Les Futurs or L”Avenir? It makes all the difference…

Forgive the French!

However, the title was prompted by pondering the work of the late Arie De Geus [including “The Living Company”], recently mentioned in a thoughtful column by Andrew Thornhill of the Financial Times when discussing the possible distinctions between those companies which will, and those which will not survive The Great Cessation.

For business executives of a certain “vintage”, De Geus (who formally retired in 1980 after 38 years) was famous as the leader of Royal Dutch Shell’s (RDS), Strategic Planning Unit, and thus the main progenitor of the process of scenario planning- something which may well be taken for granted now, yet which was little short of revolutionary in its day.

What De Geus tried to do was make managers distinguish between “l’avenir” and “les futurs”. The former essentially means “what will come”, and the latter “potential futures”. While both matter, it is the ability to foresee and adapt to the latter which is fundamental for any entity’s long-term survival and prosperity.

As De Geus pointed out, those companies, which he termed “intolerant”, going for “maximum results with minimum resources” appear to do remarkably well when times are stable. However, when dislocation, stresses or volatility appear, they become very vulnerable to existential risks. And the consequences of the pandemic certainly count as a “dislocation”!

De Geus’ underlying thesis was that companies which manage to survive for decades, then centuries, and occasionally a millennium*, treat their enterprises as “living work communities”, rather than just as purely economic machines- i.e., people, not industrial or financial assets. Consider that the average life of a S&P company is now estimated at well under 50 years, while the corporation in a recognizably modern “joint stock company” guise is barely 200 years old.   In fact, De Geus found that the average “life expectancy” of a northern hemisphere business was no more than 20 years.

So, what did De Geus see as the characteristics of resilient, long-lived businesses?

  • Their managers realize that they are a community of human beings in business to stay alive and prosper
  • They are good at managing for change- i.e., adaptable- as their environment changes
  • They are tenacious in protecting their capital, and so financially conservative
  • All the members of the business know what its goals are
  • New ideas are tolerated, rather than ignored or even suppressed
  • They value people, not assets
  • Their corporate structures are flexible in terms of control and decision-making
  • They are learning organizations
  • Managers and executives see themselves as stewards for the next generation- i.e., they are not selfishly self-interested.

At Awbury, we cannot say whether we shall survive as a business for centuries. However, as our business is based upon our ability to adapt as the world and its risks change around us, and on providing bespoke solutions to our clients as their needs change, we aim to give it a good try!

And a parting quote from De Geus: “The ability to learn faster than your competitors may be the only sustainable competitive advantage”. Indeed!

The Awbury Team

*For the record, the world’s oldest surviving business is considered to be Kongo Gumi, a Japanese construction business, founded in 578AD and specializing in Buddhist temples; while the oldest in Europe is believed to be Stiftskeller St. Peter, a bierkeller/restaurant founded within an Austrian monastery in 803AD. The sublime, vs. the hedonistic!


We are all risk-takers now… whether we realize it or not…!

Most financial and many corporate businesses, (re)insurers such as Awbury included, have someone in the role entitled “CRO” and the concept of Enterprise Risk Management (ERM- in essence meant to symbolize an holistic approach to managing all the key risks a business faces) is now a given, on which managements are judged by markets, public rating agencies, regulators and peers. This is usually coupled with the “three lines of defence” approach to mitigating risks (much beloved of regulators) through involving business originators, the ERM function (or some analogous central function) and Internal Audit (which checks on everyone else) as supposedly sequential lines of defence against loss.

So, one would think that the Covid-19 pandemic can be seen simply another risk to be managed, albeit a potentially existential one in some cases.

In many ways that is, of course, true. However, we think there is more to it than that, because it requires starting from the assumption that, while the risk may be mitigated, it may not become definable or manageable for some time. So, using prior heuristics or parameters may well be dangerously self-delusional. Events quite clearly demonstrate that the standard linear, non-complex theories and practices that still underpin much financial and risk management theory cannot really cope with the complex, dynamic systems created by an event such as the pandemic.

