Transcript The Bermuda Market in 2005

The US ART Market in the Current Economic Environment
The US ART Market in the Current
Economic Environment
• Moderator –
Gavin Collery
President & COO
Alternative Re Limited
• Speaker 1 –
Stephen D. Standing
Vice President
Kirkway International Limited
• Speaker 2 –
Richard Stock
Senior Vice President
Arch Insurance Company
The US ART Market in the Current
Economic Environment
The Market Cycle
Merriam-Webster’s Online Dictionary:
1cy·cle
Pronunciation: \sī-kəl\
Function: noun
1: an interval of time during which a sequence of a recurring succession of events or
phenomena is completed <a 4-year cycle of growth and development>2 a: a course or
series of events or operations that recur regularly and usually lead back to the starting
point b: one complete performance of a vibration, electric oscillation, current alternation, or
other periodic process c: a permutation of a set of ordered elements in which each
element takes the place of the next and the last becomes first d: a takeoff and landing of
an airplane3: a circular or spiral arrangement: as a: an imaginary circle or orbit in the
heavens b: ring 10 4: a long period of time :
XS Casualty (Attachment Point : $100M)
140.0%
3.500
130% 131%
121%
117%
111.3%
120.0%
100.0%
3.000
92%
80.0%
70%
72%
72%
76%
70%
2.000
60.0%
43.7%
38.3%
40.0%
1.500
20.0%
6.1%
4.4%
8.0%
1.000
0.0%
0.0%
-20.0%
-5.4% -7.6% -6.1%
-5.5%
-9.3% -10.8%
-8.0%
-4.5%
-8.0%
0.500
-15.0%
-40.0%
0.000
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Rate Change
Industry Loss Ratio
Rate Index + 3% trend
Rate Index
Rate Change / Loss Ratio
2.500
75%
The US ART Market in the Current
Economic Environment
Dealing with the Insurance Cycle (From Wikipedia, the free encyclopedia)
Whilst many underwriters believe that the cycle is out of their hands,
Lloyd’s is trying to push for more proactive management of the ups and
downs of the industry. In 2006 they published their ‘Seven Steps’ to
managing the insurance cycle:
1. Don’t follow the herd. Insurers need to be prepared to walk away
from markets when prices fall below a prudent, risk-based premium.
2. Invest in the latest risk management tools. Insurers must push for
continuous improvement of these tools based on the latest science
around issues such as climate change, and make full use of them to
communicate their pricing and coverage decisions.
3. Don’t let surplus capital dictate your underwriting. An excess of
capital available for underwriting can easily push an insurer to deploy
the capital in unsustainable ways, rather than having that capital
migrate to other uses such as hedge funds and equities, or returning it
to shareholders.
The US ART Market in the Current
Economic Environment
4. Don’t be dazzled by higher investment returns. Don’t let higher
investment returns replace disciplined underwriting as base rates
creep up on both sides of the Atlantic. Notionally, splitting the
business into insurance and asset management operations, and
monitoring each separately, is one way to achieve this.
5. Don’t rely on “the big one” to push prices upwards. The
spectacular insured loss should not be used as an excuse to raise
prices in unrelated lines of business. Regulators, rating agencies, and
analysts - not to mention insurance buyers – are increasingly resisting
such behaviour.
6. Redeploy capital from lines where margins are unsustainable.
There is little that individual insurers can do to alter overall supplyand-demand conditions. But insurers can set up internal monitoring
systems to ensure that they scale back in lines in which margins have
become unsustainable and migrate to other lines.
