Download Current Trends in the Global Reinsurance Market

The sector: Between Monte Carlo and Dana Point
Resilience in the face of ‘cold spot’ perils and other key risks
David Flandro
Global Head of Business Intelligence
Guy Carpenter
[email protected]
Agenda
Sector Resilience in the face of ‘cold spot’ perils and other key sector risks
•
•
•
•
•
Capital Resilience: What are the sources ?
Risk #1: Catastrophes and ‘cold spots’
Risk #2: Debt crisis and interest rate risk
Risk #3: Reserving risk
The result: Low sector valuations,
heightened risk premia
GUY CARPENTER
23 May 2017
Source: Guy Carpenter
1
Capital Resilience
What is the source?
GUY CARPENTER
Large catastrophe losses – 2011 and 2012
Low losses to date in 2012
GUY CARPENTER
23 May 2017
Source: Guy Carpenter
3
Additional supply entering from alternative (re)insurance markets
≈ $4 – 4.5 billion?
GUY CARPENTER
Source: Trading Risk, Guy Carpenter
The Guy Carpenter Global Reinsurance Composite Capital Position
Highly resilient in spite of exceptional losses
190
185
180
USDbn
175
170
165
160
155
150
GUY CARPENTER
23 May 2017
Source: Guy Carpenter
5
Corollary: reinsurance global capacity utilisation at year-end 2010 levels
GUY CARPENTER
Risk #1
Catastrophes and ‘cold spots’
GUY CARPENTER
Estimated reinsurance premium (incl life) growth by region to 2011
Most growth has come from global emerging markets, particularly China, India, SE Asia
90
80
70
USD bn
60
50
40
5 year
CAGR=13%
30
20
10
0
2007
US & Canada
2008
Western Europe
2009
Japan / Korea
2010
Global Emerging Markets
2011
Australia / NZ
Source: Swiss Re Sigma, OECD, Bloomberg consensus 2011 GDP forecasts, Conning, Standard &
Poor’s, Guy Carpenter estimates
GUY CARPENTER
23 May 2017
8
Insured catastrophe losses 1980 – 2010
USD 20.7bn average – geographic distribution
18.7%
64.0%
9.5%
1.1%
3.5%
3.4%
Insured cat losses are traditionally determined by
North American hurricane losses
GUY CARPENTER
Source: Swiss Re
2009 - 2011 worldwide catastrophe activity
‘International’ losses now dominate
GUY CARPENTER
Source:ofGuy
Carpenter
Source: Guy Carpenter, New Zealand EQC, JP Morgan, AIR Worldwide, Ins. Council
Australia,
PCS
Risk #2
Debt crisis and interest rate risk
GUY CARPENTER
Decline in ‘safe’ asset yields pressures returns on equity
Sovereign yield curves *
GUY CARPENTER
Source: Bloomberg, Guy Carpenter
* At 6 August 2012
Reinsurance sector exposure to ‘PIIGS’ sovereign debt now low . . .
. . . but the sector is heavily exposed to interest-rate sensitive securities
GUY CARPENTER
23 May 2017
13
Average reinsurer portfolio yields
2007 through to the second quarter of 2012
6%
5%
4%
3%
2%
1%
0%
GUY CARPENTER
Source: Bloomberg, Guy Carpenter
US government borrowing offsetting private sector deleveraging
Are ‘safe’ assets really safe?
25%
US annual borrowing as a % of GDP by sector
20%
15%
10%
5%
0%
-5%
-10%
-15%
Federal borrowing to GDP
Household sector borrowing to GDP
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
-20%
Corporate sector borrowing to GDP
Source: Guy Carpenter, Bloomberg data, US Federal Reserve
GUY CARPENTER
23 May 2017
15
Interest rates and inflation: balance sheet impact
Wrong bet on interest rates = capital destruction?
