Distressed Underwriting - a Vulture Investing Approach to Risk

Posted: 22 Oct 2006

See all articles by Joseph Calandro, Jr.

Joseph Calandro, Jr.

Fordham University - Gabelli Center for Global Security Analysis

Sarah Crootof

affiliation not provided to SSRN

Abstract

When a firm suffers an extreme property and casualty (P&C) loss it frequently finds it difficult to transfer similar P&C risk in the future. This circumstance adds stress to the firm just as it is trying to recover from the effects of the super catastrophic (Super Cat) loss. For example, numerous directors and officers (D&O) claims were filed against firms that engaged in fraudulent "new economy" related accounting practices. The severity of those claims was such that the insurance industry in general pulled back from assuming further D&O risk from those firms. That decision placed the viability of those firms in jeopardy as they could not hire new executives, or re-seat new Boards, without adequate D&O risk transfer. Financiers skilled in evaluating volatile risk have stepped in to assume such risk, but for significantly higher prices. This paper presents an applied method for pricing post-Super Cat or volatile risk with a margin of safety. It also includes guidelines, such as leveraging brokerage/prime brokerage relationships, which could prove useful in future distressed underwriting deals.

Keywords: Insurance, Risk, Alternative Investments

JEL Classification: G22, L89, M21

Suggested Citation

Calandro, Jr., Joseph and Crootof, Sarah, Distressed Underwriting - a Vulture Investing Approach to Risk. Journal of Alternative Investments, pp. 87-98, Fall 2006. Available at SSRN: https://ssrn.com/abstract=939034

Joseph Calandro, Jr. (Contact Author)

Fordham University - Gabelli Center for Global Security Analysis ( email )

531 Hughes Hall
441 E. Fordham Rd
Bronx, NY 10458
United States

HOME PAGE: http://www.linkedin.com/in/josephcalandro/

Sarah Crootof

affiliation not provided to SSRN ( email )

No Address Available

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