Resetting the financial system: The implications for reinsurance

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Re-setting the financial system The implications
for reinsurance

• 24 February 2009

David Flandro Global Business Intelligence
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Blasts from the past (can you guess the year?)
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Blasts from the past

• Principles based management / light touch
  regulation

• Economic decoupling

• Oil at 500 / barrel

• Market X is fundamentally different because . . .

• We need to make our capital sweat

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Risks misunderestimated
AMERICAN INTERNATIONAL GROUP (AIG US)
Source Guy Carpenter, Bloomberg data
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Ratings precipice Lehman Brothers
12 Sep Watch developing
2 Jun A , Outlook negative
9 Sep Watch negative
Long-term issuer credit rating A, Outlook
stable
15 Sep Lehman files for bankruptcy SP assigns
SD (selective default) rating
Source Guy Carpenter, Standard Poors,
Bloomberg data
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Sample Credit Default Swaps
XL Capital 850.7 Liberty Mutual 490.4 Swiss
Re 488.0 Berkshire Hathaway 296.7 Allstate 28
5.14 KBC Bank 243.1 AXA 142.5 Allianz 95.8 H
annover Re 86.0 Munich Re 62.6
Source Bloomberg data
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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

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How has the insurance sector fared?
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Hurricane losses revisions to initial estimates
Source Guy Carpenter, company information
Source Guy Carpenter
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Changes to equity shareholders funds 2008
(weighted avge -16.6)
Source Guy Carpenter, company information
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Insurance sector capital as measured by the
Russell 1000 Index
Golden Months
No major decline in BV after KRW as companies
were able to recapitalize easily
Sluggish growth in BV due to Legacy Liability
Issues / Reserve Strengthening
Major Decline in BV driven by Credit Contagion /
Asset Impairment / Major Catastrophes
Bear Market
A long-term trend?
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Insurance vs banking sector capital (our estimate)
Source Guy Carpenter
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1 January 2009 Renewal Guy Carpenter World
Property Catastrophe Rate-on-line Index
1990 100
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1 January 2009 Renewal Regional Property
Catastrophe Rate-on-Line Indices
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1 January 2009 Renewal Property Catastrophe
Treaty Retrocession Rate-on-Line Index
2002 100
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Evolving Catastrophe Reinsurance Market
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Post-loss Capital Raising
2009?
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Capital availability
- Cost of equity (KE)
- Cost of debt (KD)
- Willingness to invest
- Willingness to lend
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VIX Index (a measure of implied volatility)
Equity capital markets closed
Source Bloomberg
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USD 3M LIBOR
Source Bloomberg
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TED spreads (3 month LIBOR less yield on 3 month
T Bills)
Debt capital markets closed
Source Bloomberg
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Conclusion
- Autumn 2008 Reinsurance was the cheapest form
of contingent capital for insurers.
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Standard Poors Insurance Supercomposite Index
forward P/E
P/ 2008FY
P/ 2009FY
Source Bloomberg
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Implied earnings yield
1 / P/ 2008FY
1 / P/ 2009FY
Source Bloomberg
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Implied earnings yield
1 / P/ 2008FY
1 / P/ 2009FY
Source Bloomberg
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Costs of equity / debt capital
Potential for investment / MA
Source Bloomberg
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Current Canadian and US financial sector /
insurance debt yields
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Recent capital raising
Source Guy Carpenter
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Recent capital raising
Source Guy Carpenter
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MA / 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
Catlin capital raise
Mitsui Sumitomo, Nissay Dowa, Aioi
Beazley capital raise
Chaucer / Novae??
Axa additional flexibility
Swiss Re / Berkshire deal
SCOR cat bond
. . . . . . . . ? ? ?
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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

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Contact David Flandro T 44 (0)207 357
3267 E david.flandro_at_guycarp.com
www.guycarp.com