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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]

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Page 1: 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

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

[email protected]

David Flandro

Global Head of Business Intelligence

Guy Carpenter

[email protected]

Page 2: 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 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

Page 3: 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

Capital ResilienceWhat is the source?

Page 4: 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 410 April 2023

Large catastrophe losses – 2011 and 2012Low losses to date in 2012

Source: Guy Carpenter

Page 5: 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

Additional supply entering from alternative (re)insurance markets

Source: Trading Risk, Guy Carpenter

≈ $4 – 4.5 billion?

Page 6: 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 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

Page 7: 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

Corollary: reinsurance global capacity utilisation at year-end 2010 levels

Page 8: 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

Risk #1Catastrophes and ‘cold spots’

Page 9: 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

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%

Page 10: 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

Insured catastrophe losses 1980 – 2010USD 20.7bn average – geographic distribution

Insured cat losses are traditionally determined by North American hurricane losses

Source: Swiss Re

Page 11: 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

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

Page 12: 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

Risk #2Debt crisis and interest rate risk

Page 13: 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

Decline in ‘safe’ asset yields pressures returns on equitySovereign yield curves *

Source: Bloomberg, Guy Carpenter* At 6 August 2012

Page 14: 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 1410 April 2023

Reinsurance sector exposure to ‘PIIGS’ sovereign debt now low . . .. . . but the sector is heavily exposed to interest-rate sensitive securities

Page 15: 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

Average reinsurer portfolio yields 2007 through to the second quarter of 2012

Source: Bloomberg, Guy Carpenter

0%

1%

2%

3%

4%

5%

6%

Page 16: 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 1610 April 2023

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

Page 17: 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 CARPENTER1717

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

Page 18: 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

Risk #3Reserving risk

Page 19: 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

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

Page 20: 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

Source: Guy CarpenterSource: Guy Carpenter

Reserve Cycle: Accident year loss reserve development

Page 21: 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

The resultLow sector valuations, heightened risk premia

Page 22: 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 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

Page 23: 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 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%

Page 24: 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 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

Page 25: 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 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?

Page 26: 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

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

Page 27: 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

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.

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