Example of a 1.5 percentage point increase in inflation expectations
10%
£25
9%
Assumes a £20bn, 5-year
duration reserve position
rated bond portfolio in
GBP bn
8%
backed by an ALM AA-
7%
the event of an
AA Yield
point in yields
-£1.5bn
£15
£10
£5
6%
unexpected, rapid and
sustained 1.7 percentage
+£1.6bn
£20
£0
5%
Liabilities
Assets
4%
3%
1.7 pp
2%
1%
0%
10Y
7Y
5Y
3Y
2Y
1Y
6M
3M
Maturity
GUY CARPENTER
16
Risk #3
Reserving risk
GUY CARPENTER
Reserve Cycle: Calendar year loss reserve development
GUY CARPENTER
Source: Guy Carpenter
Note: Calendar year releases for a composite of 26 carriers
Reserve Cycle: Accident year loss reserve development
GUY CARPENTER
Source: Guy Carpenter
The result
Low sector valuations, heightened risk premia
GUY CARPENTER
Reinsurance average price to book ratios near historic lows
Nearly 1.5 standard deviations below the 22-year mean
Source: Bloomberg, Guy Carpenter
GUY CARPENTER
23 May 2017
21
Low sector valuations are a persistent problem
Forward returns on equity vs valuations as measured by price to book ratios
1.4x
Guy Carpenter geometric estimate* of
Global Reinsurance Composite m KE : 12.1%
Adjusted price to book ratio
1.3x
y = 4.45x + 0.40
Composite m 2013 consensus RoE : 9.6%
1.2x
1.1x
1.0x
0.9x
Not the ‘sweet spot’
0.8x
0.7x
0.6x
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2013E return on equity
GUY CARPENTER
23 May 2017
Source: Bloomberg, Guy Carpenter
22
What is driving low valuations?
Guy Carpenter composite may not earn its cost of equity in 2012
1.4x
Guy Carpenter geometric estimate* of
Global Reinsurance Composite m KE : 12.1%
Adjusted price to book ratio
1.3x
y = 4.45x + 0.40
Composite m 2013 consensus RoE : 9.6%
1.2x
1.1x
1.0x
0.9x
Mathematically
0.8x
KE = Forward RoE + (1-P/B) * slope
0.7x
0.6x
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2013E return on equity
GUY CARPENTER
23 May 2017
Source: Bloomberg, Guy Carpenter
* Unadjusted for forward reserving assumptions
23
How can valuations be improved?
How can reinsurance affect RoE and valuation and what is the relative cost?
1.4x
Guy Carpenter geometric estimate* of
Adjusted price to book ratio
Global Reinsurance Composite m KE : 12.1%
1.3x
Composite m 2013 consensus RoE : 9.6%
1.2x
Is the cost of equity
currently greater than
the cost of reinsurance?
1.1x
y = 4.45x + 0.40
1.0x
Reinsurance can
- Finance growth
- Satisfy
regulators
Reinsurance can
- Mitigate risk
- Optimise credit
0.9x
0.8x
0.7x
0.6x
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2013E return on equity
GUY CARPENTER
23 May 2017
Source: Bloomberg, Guy Carpenter
* Unadjusted for forward reserving assumptions
24
Important Disclosure
Guy Carpenter & Company, LLC provides this report for general information only. The information and data contained herein is based on sources we
believe reliable, but we do not guarantee its accuracy, and it should be understood to be general insurance/reinsurance information only. Guy Carpenter &
Company, LLC makes no representations or warranties, express or implied. The information is not intended to be taken as advice with respect to any
individual situation and cannot be relied upon as such. Please consult your insurance/reinsurance advisors with respect to individual coverage issues.
Readers are cautioned not to place undue reliance on any calculation or forward-looking statements. Guy Carpenter & Company, LLC undertakes no
obligation to update or revise publicly any data, or current or forward-looking statements, whether as a result of new information, research, future events or
otherwise. The rating agencies referenced herein reserve the right to modify company ratings at any time.
Statements concerning tax, accounting or legal matters should be understood to be general observations based solely on our experience as reinsurance
brokers and risk consultants and may not be relied upon as tax, accounting or legal advice, which we are not authorized to provide. All such matters should
be reviewed with your own qualified advisors in these areas.
