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Www.guycarp.com Re-setting the financial system: The implications for reinsurance 24 February 2009 David Flandro Global Business Intelligence.

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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:

1 Re-setting the financial system: The implications for reinsurance 24 February 2009 David Flandro Global Business Intelligence

2 1 Guy Carpenter Blasts from the past (can you guess the year?)

3 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”

4 3 Guy Carpenter Risks “misunderestimated” Source: Guy Carpenter, Bloomberg data AMERICAN INTERNATIONAL GROUP (AIG US)

5 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

6 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

7 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

8 7 Guy Carpenter How has the insurance sector fared?

9 8 Guy Carpenter Hurricane losses – revisions to initial estimates Source: Guy Carpenter Source: Guy Carpenter, company information

10 9 Guy Carpenter Changes to equity shareholders’ funds 2008 (weighted avge -16.6%) Source: Guy Carpenter, company information

11 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?

12 11 Guy Carpenter Insurance vs banking sector capital (our estimate) Source: Guy Carpenter

13 12 Guy Carpenter 1 January 2009 Renewal Guy Carpenter World Property Catastrophe Rate-on-line Index 1990 = 100

14 13 Guy Carpenter 1 January 2009 Renewal Regional Property Catastrophe Rate-on-Line Indices

15 14 Guy Carpenter 1 January 2009 Renewal Property Catastrophe Treaty Retrocession Rate-on-Line Index 2002 = 100

16 15 Guy Carpenter Evolving Catastrophe Reinsurance Market % Increase in Rate On Line

17 16 Guy Carpenter Post-loss Capital Raising 2009?

18 17 Guy Carpenter Capital availability - Cost of equity (K E ) - Cost of debt (K D ) - Willingness to invest - Willingness to lend

19 18 Guy Carpenter VIX Index (a measure of implied volatility) = Equity capital markets closed Source: Bloomberg

20 19 Guy Carpenter USD 3M LIBOR Source: Bloomberg

21 20 Guy Carpenter TED spreads (3 month LIBOR less yield on 3 month T Bills) = Debt capital markets closed Source: Bloomberg

22 21 Guy Carpenter Conclusion - Autumn 2008: Reinsurance was the cheapest form of contingent capital for insurers.

23 22 Guy Carpenter Standard & Poor’s Insurance Supercomposite Index forward P/E P/ 2008FY P/ 2009FY Source: Bloomberg

24 23 Guy Carpenter Implied earnings yield 1 / P/ 2008FY 1 / P/ 2009FY Source: Bloomberg

25 24 Guy Carpenter Implied earnings yield 1 / P/ 2008FY 1 / P/ 2009FY Source: Bloomberg

26 25 Guy Carpenter Costs of equity / debt capital Potential for investment / M&A Source: Bloomberg

27 26 Guy Carpenter Current Canadian and US financial sector / insurance debt yields

28 27 Guy Carpenter Recent capital raising Source: Guy Carpenter

29 28 Guy Carpenter Recent capital raising Source: Guy Carpenter

30 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 ? ? ?

31 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

32 Contact: David Flandro T: +44 (0) E:


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