work which has to be done by someone -- often by someone who has to live, breathe and survive in the market all year round.

So, we are back to the need to think globally and act locally. Technology can help the organisation which has its head in the right place, but it will not do much good for those organisations which attempt to do at the centre that which ought to be done close to the customer. Even though the modern broker has had the financial muscle to leverage a course of dealings which comprises commission payable at the time and then another commission payable in arrears, the model has proved unsound.

A more modern approach is called for which involves smaller centres, greater freedom and corporate
capability in the marketplace, where the resources of the company are managed in such a way that the customer relationship is pre-eminent.

I once asked a retail broker in Hong Kong from a large house why he chose to place his reinsurance business with an independent specialist in the London market rather than with his own office in London or New York. "Because they treat me like a customer, whereas my own office treats me like a subordinate," he replied.

But as in so many things, the way we are paid deeply influences how we deal with the world.

3. The Month of October in Marine

Walter Mellert writes:-

Scandals, storms, thieves, accidents, financial mayhem and weird innovation - in short another ordinary month has come and gone in just 31 days!

Some of the highlights:-

--> The Rotterdam rolling by 20 degrees while passing near Karl caused lubrication sediment to whirl up, clog and stop the engine for nearly 3 hours. Stabilizers also shut down and numerous pax did have difficulties holding on to their lunches.

--> ChevronTexaco Gulf of Mexico production drops by 30% in September due to frequent hurricane shut downs. Now that's a possible contributor to oil prices going through the roof.

--> Quote of the month:"For every complex problem there is a solution that's both simple and wrong!" Works equally well when inverted.

--> Comoro Island flagged 27 yr old panamax bulker Nina carrying coal is beached off Singapore in an attempt to extinguish a fire in Nr. 3 hold that was smoldering for weeks. GA is declared.

--> Congested container ports, (e.g. 6 day turnarounds on the US West coast) rail and truck gridlock may soon jeopardize "just in time delivery" concepts. Pressured handling is of course another (underwriting) issue.

--> Shipbuilding. Iran sees a golden opportunity, "we can easily compete on equal terms with the Japanese, Koreans and Chinese" an official said. 75%, 12 yr financing at 3% interest should work some magic.

--> Trying to mate the new accommodation block to the re-built Hanjin Pennsylvania it was found hanging out to starboard by 7 cm. Re-measuring revealed vsl deformation making replacement of a further 28 t of steel (on top of 3700 t already used) necessary. Sounds a bit like a do-it- yourself problem.

--> Converium faces class action suit in NY for not advising shareholders earlier of materially insufficient reserves. The benefit of hindsight! Smarts and smartens at the same time!

--> Underwriters lament: If only they knew what could have been known if it had been acknowledged what most of us knew all along. Remains to be clarified: Who're they?

--> The bill to severely restrict port- and ship-made air pollution in California draws the Governor's veto. Hasta la vista Baby!

--> S&P and Moody's both change the outlook for reinsurance from negative to stable. Ability to manage the beginning soft cycle is said to be crucial. Really!

--> RCCL's Jewel of the Seas berthes at Saint John with a 60 ft finback harpooned on her bulbous bow. Some fishing!

--> French fishermen, protesting high diesel prices blockade ferries from Marseilles, Toulon and other Mediterranean ports.

--> Removing the roughly 282 shipwrecks (some dating back to the 1980s) from Iraqi waterways is estimated to cost between $ 1- 8 mio each for the 40 biggest ones and $ 35 mio for the rest. (on top of the $ 60 mio spent to date) When grown-ups break their necessities...
--> An unknown number of highly professional thieves manage to get hold of Chopard diamonds from an exhibition in the Louvre. The heist worth Euros 11.5 mio took just a few seconds. The Parisian police are scratching their heads.

--> With global warming progressing the Northwest Passage could possibly open to commercial traffic in 10-70 years, some models suggest. Accuracy and weather forecasting!

--> China's share of Canada's total pulp export doubled to 15% in the last 4 years with no trend reversal in sight.

--> Allianz Marine & Aviation (AMA) is confident that after sacrificing 25% of their topline to underwriting quality gods they will be at the top by 2006. Yachts are seen as a field to expand.

--> Kiwis (the fruit) generate NZ$ 1 bio pa for the Kiwis and involve nearly 83 mio t/e (tray equivalents = 1 single layer tray) or 300'000 tons of "chinese gooseberries" (3.6Kg per t/e)!

--> Skuld gets out of rig P&I which will likely swell Gard's portfolio - already the worlds largest with 180 mobiles (7 mio gt) by the 30 units abandoned by Skuld

--> VLCCs re-selling at $ 125 mio and booze cruise ferries suing Britain's custom and excise for UKP 50 mio on account of disgruntled customers searched for bottles and fags. Weird world.

