Deep-pocketed sovereign wealth funds from Asia and the Middle East have made the headlines over the past year by snapping up stakes in stock exchanges, hedge funds, banks and private equity firms. Should they now set their sights on making acquisitions in the insurance sector?

That’s the thesis of a new research paper from accounting and consulting firm Deloitte.  Using a ‘don’t forget your own backyard’ type of argument, Deloitte points out that sovereign wealth funds have not spent much of the $3 trillion at their disposal on this sector — even though it could boost development of insurance services in their own regions, a critical area of need.

“If any of these cities or countries plans to become a world-class financial center in the range of New York or London, it must necessarily attract a large number of insurance and reinsurance companies,” according to the report, since as nations accumulate assets, they need more protection.

Insurance is a logical next step in developing the financial services industry of these emerging markets, said Deloitte.

“Insurance markets in the Middle East present high potential for growth, but are acutely underdeveloped, neglected and undercapitalized,” wrote the report’s author Priti Rajagopalan.  Even though the Middle East is one of the world’s wealthiest regions,  it accounts for less than 1 percent of global premiums, according to Deloitte.

A similar deficiency has emerged in China, albeit for different reasons. “China has a well-developed insurance industry, but it is state-owned with significant structural weaknesses. An investment in an insurance carrier would facilitate access to the best practices, modernized systems and infrastructure required to bring China’s insurance industry out from under the legacy of state ownership,” said the report.

Only time will tell if sovereign wealth funds see opportunity in insurance. But one thing is certain — insurers already see potential in these regions, and are actively exploring ways to tap into what could be key areas of growth in the not too distant future.

It couldn’t come at a better time as far as insurers are concerned. Insurance rates are softening in many other parts of the world, leaving the industry searching for new pockets of growth.

(Photo credit: This Reuters photo shows construction of  part of the Palm Jumeirah breakwater, a land reclamation project being undertaken by the government of Dubai.)

Three years after his ouster from American International Group – a company that he built into the world’s largest insurer over a nearly four-decade tenure, Maurice “Hank” Greenberg is still traveling the world looking for deals.

Does the octogenarian billionaire see himself slowing down – or putting his business concerns in someone else’s care any time soon?

“I suppose eventually it will be handed off to somebody else,” he said in an interview with Reuters last Thursday. “Everybody I’m speaking to today, including you,  will be doing something else in the next number of years, obviously ….I don’t have immortality.”

In the meantime, Greenberg, who will turn 84 later this year, credits temperance for his ability to keep up a hectic business schedule.

“I have lived a very clean life, I exercise a great deal, and I love what I am doing.”

Greenberg, who now devotes his time to running two firms that were once closely aligned with AIG – Starr International Co., a closely-held investment firm and C.V. Starr & Co., an insurance agency – said recent business trips have included Hong Kong and Moscow.

Among recent deals, Greenberg’s Starr International and a consortium of investors inked a $900 million Russian commercial real estate deal.

Greenberg said he sees more deals in Russia, and elsewhere where “opportunities arise,” with a particular focus on Asia. Starr International has about $20 billion in assets, and remains a a large AIG shareholder.

Greenberg parted ways with AIG in 2005 amid an accounting scandal, after then-New York Attorney General Eliot Spitzer accused the insurer of improperly keeping the books, and threatened to indict the company if Greenberg remained in charge.

Speaking with Reuters a day after Spitzer resigned as New York Governor amid a sex scandal, Greenberg made this brief comment: “I think I would say no comment on what occurred with respect to Governor Spitzer, but I do feel sorry for his family.”

Photo credit: Maurice Greenberg meets with Vladimir Putin, former president of Russia, in this 2003 Reuters photo.

The Futures Industry Association meeting, taking place this week in Boca Raton,  is a gracious affair — bigwig-led panel discussions, rounds of golf and poolside cocktail parties.

This year there is a new participant: Upstart futures exchange, ELX Electronic Liquidity Exchange, is using the FIA as a platform to wine-and-dine potential clients, and launch its new name, having previously gone by the unofficial moniker “Four Seasons.”