A natural disaster, however bad, usually has a finite scope, even if there may be lingering second- or third-order effects (think of Chernobyl, or Fukushima); and then things go back to “normal”, until the next time. Models are updated and tweaked; pricing modified- i.e., increased (if possible).

The current pandemic is probably different. Of course (as we have written) there have been pandemics before, ones far more devastating in proportionate terms than the current one is ever likely to be, such as the Antonine Plague, the Black Death or the Spanish ‘Flu’. However, the severe economic consequences (and therefore many of the human costs) of the Covid-19 pandemic, while triggered by an epidemiological (and ever-changing) calculation, are largely man-made. Thus, successfully navigating Its outcome depends not so much on understanding the epidemiology, as on the behaviours of those supposedly rational, but inherently unpredictable agents known as human beings, and the capacity of our institutions and leadership to adapt and balance competing priorities.

And what if a major “normal” natural disaster were to occur during the depths of the pandemic, such an earthquake, volcanic eruption, hurricane and so on? Are existing risk models really going to be able to cope with a non-correlated, but significant CAT event, or several? After all, Nature is completely indifferent to the fate of Humanity.

All of this emphasizes that every single member of any entity, whether government, commercial or NGO, is a risk-taker as well as a risk-manager simply by trying to function and be productive in such times. ‘Twas ever thus, but the global pandemic has rammed the point home. Avoiding the risks is a risk in itself!

Fortunately, human beings and well-designed and well-managed institutions have, time and again, shown their resilience in the face of severe risks. This in time should be no different. It behooves the (re)insurance industry as a whole to demonstrate that being in the business of taking and managing risks is not merely a slogan, but an enduring reality. Individual businesses may become stressed, but the industry as a whole should be more than capable of weathering the storm; fulfilling its role; and prospering over time. Demand is not likely to go away in the longer term, even though it may be severely challenged in the immediate future.

At Awbury, with our range of flexible and bespoke, credit, economic and financial risk management tools and products, we stand ready to meet and master the challenge. It is why we exist!

The Awbury Team


The Oil Markets Enter the Realm of the Surreal…

Within the space of a few weeks, the global market for crude oil has truly entered the realm of the surreal. Dali’s painting entitled “The Persistence of Memory” comes to mind, with its images of melting watch faces amidst a barren wasteland. After all, one has to struggle to remember that there was once concern that WTI could go to USD 200/barrel; yet, on Monday 20th April, the  price for US WTI May 2020 contract fell to minus USD 40/barrel, before retracing to around USD 20/barrel in early May.

Mental “whiplash” probably cannot begin to describe the experience of long-term observers of the markets, as they try to come to terms with the seeming absurdity of recent events- a ruinous price war catalyzed by Saudi Arabia in response to supposed Russian “intransigence” over continuing a programme of relatively modest production cuts, followed by an “historic”  and unprecedented agreement by the so-called OPEC+ to cut some 10 million barrels from daily supply then averaging 100 million barrels; followed by a generational collapse in the price of WTI to USD 18/barrel- and then the hitherto unthinkable and unseen negative prices within the course of a day.

And yet, as always, it pays to look beyond the headlines and ask what is the significance of what happened, given that the price of the major global crude oil benchmark, ICE Brent, while very weak, having fallen to a 2-decade low below USD 20/barrel at the same time,  did not respond with as much volatility to the WTI move- opening up an absurdly wide differential of some USD 60/barrel for at least a short time – so, some 3X the price of WTI in absolute terms, and theoretically infinitely greater, as the latter was negative, which is ludicrous!

For one thing, the US WTI and ICE Brent indices, although often seen as comparable, are quite different in reach and mechanism. The former is a domestic index, for physical delivery into one geographical location, Cushing, OK; while the latter is mainly sea-borne, cash settled and global. They may seem the same, but they are not. This demonstrates the need for precise knowledge.

On the other, in the wider sense, the event is a clear signal of widespread dislocation and distress; because no such event has occurred in the recorded history of the crude oil markets dating back to Titusville, PA in 1859.