7. Get smarter with underwriter and manager incentives. Incentives
for key staff should be structured to reward efficient deployment of
capital, linking such rewards to target shareholder returns rather than
volume growth.[5]
The US ART Market in the Current Economic Environment - A
Broker’s Perspective
Stephen D. Standing
Kirkway International Limited
The Dow Jones Industrial Average
June 2008 – June 2009
September 2008
September 13, 2008: IKE hits Texas; $20bn Loss
September 15, 2008: Lehman Brothers file bankruptcy
September 16, 2008: AIG Bailout
2008: Year in Review
2nd Costliest year ever with $50bn in insured losses (Swiss Re)
$43bn from Cats
$7bn from man-made events
240,000 deaths
Policy Holder Surplus down by 11.3% (AM Best)
Shareholder Equity down by 15% (AM Best)
Vaporized Capacity
Retrocessional Capacity Diminishes – Retro increases will drive
the reinsurance market which will trickle down to the insurance
market.
Cat Bond Market
2007: Record setting year.
2008: Decline of 62% in
volume and 52% transaction
size.
Vaporized Capacity cont.
Currency Effect - Pound falls as Dollar climbs
Credit Crunch – No way to recharge balance sheets due to
contraction of capital markets. $3.5tr in losses tied to US
Banking System. (John Mauldin)
Vaporized Capacity cont.
LIMITED NUMBER OF START-UPS
Post 9/11: Close to $7bn capital raised between October and
December 2001 (CD&P)
Arch, AWAC, AXIS, Endurance, Montpelier
Post Katrina: 53 new start-ups/Side-Cars/CAT Bonds with
$21.4bn of capital
Lancashire, Validus, Ariel, Harbor Point, Flagstone, Ironshore
$12bn in Capital Additions from existing entities
2008 & 2009 Activity
Torus, Iris Re, Timicuan Re II, Jubilee, W.R. Berkeley, Ren Re
Financial results for Selected Insurance Entities
Gross Premiums
Written
vs. Net Premiums vs. Net Income
2007
Earned
2007
2008
$m
ACE Limited
AWAC
ARCH Capital
ARGO Group
Aspen Insurance
AXIS Capital
Catlin Group
Endurance Specialty
Everest Re
Flagstone Re
IPC Holdings
Lancashire
Max Capital
Montpelier Re
Partner Re
Platinum Underwriters
Renaissance Re
Validus
White Mountains
XL Capital
Source: Bermuda Insurance Update 2009 Vol. 1
19,242
1,446
3,669
1,602
2,002
n.a.
3,437
2,246
n.a.
782
403
638
12,154
620
4,028
n.a.
1,736
1,363
n.a.
8,260
8%
-4%
-11%
36%
10%
n.a.
2%
26%
n.a.
35%
same
-15%
16%
-5%
6%
n.a.
-4%
-1%
n.a.
-8%
$m
13,203
1,117
2,845
1,127
1,702
2,687
2,596
1,766
3,694
654
387
607
814
529
3,928
1,115
1,387
1,256
3,710
6,640
7%
-4%
-3%
31%
-2%
-2%
4%
11%
-8%
37%
-1%
same
-1%
-5%
4%
-5%
-3%
10%
-2%
-8%
$m
1,197
184
265
63
104
351
(46)
83
(19)
(187)
76
98
(200)
(151)
47
216
(13)
403
(749)
(2,632)
vs.
2007
-54%
-61%
-68%
-56%
-79%
-67%
n.m.
-84%
n.m.
n.m.
-79%
-75%
n.m.
n.m.
-94%
-38%
n.m.
-7%
n.m.
n.m.
Shareholders Equity
at Dec 31, 08
$m
14,446
2,417
3,433
1,353
2,779
4,461
2,469
2,207
4,960
986
1,851
1,273
1,280
1,358
4,199
1,809
3,033
1,939
2,899
6,615
Current Fronting Companies
Captive and RRG Growth
CAPTIVE GROWTH
1989-2008
Number of
Year
captives
1989
1992
1995
1997
1998
2004
2005
2006
2007
2008
2,535
2,896
3,199
3,361
3,418
4,688
4,772
4,951
5,119
5,211
Source: Insurance Information Institute,
based on Business Insurance and Conning
Research data.