But not all have rolled out the welcome mat. Craig Donohue, chief executive of the Chicago Mercantile Exchange, took a pot shot at his new rival’s choice of name during a panel discussion at the FIA on Thursday. “If I was naming a new exchange I wouldn’t come up with a name that reminded people of a laxative.”

Donohue’s likely motivation for the thinly-veiled comparison between ELX and chocolate-flavored laxative Ex-Lax? ELX, led by a dozen banks and trading firms, is openly planning to give CME,  the world’s largest futures exchange, a run for its money with its new low-cost, electronic platform.

Although a fledgling venture, ELX is backed by a string of heavyweights. Backers so far include JPMorgan, Merrill Lynch & Co, Chicago hedge fund Citadel Investment Group, eSpeed Inc, Bank of America, Credit Suisse, Barclays Plc, Citigroup Inc, Deutsche Bank AG, GETCO LLC, PEAK6 and Royal Bank of Scotland Group Plc.

– Blog post by Lilla Zuill in New York and Ros Krasny in Boca Raton

Picture credit: www.forgotten-ny.com

Basel, one of Switzerland’s largest cities,  is known as the home to such drugmakers as Novartis AG and Roche Holding AG, earning the old Swiss canton the unofficial moniker of ”biotech Silicon Valley.”

Increasingly the metropolis is also known as the birthplace of international capital adequacy banking accords — Basel I and Basel II.

The banking rules were devised as a one-size-fits-all capital adequacy standard for global financial institutions. However, critics are now asking if Basel II has backfired by allowing firms to lower capital requirements, leaving them in a crunch now that some investments have soured.

At issue is whether the new rules allowed some European firms — where Basel II regulations had already begun to be rolled out – to put less capital into loss reserves for highly-rated debt, including U.S. mortgage-backed securities, exacerbating a crunch that at first seemed contained in the United States.

Swiss-based UBS on Friday estimated that the credit crisis that has been roiling markets, and putting a chill into M&A markets worldwide, is far from over, forecasting losses that could exceed $600 billion globally.

Abby Joseph Cohen, chief U.S. investment strategist at Goldman Sachs speaking at a New York business conference last Thursday said, based on anecdotal evidence, it appeard that the subprime mortgage crisis had caused a higher degree of problems for non-U.S. financial firms.

 The write-downs that European financial institutions have had to take on bad U.S. mortgage debt was something that Cohen attributed to Basel II, as the regulations gave firms some wriggle room when it came to putting up capital for top-rated securities.

The snag? ”The ratings were wrong,” said Joseph Cohen, who added it was not yet clear how the crisis will play out. “The final chapter has not been written,” she said.

In the meantime, Basel II’s potential flaw is starting to get a lot of attention. “Mortgage fallout exposes holes in new bank-risk rules” read a page 1 story in Tuesday’s Wall Street Journal. And an earlier Financial Times op-ed was titled “Turmoil reveals the inadequacy of Basel II.”

 Federal Reserve Vice Chairman Donald Kohn stepped up to defend Basel II  on Tuesday, calling the rules an “important step forward to make capital requirements more risk sensitive.”

But if critics of Basel II are on to something, Basel – which is also home to UBS, the European bank hardest hit by the credit crisis – could find itself with a bad headache, one that none of its drug firms are likely to have a cure for.       
     

(Photo: Firefighters in Basel watch as a burning wooden wagon passes the old city tower of Liestal during a festival. Source: Reuters, 10 February 2008)
  

While traditional initial public offerings on U.S. stock exchanges have floundered, the once-obscure “blank check” arena has only gained traction so far this year, becoming a kind of safe playground for investors, and a retreat for some private equity players finding it tougher to raise debt now that credit terms have tightened.

Four weeks into 2008, 5 IPOs by so-called blank check companies– also called special purpose acquisition companies, or SPACs – have tapped investors for about $4 billion. The latest, activist Nelson Peltz’s Trian Acquisition I Corp, was expected to raise $750 million on Wednesday.

