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
david.flandro@guycarp.com
Agenda
Sector Resilience in the face of ‘cold spot’ perils and other key sector risks
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•
•
•
•
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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07 April 2015
Source: Guy Carpenter
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Capital Resilience
What is the source?
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Large catastrophe losses – 2011 and 2012
Low losses to date in 2012
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07 April 2015
Source: Guy Carpenter
3
Additional supply entering from alternative (re)insurance markets
≈ $4 – 4.5 billion?
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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
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07 April 2015
Source: Guy Carpenter
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Corollary: reinsurance global capacity utilisation at year-end 2010 levels
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Risk #1
Catastrophes and ‘cold spots’
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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
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07 April 2015
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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
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Source: Swiss Re
2009 - 2011 worldwide catastrophe activity
‘International’ losses now dominate
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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
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Decline in ‘safe’ asset yields pressures returns on equity
Sovereign yield curves *
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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
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07 April 2015
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Average reinsurer portfolio yields
2007 through to the second quarter of 2012
6%
5%
4%
3%
2%
1%
0%
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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
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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
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Risk #3
Reserving risk
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Reserve Cycle: Calendar year loss reserve development
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Source: Guy Carpenter
Note: Calendar year releases for a composite of 26 carriers
Reserve Cycle: Accident year loss reserve development
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Source: Guy Carpenter
The result
Low sector valuations, heightened risk premia
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Reinsurance average price to book ratios near historic lows
Nearly 1.5 standard deviations below the 22-year mean
Source: Bloomberg, Guy Carpenter
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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
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07 April 2015
Source: Bloomberg, Guy Carpenter
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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
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07 April 2015
Source: Bloomberg, Guy Carpenter
* Unadjusted for forward reserving assumptions
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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
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07 April 2015
Source: Bloomberg, Guy Carpenter
* Unadjusted for forward reserving assumptions
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