--> Unexploded ordnance turning up in scrap metal poses an increasing danger to scrap yard operators (10 lives lost near Delhi recently) and to the various modes of transportation.

--> Korean thick steel plate used in shipbuilding sees another price hike by 10% to $ 523 a ton.

--> Seems that the days of fixed price liner conferences are numbered as the EU commission tightens the noose.

--> Handymax Federal Pescadores grounds on and seriously damages a coral reef off Fort Lauderdale - raises interesting thoughts on liability and indemnity as destroyed coral can't be rebuilt by man.

--> Corruption charges against Marsh; Willis plotting a $ 10,5 bio takeover of AON? Turmoil in mega-broker-land. Customer benefit?

--> Shrinking German tax revenue may endanger EU permitted 6% yard subsidy on newbuildings. Job losses will likely be even more socio-expensive. Catch 22!

--> VLCC earnings exceeding $ 160'000 per diem (WorldScale 248) and crude going thru the $ 55 bbl roof! All Guiness book stuff!
--> 1978 built bulker Kapitonas Kaminskas trailing a 7.5km oil slick is apprehended by the French Navy off the coast of Brittany. A $ 287'000 bail will secure her release from jail card.

--> Look who's crying. VLCCs are hardest hit by a 12.5% rise in operating expenses which include "hefty" (21%) insurance increases, says a recent report. Hanky anyone?

--> German owned, Antigua flagged, 3 yr old BBC China carrying aluminium, steel, paint and batteries runs aground off South Africa's pristine Wild Coast - and, starts leaking oil!

--> Whales are barred from suing in the US! A Hawaiian lawyer trying to file a cetacean class action suit to halt the Navy's use of harmful low frequency sonar is rebuffed by the Californian court of appeals. There's hope yet!

--> Tokage, the 10th taiphoon to hit the Japanese islands this season shows with 20yr record strength that ocean going ships (Antonina Nezhdanova etal) are easy blow overs.

--> Would you be surprised to hear that a VLCC charter broke the $ 200'000 per day (equiv. WS 270) record? 95 built, single hull, Astro Lyra just did. What's next?
$ 250'000 anyone?

--> IG P&I clubs approach the IMO offering a standard $ 10 mio letter of guarantee to appease port of refuge fears.The comfort money provides!

--> A properly tuned anti-roll tank -- approx. the size of 2 containers -- would nearly eliminate the much feared "parametric roll". Hope the building industry listens.

--> Japanese ban on US-beef imports, in effect since December 03 because of suspected BSE may soon be lifted, restoring regular trade worth $ 1.7 bio pa or roughly 10% of US beef exports.

--> Germany's Meyer werft secures a Euro 630 mio contract to build two 2 030 berths cruisers for Aida -- delivery 2007/09. Hope they did not cut too many corners to win against formidable competition.

--> Bulk gasoline and diesel this month is around $ 0.35 a liter -- blame your own Government for the excess you pay at the pump. The dirty stuff ships burn costs about a third of that!

--> US owned Clipper Navigation offers a free flu shot (Canadian import) with a ferry trip from Seattle to Victoria, BC and people are lining up.

--> SCI on sale again & again - India's govt would like to convert 20% of it's 80% holding of the Shipping Corp of India into cash.

(Note: Any opinion expressed in this item should be regarded as the personal opinion of Walter Mellert and not one made in his capacity as an employee of Swiss Re and any such opinion is not the opinion of Swiss Re, of any of its affiliated companies or of any of its officers or employees. Accordingly, Swiss Re hereby expressly disclaims any liability, loss, cost or expenses arising directly or indirectly from the content or expression of views of this item or of other Websites to which this item may provide a link)

4. Institute of Chartered Shipbrokers Annual Dinner Dance

Paul Smith has written in with details of this function which he warmly recommends and which is open to non-members.

It will be held at theThe Four Seasons Hotel in London's Park Lane, W1 on Friday 26th November 2004.

Anyonetevents.com

Alternatively,Readers can go to:-

http://www.ics.org.uk/mainframes.htm

and click on booking form. If asked to enter login name and password hit cancel and flyer, booking form and wine list will appear

5. In the Wake--The Views of Gray Page for November

--Of Once Mighty Names

Global Marine Systems (GMS) was once a mighty name in shipping. Did you know that GMS was once known as Cable & Wireless and that it can chart its history back to 1850? Did you know that in 1866, the company had come to the rescue of Brunell's giant liner SS Great Eastern, and used her to lay the first trans-Atlantic cable? But situations change over time, and memories fade. This world famous brand became a part of the Bermuda-based telecommunications giant Global Crossings in July 1999, purchased by the latter for the princely sum of £550 million.