This document or any portion of the information it contains may not be copied or reproduced in any form without the permission of Guy Carpenter &
Company, LLC, except that clients of Guy Carpenter & Company, LLC need not obtain such permission when using this report for their internal purposes.
The trademarks and service marks contained herein are the property of their respective owners.
© 2012 Guy Carpenter & Company, LLC
All Rights Reserved
GUY CARPENTER
Disclosure
Securities or investments, as applicable are offered in the US through GC Securities, a division of MMC Securities Corp. (“MMCSC”), a US registered
broker-dealer and member FINRA/SIPC. Main office: 1166 Avenue of the Americas, New York, NY 10036. Phone: 212.345.5000. Securities or
investments, as applicable are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and
regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC
Securities Corp., MMC Securities (Europe) Ltd., and Guy Carpenter, LLC are affiliates owned by Marsh & McLennan Companies (“MMC”). Reinsurance
intermediary services are offered through Guy Carpenter & Company, LLC.
This information was prepared by MMCSC and/or Guy Carpenter & Company, LLC (“Guy Carpenter” or ”GC”), the reinsurance brokerage arm of MMC.
All statistical tables, charts, graphs or other illustrations contained herein were prepared by MMCSC or GC unless otherwise noted. Results from
simulations and projections are for illustrative purposes only and are based on certain assumptions. Therefore the recipient should not place undue
reliance on these results. Past performance does not guarantee future results.
Neither MMCSC nor GC is a legal, tax or accounting adviser and makes no representation as to the accuracy or completeness of any data or
information gathered or prepared by MMCSC or GC hereunder. Your company should therefore consult with its own tax, accounting, legal or other
advisers and make its own independent analysis and investigation of the proposed transaction, as well as the financial and tax consequences thereof,
the creditworthiness of the parties involved and all other matters relating to the transaction, prior to its own independent decision whether or not to enter
into any agreements in connection with any transaction.
This document contains indicative terms for discussion purposes only. MMCSC and GC give no assurance that any transaction will be consummated on
the basis of these indicative terms and no specific issuer is obligated to issue any security or instrument on such indicative terms. This presentation
does not constitute an offer to sell or any solicitation of any offer to buy or sell any security or instrument or to enter into any transaction on such
indicative terms. An investment in insurance linked securities is speculative, involves a high degree of risk and should be considered only by institutional
investors who can bear the economic risks of their investments and who can afford to sustain the loss of their investments. Noteholders may lose all or
a portion of their investment. Institutional investors should thoroughly consider the information contained herein.
This document is not intended to provide the sole basis for any evaluation by you of any transaction, security or instrument described herein and you
agree that the merits or suitability of any such transaction, security or instrument to your particular situation will be independently determined by you
including consideration of the legal, tax, accounting, regulatory financial and other related aspects thereof. Opinions and estimates constitute MMCSC’s
and/or GC’s judgment and are subject to change without notice. In particular, neither MMCSC nor GC owes duty to you (except as required by the rules
of the Securities and Exchange Commission, Financial Industry Regulatory Authority, Financial Services Authority, and/or any other regulatory body
having proper jurisdiction) to exercise any judgment on your behalf as to the merits or suitability of any transaction, security or instrument. The
information contained herein is provided to you on a strictly confidential basis and you agree that it may not be copied, reproduced or otherwise
distributed by you (other than to your professional advisers) without our prior written consent.
This material provides general and conceptual information about certain financial strategies, and does not discuss or refer to any specific securities or
other financial product. This presentation is not intended as marketing, solicitation or offering any security or other financial product in Japan. This
material is intended only for sponsors, financial intuitions and qualified investors.
MMCSC and/or GC may have an independent business relationship with any companies described herein.
Trademarks and service marks are the property of their respective owners.
The source of information for any charts, graphs, or illustrations in this document is GC Securities Proprietary Database 2012, unless otherwise
indicated.
Cory Anger, Chi Hum, Hong Guo, Ryan Clarke and Brad Livingston are registered representatives of MMCSC.
GUY CARPENTER