In stark comparison, only one mainstream IPO has managed to stir up enough interest — Williams Pipeline Partners which raised $325 million last week – to actually make it to market, and has disappointed since its debut. 

Blank check companies, which are formed to acquire other businesses and are little more than a shell until an acquisition is made, took off in 2007, accounting for roughly every fourth new U.S. listing, raising nearly $12 billion.

That trend looks set to carry over into this year with about 25 percent of the U.S. IPO pipeline being filled with blank check offerings — 23 out of 89 companies that have filed to sell shares to the public, according to data tracker Dealogic.

“SPACs fill a particular need in the market right now,” Linda Killian, portfolio manager of the IPO Plus Fund, a mutual fund advised by Renaissance Capital, recently told Reuters. “With the U.S. market in turmoil, large pools of money are looking for safer, more reliable terms.”

Killian said blank check IPOs have “little downside” for investors since they must set aside about 90 percent of the funds raised to pay for an acquisition. Investors also get to vote on potential acquisitions, and are promised a return of their investment if no deal materializes in a specific period of time.

On average, blank check companies generated average returns of 2.4 percent in 2007, according to Renaissance Capital’s IPOhome.com, but performance shot up for companies that were near to closing an acquisition — to 18.9 percent.

Killian predicts blank check offerings will continue to be rolled out as long as borrowing costs remain high for other types of deals.

Indeed, as easy debt to finance leveraged buyouts has dried up, private equity bosses have been eyeing the SPAC space as a place to retreat to during this period of inhospitable credit markets.

Edward Mathis, a managing director of private equity firm Carlyle Group, for example, has been involved in a number of blank check deals, including Endeavor Acquisition Corp’s reverse merger with casual wear retailer American Apparel last month.
 

(Image credit. www.americanapparelstore.com)

Investors are waiting to see if E*Trade will pursue a strategic alternative, such as a deal or sale of some assets, after large losses in its mortgage business.

But buyers are getting bogged down in the problem of how to value E*Trade’s banking business, after mortgage woes have grown, according to a Monday article in the Wall Street Journal.

Fox-Pitt Kelton analyst David Trone has a solution– pay nil for E*Trade’s banking arm, and and the deal could still pay dividends for the buyer, and be a better deal than shareholders have now.

Trone, with Ameritrade and its partner TD Bank Financial in mind as buyers, estimates in a research note  that a deal for E*Trade could be hatched for between $10 and $11 per share. Most, if not all of that, he says, would be in payment for E*Trade’s brokerage business.

The calculation goes like this. If Ameritrade were to buy E*Trade’s brokerage business (estimate of $10.63 per share) it could be 37 percent accretive to its fiscal 2009 earnings. Canada’s Toronto-Dominion Bank would benefit as it has a 40 percent stake in Ameritrade.

There’s more. Based on a $4.60 share price, Trone estimates that the market is ascribing a negative value to E*Trade’s banking operations, so paying nothing for them could be accretive.

And Trone points out that for shareholders, getting between $10 and $11 per share, would be more than double the current share price, with E*Trade shares closing at $4.91 today, an 80 percent drop from its year high of $26.08 per share.

That may not be the type of ’shareholder enhancement’ E*Trade had in mind when it said it could explore a deal last month, but for shareholders this might be a case of ’something is better than nothing’.

Indeed, investors were likely eager for a management update on the prospects of such a deal, but it emerged today that E*Trade has withdrawn from a financial services conference presentation being held by Fox-Pitt Kelton Cochran Caronia Waller it was scheduled to participate in later this week.

Investors are likely to read one of two things into E*Trade’s absence — it is locked in negotiations, or it is too scared to face shareholders. Based on the 6.7 percent rally E*Trade shares made late in the day, it is likely shareholders are betting on the former.

E*Trade shares shot up earlier this month when Chief Executive Mitch Caplan backed out of a scheduled presentation at a Merrill Lynch & Co banking conference in New York,  which a spokesperson attributed to Caplan’s need to focus on “priorities”.  While the news rallied the shares, when no deal materialized the shares again fell. Will this time be any different?