Sadly for the new purchasers, the timing of this acquisition came close to the downturn in the global telecommunications market of 2000 and 2001. Global Crossings ended-up filing for chapter XI in January 2001, and was rescued from bankruptcy by a US$250 million package from Hutchinson Whampoa and Singapore Technologies in January 2003. Global Marine Systems (GMS) continued to operate through this period, although its 21 vessel fleet was pared down to 14, and many of these were reported to be laid-up. GMS saw net losses of GB £61m in 2001, and losses of US$7.9m in 2002, and turnover halving from £526m to just £206m in that same year.

In August 2004, GMS was sold by Global Crossings to Bridgehouse for just US$14.8m, considerably less than Global Crossings had paid back in 1999, although Bridgehouse did take over responsibility for US$117m of capital debt. Hopes for a change in fortune for GMS did start to rise, although this proved short lived. Just two months later, the new owners of GMS filed for administration too, with principal creditors such as A.P. Moller, and the Royal Bank of Scotland owed substantial sums. A creditors meeting on the 1st November finalised an agreement on restructuring GMS, which is much hoped to be the start of a change in fortunes for a once glorious name of shipping's history. We hope it will last another 150 years.

--Boom to Bust?

A number of large and respected banks, including such names as Morgan Stanley and Deutsche Bank, along with other commentators on market economics in shipping sectors such as tankers, dry cargo and containers, have all been preaching the same message this last week. This message is a warning that the booming freight rates cannot be expected to continue for much longer, and an expectation that rates are expected to decline throughout 2005/6 in all sectors.

With some owners and operators having placed substantial newbuilding orders for deliver into 2005 and 2006, we can only agree. As a sectoral example, Clarksons indicate that 235 chemical tankers having been ordered in 2004, up from 204 in 2003, and just 98 in 2001. These deliveries in just one sector are bound to have a substantial effect on the likely freight rates when these ships start to deliver. Similar patterns can also be seen within the product tanker, container and bulk carrier sectors. What also needs to be considered is that the more recent orders have been placed at historically higher prices. This too will result in each such newbuild having to earn more than did their counterparts ordered across 1999-2003, increasing the financial pressure on owners should rates fall significantly.

Peter Kerr-Dineen, the Chairman of the Baltic Exchange and CEO of Howe Robinson, was reported to have commented last week that a shortage of less than 20 capesize bulkers may have been responsible for the sudden, and unprecedented, rise in that market. So far in 2004, 38 capesize vessels have been delivered, and a further nine are expected before the end of the year. We have only traced two reports of capesize vessels being scrapped this year. Despite the substantial rise in fleet size that exceeds the reported 20 ships, rates have still managed to increase throughout 2004, indicating the effect that increasing distances travelled by cargo has had on the market. If the predicted slowdown in China's growth does occur in 2005/6, then it is likely that the 55 newbuildings due in 2005, and 77 due in 2006 may see a very different market to that which their owners hoped when they put their signatures on the contracts. We might just see the shipping market back to a situation where newbuilds head straight for lay-up.

--Grand Ladies of the Sea--or just Toxic Waste?

Last week in Basel, Switzerland there was a convention on ship scrapping that discussed the future direction of the demolition market, and its need for tighter control on the handling of ships. Environmental lobbies such as Greenpeace consider any ship for scrap to be toxic waste, and laudably want to reduce, or eliminate where possible, the risks and environmental damage that currently falls on the world's poorer countries. Further discussions on this issue are to take place early in 2005, when the Basel Convention will team-up with the IMO to finalise the latest set of official guidelines for the scrapping of ships.

Ships have a finite life and have to be broken up somewhere. The questions at the end of these debates always amount to one of the cost and who will pay. The costs in question revolve around higher income to workers, greater health and safety provisions, and much improved standards of environmental protection. All of us will have to indirectly take the burden of the additional cost of scrapping if the charges are increased and geographically shifted. This may well be met by additional levies on ship's freight earnings during its operating life.

In view of these likely increases in environmental control and therefore the associated costs that may be passed on to ship owners, it is surprising that, at a time of record scrap prices, so few ships are being scrapped. Clarksons Research indicate that just 251 vessels have been sold for demolition so far in 2004, compared to nearly 630 in 2003. This represents a 60% drop, and a 65% drop in deadweight terms. While most of this reluctance to scrap is directly attributable right now to the booming freight markets, might it be that the increases in the direct costs of scrapping will see more vessels traded for longer than they should be?

http://www.graypagelimited.com

6. And Finally...

Many thanks to David Grainger for passing on this warning:-

BE CAREFUL!!

Yesterday, I was robbed at a traffic light!

A young woman proposes to wash your car windows while you wait at the red light while another one takes advantage of the distraction to open the back door and steal everything she can grab.

Be warned, they are very well organized!!!

Don't leave your doors or windows open if you drive up to a red light!

If your windows get washed.. . Don't look at them, they try to divert your attention.

Please inform your friends of this new scam. They have got me 10 times Saturday. Also got me 4 times yesterday, four times the day before that and six times Sunday. Today I couldn't find the corner they were working.

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