Presentation on theme: "Www.guycarp.com Re-setting the financial system: The implications for reinsurance 24 February 2009 David Flandro Global Business Intelligence."— Presentation transcript:
Re-setting the financial system: The implications for reinsurance 24 February 2009 David Flandro Global Business Intelligence
1 Guy Carpenter Blasts from the past (can you guess the year?)
2 Guy Carpenter Blasts from the past Principles based management / light touch regulation Economic decoupling Market X is fundamentally different because... Oil at $500 / barrel We need to make our capital “sweat”
3 Guy Carpenter Risks “misunderestimated” Source: Guy Carpenter, Bloomberg data AMERICAN INTERNATIONAL GROUP (AIG US)
4 Guy Carpenter Ratings precipice: Lehman Brothers Source: Guy Carpenter, Standard & Poor’s, Bloomberg data Long-term issuer credit rating: ‘A+’, Outlook stable 2 Jun: ‘A’, Outlook negative 9 Sep: Watch negative 12 Sep: Watch developing 15 Sep: Lehman files for bankruptcy; S&P assigns SD (selective default) rating
5 Guy Carpenter Sample Credit Default Swaps XL Capital850.7 Liberty Mutual490.4 Swiss Re488.0 Berkshire Hathaway296.7 Allstate KBC Bank243.1 AXA142.5 Allianz95.8 Hannover Re86.0 Munich Re 62.6 Source: Bloomberg data
6 Guy Carpenter Government Intervention – we are all Keynesians, at least temporarily Liquidity and lending guarantees Deposit guarantees Bank recapitalisation / nationalisation Interest rates Buying assets Quaker banking 3 – 5 – 3
7 Guy Carpenter How has the insurance sector fared?
8 Guy Carpenter Hurricane losses – revisions to initial estimates Source: Guy Carpenter Source: Guy Carpenter, company information
9 Guy Carpenter Changes to equity shareholders’ funds 2008 (weighted avge -16.6%) Source: Guy Carpenter, company information
10 Guy Carpenter Insurance sector capital as measured by the Russell 1000 Index Components of this Index are: Allied, Arch, Axis, Chubb, Endurance, Erie, Everest, HCC, Mercury, OneBeacon, PartnerRe, Progressive, Transatlantic, White Mountains, WR Berkley and XL Capital Bear Market Sluggish growth in BV due to Legacy Liability Issues / Reserve Strengthening No major decline in BV after KRW as companies were able to recapitalize easily Major Decline in BV driven by Credit Contagion / Asset Impairment / Major Catastrophes Golden Months A long-term trend?
11 Guy Carpenter Insurance vs banking sector capital (our estimate) Source: Guy Carpenter
12 Guy Carpenter 1 January 2009 Renewal Guy Carpenter World Property Catastrophe Rate-on-line Index 1990 = 100
13 Guy Carpenter 1 January 2009 Renewal Regional Property Catastrophe Rate-on-Line Indices
14 Guy Carpenter 1 January 2009 Renewal Property Catastrophe Treaty Retrocession Rate-on-Line Index 2002 = 100
15 Guy Carpenter Evolving Catastrophe Reinsurance Market % Increase in Rate On Line
16 Guy Carpenter Post-loss Capital Raising 2009?
17 Guy Carpenter Capital availability - Cost of equity (K E ) - Cost of debt (K D ) - Willingness to invest - Willingness to lend
18 Guy Carpenter VIX Index (a measure of implied volatility) = Equity capital markets closed Source: Bloomberg
19 Guy Carpenter USD 3M LIBOR Source: Bloomberg
20 Guy Carpenter TED spreads (3 month LIBOR less yield on 3 month T Bills) = Debt capital markets closed Source: Bloomberg
21 Guy Carpenter Conclusion - Autumn 2008: Reinsurance was the cheapest form of contingent capital for insurers.
22 Guy Carpenter Standard & Poor’s Insurance Supercomposite Index forward P/E P/ 2008FY P/ 2009FY Source: Bloomberg
25 Guy Carpenter Costs of equity / debt capital Potential for investment / M&A Source: Bloomberg
26 Guy Carpenter Current Canadian and US financial sector / insurance debt yields
27 Guy Carpenter Recent capital raising Source: Guy Carpenter
28 Guy Carpenter Recent capital raising Source: Guy Carpenter
29 Guy Carpenter = M&A / Investment, for those with the resources “Continuing to look at areas where we can grow through both organic and inorganic growth” – James Schiro, CEO Zurich Financial Services, 29 January “[Amlin] is looking to achieve a “quantum leap” in its attritional book via acquisition, to allow further expansion of its catastrophe-exposed book. The favoured option would be a specialty lines operation in the US. Currently the group has only an office in Chicago, opened in August 2008.” – Charles Phillips, CEO, Amlin Munich Re / HSB. Munich says it has an additional €4 billion it could spend on acquisitions. Hannover Re – ING US Life Re acquisition Mitsui Sumitomo, Nissay Dowa, Aioi Chaucer / Novae?? Swiss Re / Berkshire deal Catlin capital raise Beazley capital raise Axa additional flexibility SCOR cat bond ? ? ?
30 Guy Carpenter In conclusion - Upward pressure on rates will persist - Certain lines likely to see significant increases - But capital markets will re-enter the game in 2009, mitigating “across the board” rises