However, what no-one can yet know are the longer-term consequences of all the price volatility and precipitate fall in demand (estimated at up to one third of “normal” levels). Crude oil remains, for now at least, an essential commodity and underpins the economies of many states to a level where loss of revenues will have serious domestic and geopolitical repercussions. On the one hand, governments affected can point out that it is “not their fault”; on the other, it will reveal the fragility of their budgets and long-standing failures of policy and waste.

This situation provides yet another example of the need to look at an issue or risk holistically- both understanding its specific, idiosyncratic components and being able to set it into a wider context, and consider second and further order effects. This is an approach which is fundamental to Awbury’s risk selection and risk management. If the answer to something seems simple or “obvious”, the odds are, in our complex and inter-connected world, that one has missed a factor that could shift the risk from being sound to one where there is the danger of becoming the “dumb money”- and Awbury is not the “dumb money”!

The Awbury Team


Sticks and stones may break my bones, but words will never hurt me…

Sticks and stones may break my bones, but words will never hurt me…

A phrase from a children’s nursery rhyme may seem somewhat out of place in a corporate blog. However, recent and continuing events have amply demonstrated that words- their presence or absence, meaning and construction- can be just as dangerous in their potential for harm as any physical threat.

We live in a time when the seemingly archaic Latin terms “Fidentia” (Confidence) and “Pactum Meum Dictum” (My Word is My Bond), perhaps sometimes seen as tired tropes, have come to represent a reality in which the fundamental premise of the (re)insurance markets- that all valid claims will be paid promptly and in full- is being challenged by the perception, right or wrong, that this may only be true if the existence and expected parameters of a risk had been anticipated by pricing actuaries and risk managers when designing and offering a particular coverage.

We cannot and would not offer an opinion on the merits of any disputes which have arisen, or may yet arise, in relation to whether the particular wording of a policy mean “X” or “Y”. However, anything that threatens the perception of the integrity of the “promise to pay” quite clearly should be of concern to the industry as a whole. Ultimately, any business (particularly when its performance is inextricably linked with some form of loss) is based upon trust and reputation, so anything which brings that into doubt is potentially damaging.

The Covid-19 pandemic and its consequences have so far upended many hitherto unquestioned assumptions across whole swathes of industry, government, finance and academia; and (re)insurance is now no exception. For example, one can argue that the current economic dislocation resulting from the pandemic is a man-made, “unnatural” disaster. Rather than allowing businesses and markets to function, governments have deliberately (in order to minimize the potential loss of life) caused enormous and rising economic loss, the scale and consequences of which cannot yet properly be measured. Of course, the better-functioning and more solvent ones are trying to mitigate at least some of the damage they are causing, but the complexity of the current situation and the inter-dependencies it reveals mean that setting parameters around all the direct and contingent consequences is extraordinarily difficult.

In such circumstances, the more one can do to introduce at least some element of simplicity and certainty the better. This can be in the nature of the products one offers; how they are delivered; or in their terms and conditions. Such an approach benefits all parties, because it increases understanding and trust, and reduces the scope for future argument over whether or not any contract agreed was fulfilled.

At Awbury, we have always tried to ensure in everything we do that not only does the Insured (and any other parties involved) receive exactly the coverage sought (removing the “basis risk” that plagues off-the-shelf, commoditized offerings), but that, to the full extent possible, there is absolute certainty that the “promise to pay” can and will be honoured without cavil in the event of a valid claim. Ambiguity and misunderstanding serve no purpose to anyone.

The Awbury Team


So, what are we missing or ignoring…?

It is all too easy in this time of obsessive focus on the epidemiological and economic consequences of the Covid-19 pandemic to think that not much else is material in term of risks to be concerned about.

While, as result of the ways in which governments, agencies, businesses and individuals decided to act, the consequences of the pandemic, in economic terms are, in many ways, without precedent in terms of the speed,  sudden depth and breadth of their impact, it would be somewhat foolish to assume that all the other risks which existed prior to its appearance have decided to go on furlough.

