www.guycarp.com re-setting the financial system: the implications for reinsurance 24 february 2009...
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www.guycarp.com
Re-setting the financial system: The implications for reinsurance
24 February 2009
David Flandro
Global Business Intelligence
2Guy Carpenter
Blasts from the past (can you guess the year?)
3Guy 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”
4Guy Carpenter
Risks “misunderestimated”
Source: Guy Carpenter, Bloomberg data
0
10
20
30
40
50
60
70
80
90Ja
n 08
Feb
08
Mar
08
Apr
08
May
08
Jun
08
Jul 0
8
Aug
08
Sep
08
Oct
08
Nov
08
Dec
08
Bloomberg consensus price objective Closing price
AMERICAN INTERNATIONAL GROUP (AIG US)
5Guy Carpenter
Ratings precipice: Lehman Brothers
Source: Guy Carpenter, Standard & Poor’s, Bloomberg data
0
100
200
300
400
500
600
Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08
0
10
20
30
40
50
60
70
80
Lehman 5 yr senior CDS spread in bps (left hand scale) Lehman share price (right hand scale)
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
6Guy Carpenter
Sample Credit Default Swaps
XL Capital 850.7Liberty Mutual 490.4Swiss Re 488.0Berkshire Hathaway 296.7Allstate 285.14KBC Bank 243.1AXA 142.5Allianz 95.8Hannover Re 86.0Munich Re 62.6
Source: Bloomberg data
7Guy 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
8Guy Carpenter
How has the insurance sector fared?
9Guy Carpenter
Hurricane losses – revisions to initial estimates
Source: Guy Carpenter
Source: Guy Carpenter, company information
Hurricane Exposure as % of 1H 08 Shareholders' Funds
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Swiss R
e
AWAC
Argo
Trans
atlan
tic
Aspen Brit
Partn
erRe
Arch
IPC
Catlin
Platin
um
Flagsto
ne
Validu
s
Chauc
er
Adven
t
Initial Estimate Latest Estimate
10Guy Carpenter
Changes to equity shareholders’ funds 2008 (weighted avge -16.6%)
Source: Guy Carpenter, company information
-55%
-45%
-35%
-25%
-15%
-5%
5%
15%Har
tford
Group
ama
Allsta
te
Swiss R
e
XL Zurich
Max
Cap
ital
Flagsto
ne
Amer
ican
Financ
ial
Catlin
Mon
tpeli
er
Old Rep
ublic
Mar
kel
Mun
ich R
e
W.R
. Ber
kley
Arch
Re
Axis ACERen
Re
Evere
st Re
Endur
ance
IPC
Euler H
erm
es
Chubb
Trave
lers
Trans
atlan
tic
Partn
er R
e
Argo
Aspen
Validu
s
Beazle
y
Naviga
tors
Lanc
ashir
e
AWAC
Map
fre
11Guy 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?
12Guy Carpenter
Insurance vs banking sector capital (our estimate)
0.6
0.7
0.8
0.9
1
1.1D
ec
07
Jan
08
Fe
b 0
8
Ma
r 0
8
Ap
r 0
8
Ma
y 0
8
Jun
08
Jul 0
8
Au
g 0
8
Se
p 0
8
Oct
08
No
v 0
8
De
c 0
8
GC Global Composite of 141 carriers S&P Banks SupercompositeSource: Guy Carpenter
13Guy Carpenter
1 January 2009 Renewal Guy Carpenter World Property Catastrophe Rate-on-line Index
0
50
100
150
200
250
300
350
400
450
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
P
1990 = 100
14Guy Carpenter
1 January 2009 Renewal Regional Property Catastrophe Rate-on-Line Indices
1990 = 100
0
50
100
150
200
250
300
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009P
United Kingdom Continental Europe United States
15Guy Carpenter
1 January 2009 Renewal Property Catastrophe Treaty Retrocession Rate-on-Line Index
0
20
40
60
80
100
120
140
160
180
2002
2003
2004
2005
2006
2007
2008
01/01
/200
9
01/06
/200
9E
2002 = 100
16Guy Carpenter
Evolving Catastrophe Reinsurance Market
% Increase in Rate On Line
17Guy Carpenter
Post-loss Capital Raising
2009?
18Guy Carpenter
Capital availability
- Cost of equity (KE)
- Cost of debt (KD)
- Willingness to invest
- Willingness to lend
19Guy Carpenter
VIX Index (a measure of implied volatility)
0
10
20
30
40
50
60
70
80
9091 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
= Equity capital markets closed
Source: Bloomberg
20Guy Carpenter
USD 3M LIBOR
0
1
2
3
4
5
6
Jan
08
Feb
08
Mar
08
Apr
08
May
08
Jun
08
Jul 0
8
Aug
08
Sep
08
Oct
08
Nov
08
Dec
08
Source: Bloomberg
21Guy Carpenter
TED spreads (3 month LIBOR less yield on 3 month T Bills)
= Debt capital markets closed
Source: Bloomberg
22Guy Carpenter
Conclusion
- Autumn 2008: Reinsurance was the cheapest form of contingent capital for insurers.
23Guy Carpenter
Standard & Poor’s Insurance Supercomposite Index forward P/E
0 x
2 x
4 x
6 x
8 x
10 x
12 x
14 x
16 x
18 x
20 xJa
n 0
7
Ma
r 0
7
Ma
y 0
7
Jul 0
7
Se
p 0
7
No
v 0
7
Jan
08
Ma
r 0
8
Ma
y 0
8
Jul 0
8
Se
p 0
8
No
v 0
8
P/E
P/ 2008FY P/ 2009FY
Source: Bloomberg
24Guy Carpenter
Implied earnings yield
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%Ja
n 0
7
Ma
r 0
7
Ma
y 0
7
Jul 0
7
Se
p 0
7
No
v 0
7
Jan
08
Ma
r 0
8
Ma
y 0
8
Jul 0
8
Se
p 0
8
No
v 0
8
Implied earning's yield (1/ forward P/E ratio)
1 / P/ 2008FY 1 / P/ 2009FY
Source: Bloomberg
25Guy Carpenter
Implied earnings yield
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%Ja
n 0
7
Ma
r 0
7
Ma
y 0
7
Jul 0
7
Se
p 0
7
No
v 0
7
Jan
08
Ma
r 0
8
Ma
y 0
8
Jul 0
8
Se
p 0
8
No
v 0
8
Implied earning's yield (1/ forward P/E ratio)
1 / P/ 2008FY 1 / P/ 2009FY
Source: Bloomberg
26Guy Carpenter
Costs of equity / debt capital
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Fai
rfax
Tra
vele
rs
Arc
h
AC
E
Alli
anz
Axi
s
Par
tne
r R
e
Mun
ich
Re
WACC KE KD
Potential for investment / M&A
Source: Bloomberg
27Guy Carpenter
Current Canadian and US financial sector / insurance debt yields
28Guy Carpenter
Recent capital raising
Source: Guy Carpenter
-
500
1,000
1,500
2,000
2,500
3,000
3,500
Omega* Chaucer* Beazley Catlin
SHF YE08 Capital Increase SHF YE07
USDm
Note: * as of June 30, 2008
29Guy Carpenter
Recent capital raising
Source: Guy Carpenter
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Omega* Chaucer* Beazley Catlin Swiss Re Axa
SHF YE08 Capital Increase SHF YE07
30Guy 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
. . . . . . . . ? ? ?
31Guy 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
