the sector: between monte carlo and dana point resilience in the face of cold spot perils and other...
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The sector: Between Monte Carlo and Dana PointResilience in the face of ‘cold spot’ perils and other key risks
David Flandro
Global Head of Business Intelligence
Guy Carpenter
David Flandro
Global Head of Business Intelligence
Guy Carpenter
GUY CARPENTER 210 April 2023 210 April 2023
AgendaSector Resilience in the face of ‘cold spot’ perils and other key sector risks
Source: Guy Carpenter
• 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
• 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
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Capital ResilienceWhat is the source?
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Large catastrophe losses – 2011 and 2012Low losses to date in 2012
Source: Guy Carpenter
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Additional supply entering from alternative (re)insurance markets
Source: Trading Risk, Guy Carpenter
≈ $4 – 4.5 billion?
GUY CARPENTER 610 April 2023 610 April 2023
The Guy Carpenter Global Reinsurance Composite Capital PositionHighly resilient in spite of exceptional losses
Source: Guy Carpenter
150
155
160
165
170
175
180
185
190
USD
bn
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Corollary: reinsurance global capacity utilisation at year-end 2010 levels
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Risk #1Catastrophes and ‘cold spots’
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0
10
20
30
40
50
60
70
80
90
2007 2008 2009 2010 2011
USD
bn
US & Canada Western Europe Japan / Korea Global Emerging Markets Australia / NZ
Estimated reinsurance premium (incl life) growth by region to 2011Most growth has come from global emerging markets, particularly China, India, SE Asia
910 April 2023
Source: Swiss Re Sigma, OECD, Bloomberg consensus 2011 GDP forecasts, Conning, Standard & Poor’s, Guy
Carpenter estimates
5 year
CAGR=13%
5 year
CAGR=13%
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Insured catastrophe losses 1980 – 2010USD 20.7bn average – geographic distribution
Insured cat losses are traditionally determined by North American hurricane losses
Source: Swiss Re
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2009 - 2011 worldwide catastrophe activity ‘International’ losses now dominate
Source: Guy Carpenter, New Zealand EQC, JP Morgan, AIR Worldwide, Ins. Council of Australia, PCS Source: Guy Carpenter
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Risk #2Debt crisis and interest rate risk
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Decline in ‘safe’ asset yields pressures returns on equitySovereign yield curves *
Source: Bloomberg, Guy Carpenter* At 6 August 2012
GUY CARPENTER 1410 April 2023
Reinsurance sector exposure to ‘PIIGS’ sovereign debt now low . . .. . . but the sector is heavily exposed to interest-rate sensitive securities
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Average reinsurer portfolio yields 2007 through to the second quarter of 2012
Source: Bloomberg, Guy Carpenter
0%
1%
2%
3%
4%
5%
6%
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US government borrowing offsetting private sector deleveragingAre ‘safe’ assets really safe?
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%19
85
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Federal borrowing to GDP Household sector borrowing to GDP Corporate sector borrowing to GDP
Source: Guy Carpenter, Bloomberg data, US Federal Reserve
US annual borrowing as a % of GDP by sectorUS annual borrowing as a % of GDP by sector
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Assumes a £20bn, 5-year
duration reserve position
backed by an ALM AA-rated
bond portfolio in the event of
an unexpected, rapid and
sustained 1.7 percentage
point in yields
Interest rates and inflation: balance sheet impact Wrong bet on interest rates = capital destruction?
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
3M 6M 1Y 2Y 3Y 5Y 7Y 10Y
AA
Yie
ld
Maturity
1.7 pp
£0
£5
£10
£15
£20
£25
LiabilitiesAssets
GBP
bn
+£1.6bn-£1.5bn
Example of a 1.5 percentage point increase in inflation expectations
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Risk #3Reserving risk
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Reserve Cycle: Calendar year loss reserve development
Source: Guy Carpenter
Note: Calendar year releases for a composite of 26 carriers
Source: Guy Carpenter
Note: Calendar year releases for a composite of 26 carriers
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Source: Guy CarpenterSource: Guy Carpenter
Reserve Cycle: Accident year loss reserve development
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The resultLow sector valuations, heightened risk premia
GUY CARPENTER 2210 April 2023
Reinsurance average price to book ratios near historic lowsNearly 1.5 standard deviations below the 22-year mean
Source: Bloomberg, Guy Carpenter
GUY CARPENTER 2310 April 2023 Source: Bloomberg, Guy Carpenter
y = 4.45x + 0.40
0.6x
0.7x
0.8x
0.9x
1.0x
1.1x
1.2x
1.3x
1.4x
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%
Not the ‘sweet spot’
Adj
uste
d pr
ice
to b
ook
ratio
2013E return on equity
Low sector valuations are a persistent problemForward returns on equity vs valuations as measured by price to book ratios
Guy Carpenter geometric estimate* of
Global Reinsurance Composite KE : 12.1%
Composite 2013 consensus RoE : 9.6%
GUY CARPENTER 2410 April 2023Source: Bloomberg, Guy Carpenter
* Unadjusted for forward reserving assumptions
Adj
uste
d pr
ice
to b
ook
ratio
2013E return on equity
y = 4.45x + 0.40
0.6x
0.7x
0.8x
0.9x
1.0x
1.1x
1.2x
1.3x
1.4x
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%
Mathematically
KE = Forward RoE + (1-P/B) * slope
Guy Carpenter geometric estimate* of
Global Reinsurance Composite KE : 12.1%
Composite 2013 consensus RoE : 9.6%
What is driving low valuations?Guy Carpenter composite may not earn its cost of equity in 2012
GUY CARPENTER 2510 April 2023Source: Bloomberg, Guy Carpenter
* Unadjusted for forward reserving assumptions
Adj
uste
d pr
ice
to b
ook
ratio
2013E return on equity
y = 4.45x + 0.40
0.6x
0.7x
0.8x
0.9x
1.0x
1.1x
1.2x
1.3x
1.4x
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%
Guy Carpenter geometric estimate* of
Global Reinsurance Composite KE : 12.1%
Composite 2013 consensus RoE : 9.6%
How can valuations be improved?How can reinsurance affect RoE and valuation and what is the relative cost?
Reinsurance can
- Mitigate risk
- Optimise credit
Reinsurance can
- Mitigate risk
- Optimise credit
Reinsurance can
- Finance growth
- Satisfy regulators
Reinsurance can
- Finance growth
- Satisfy regulators
Is the cost of equity
currently greater than the
cost of reinsurance?
Is the cost of equity
currently greater than the
cost of reinsurance?
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