We are reminded of a quotation by Thomas Schelling, a game theorist and nuclear strategist: “There is a tendency in our planning to confuse the familiar with the improbable. The contingency we have not considered seriously looks strange; what looks strange is thought improbable; what is improbable need not be considered seriously.”

Less than 3 months ago, Covid-19 would have been considered “improbable”; now it is familiar with a vengeance. Similarly, for (re)insurers, the idea of retroactive legislation intended to compel them to pay claims which they had even specifically excluded from the wording of a policy would have seemed ludicrous. Not now. So, are the previously “familiar” risks now “improbable”? Hardly.

Like a magician’s sleight of hand or misdirection of attention in order to perform a trick or illusion, the fact that attention has been diverted enhances the possibility that underwriters, CROs and risk managers will miss the obvious, or be misdirected down probability “rabbit holes”, and thus suffer “unexpected” claims, that are nothing of the sort.

As we have written before, it is the risk that you don’t see which is the one you should really worry about.

Of course it matters what the R0 (R naught) number or the true mortality rate of Covid-19 is, or how protracted the pandemic will be before it is contained, or at least becomes manageable; or what the likely rates of business failure are by industry or in the aggregate. However, the frequency of earthquakes or severity of hurricanes are not correlated with those outcomes; while geopolitical risks may well be exacerbated; and just because there is one coronavirus wreaking havoc and focusing attention does not mean that other endemic diseases have become less virulent- in fact, in a physically weakened or economically poorer population they may flare up even more at a time when government resources are already stretched or overwhelmed.

In such circumstances, a continuing and continuous healthy paranoia is warranted; because ignoring or downplaying other risks can be equally as fatal, if not more so,  than the current pandemic. One does not want a weakened corporate immune system to focus on one target, only to be surprised by others that hide within its shadow.

At Awbury, our focus is, of course, on credit, financial and economic risks; but that does not mean that we are indifferent or oblivious to the second and third order impacts of other contingencies or risks. Our institutionalized paranoia is in full force! We always wonder and think about what we might be missing. The improbable has the habit of becoming all too real.

The Awbury Team


O Liquidity, Liquidity; wherefore art thou Liquidity…?

Those familiar with Shakespeare’s Romeo and Juliet will recall that it did not end well.

As always seems to the case, it takes a crisis to ram home the point, yet again, that ultimately what matters to the survival of a business or market is the availability of timely and (more than) sufficient liquidity.

The speed and extent of the pandemic-induced recession (putting the D-word to one side for now) which most economies are now suffering provides stark evidence of the truism; “Lack of cash kills companies”. Not only that (unless you are a bank with access to a central bank’s discount window, or other undoubted liquidity-providing mechanism), preventive asset and liability management, in which your assets re-price and become available in cash faster than your liabilities fall due, is a fundamental and necessary skill. Several US mortgage REITs, which became functionally insolvent overnight when they could not meet margin calls, yet again proved that adage. As the FT’s Izabella Kaminska has written: “…the real economy has no lender of last resort”.

The unusually long economic expansion post-GFC, the fact of better-capitalized banking systems, and a search for yield by investors amid historically low interest rates and reduced spreads combined to create conditions in which a sudden economic shock, inducing what can only be described as a general and largely indiscriminate initial market panic, upended normal expectations in terms of the ability to adjust and prepare for a downturn.

It would be unfair to criticize CFOs and Treasurers for not foreseeing the reality and speed of the spread of the Covid-19 pandemic, even if there were partial precedents within recent memory. No business ever expects anything approaching an immediate cessation of most or all of its revenues.

Yet having access to sufficient cash and liquidity to meet unexpected shocks is something that could reasonably have been expected. Of course, it is the meaning of “unexpected shock” which has now been indelibly re-framed. Unfortunately, while large corporations do generally have access to significant bank lines, or the ability to negotiate more, many smaller businesses (SMEs) tend not to have that “luxury’ (in fact, necessity) –and they are the ones who employ the majority of individuals in most economies. Hence, the astonishing and unprecedented rising cascade of closures and unemployment across the world.

The behaviour of those who survive what lies ahead will undoubtedly change. One consequence is almost certain to be viewing a significant cash reserve, or paying for committed bank lines not as an opportunity cost or inefficient use of capital, but rather as an essential under-pinning of resilience.

It is also likely that manufacturing businesses will move away from “just-in-time” inventories and stockpile inputs to their processes, while re-examining their supply chains for true origin, diversity and hidden connectivities. All of this will increase the need for working capital and greater overall liquidity. At the same time, banks are likely to re-examine the scale and pricing of such products as Revolving Credit Facilities (RCFs) and “Swinglines”, or the like.

Amidst all this turmoil, it is worth pointing out that the Awbury Team has considerable experience in helping its clients with ways in which to enhance available liquidity and the efficient use of scarce capital.

We would be happy to discuss how we can help.

The Awbury Team


Pandemics in context- Part II- the longer view… Panic, Perspective, Quarantine and Resilience

In our previous post we mentioned the impact of the last acknowledged global pandemic, the so-called Spanish Flu of 1918/19, as being remarkably muted, primarily, it seems, because of the context in which it occurred.

However, if one wishes to understand the extent to which pandemics can, in fact, change the direction of human affairs, one needs to go back much further, understanding not only their relative scale, but also how a particular disease was viewed at the time.

Interestingly, in the same way there is the Richter Scale to measure the force of an earthquake or the Saffir-Simpson one to measure the strength of a hurricane, there is actually one for broader disasters afflicting Humanity. This is the Foster Scale (created by Canadian geographer Harold D. Foster), which like the other 2 scales mentioned, is logarithmic in nature. A sense of what “disaster” means can be seen by the fact that only World War II ranks ahead of the Black Death, which between 1347 and 1352 is estimated to have killed a third of Europe’s then 75MM population (which, ignore the fact of all the deaths it caused elsewhere in the world). To say that this was generally-viewed as a portent of the end of the world, would be an understatement.

While debate continues about the true mortality rate of Covid-19, current estimates usually do not rise above low single digit percentages. The bubonic plague has an estimated mortality rate of up to 60% in populations which have no immunity. One can work out the impact which an equivalent pandemic would have on the Earth’s current 7.7BN inhabitants- and, of course, it would be worst in dense population centres in an urbanizing world. So, in relative terms, Covid-19 has less of an epidemiological impact; but the nature of our inter-connected and information-deluged world exacerbates the economic and behavioural outcomes.

Apart from the fact that the consequences of the Black Death led to the reconfiguration, at least in Western Europe, of feudal societies, and so laid the foundation for the world we know today, it also, even then, produced widely varying outcomes based upon how a particular population responded. Bear in mind this was an era which had no understanding of the plague’s source, vectors and modes of transmission.

The Republic of Florence lost 50% of its population.

La Serenissima, Venice, an international trading hub, up to 60%.

However, rather than succumbing to despair and sliding into irrelevance, the Venetians fought back. They noted that some other Mediterranean cities were showing that restricting access from the outside, and keeping incomers isolated, seemed to be reducing the plague’s effects. They did not know why, but they saw that the approach worked. So, they instituted a policy of rigid isolation- for 40 days. And the Italian for 40 is “quaranta”- hence quarantine. In one of those remarkable coincidences, the average period from infection with, to death from bubonic plague is now known to be 37 days!

The point of all this is not only  that uncertainty tends to makes human beings collectively fearful and panic-stricken (which is contagious in itself), but also that human beings are adaptive, curious, learning creatures, with remarkable resilience. We would not be here if we were not.

So, while the current economic and epidemiological outlook is at best uncertain, it is foolish and counter-productive to despair or “freeze”. Such behaviour only exacerbates negative outcomes. Much better, while recognizing and managing the risks of the situation, to be thoughtful, analytical, and proactive- which is the Awbury approach.

The Awbury Team

[Note: this post owes a debt to the always interesting and counter-intuitive Eric Barker- psychologist and author of “Barking up the Wrong Tree: How to be awesome at Life”]