RISK RETENTION GROUP
PREMIUMS AND
NUMBER OF RISK RETENTION
GROUPS, 2000-2007
Year
2000
2001
2002
2003
2004
2005
2006
2007
Premium
Number
($ millions)
$803
944
1,265
1,738
2,197
2,449
2,638
2,559
Source: Risk Retention Reporter, July 2008.
65
69
90
141
186
216
238
254
Domestic and Off Shore Captive Domiciles
LEADING CAPTIVE DOMICILES
2007-2008
Number of
captives
CAPTIVES BY STATE
2007-2008
Rank
Rank
Location
2007
2008
1
1
958
960 (1)
2
2
Bermuda
Cayman
Islands
765
777
3
Vermont
567
557
4
Guernsey
368
370
5
British Virgin
Islands
392
332
(1) Business Insurance estimate.
Source: Business Insurance, March 9, 2009.
State
2007
2008
Vermont 567
557
Hawaii
163
165
3
South
Carolina 158
163
4
Nevada
108
123
5
Utah
92
122
United
States 1,415 1,553
Source: Business Insurance, March 9, 2009.
Growth Prospects
“Difficulties in the capital and credit markets may drive increased need to
manage insurance risk finance through captive insurance vehicles for
expense savings; also, anticipate hard market in the traditional insurance
sector.” (Delaware)
“With the economy in the state that it is in, companies are looking for costsaving measures. Forming a captive insurance company is a strategy to
achieve below market premiums and control company losses/claims over
time through loss prevention efforts and enhanced risk management
efforts.” (Hawaii)
“These tough economic times have taken their toll on the traditional
insurance companies’ balance sheets and their ability to properly service
their customers. As a result, captives emerge as a solution to uncertainty,
instability, and lack of service in the traditional market.” (South Carolina)
“The economy will have bottomed out (hopefully), and the insurance market
is expected to harden. We have already seen an increase over last year to
date.” (Vermont)
Growth Prospects cont.
900 new captives incorporated worldwide in 2008
- 50% of growth came from middle market companies (US Captive, April 09)
Health Benefits
- Average cost savings of 5-10% as compared to the commercial
insurance market (Business Insurance, March 09)
24.4% hike urged in California Workers’ Comp rates
US Cat reinsurance rates may rise 20% on 7/1 (Munich Re)
- Signs of things to come?
Buying Strategies
Review security of fronting carrier carefully.
Insist on buying Reinsurance separately - divide & conquer.
Deeper analysis of reinsurance security; Avoid weak balance
sheets, legacy issues and companies with no long term capital
commitment.
Stick with trusted reinsurers that you have built a “bank” of
premium with.
Buy Long; Multi Year contracts where ever possible, with built in
reinstatements to avoid renegotiating mid crisis.
Lock in aggregate protection to protect against adverse
developments from rising loss ratios across all lines.
The US ART Market in the Current Economic Environment
– A Carrier’s Perspective
Richard Stock
SVP – Alternative Markets – Arch Insurance Group
Agenda – Carrier Perspective
•
Overview of Arch Alternative Markets
•
Captive Marketplace Background
•
Impact of current economic condition on captives
– Collateral
– Viability and Interest in Captive Approach
– Fronting carriers
– Investments
– Credit Risk to Insureds
•
Impact of current insurance marketplace on
captives
– Hard or Soft Market
• Perception, reality, and expectations
Arch Alternative Markets
•
Target Markets
– Group Programs including Start-ups
– Individual Account Programs at lower-end of large
account marketplace.
– Work Comp, General Liability, and Auto Liability
– Potential expansion into other lines of business
•
Distribution is mainly regional captive specialists
•
Claim Handling and Risk Control is unbundled
•
Deal with both rent-a-captive facilities and stand
alone captives
Captive Marketplace Background
•
Major Concerns of Captive Participants
– Collateral
– Expanded utilization
– Service
– Fronting carriers
– Cost of reinsurance
– Investments
– Tax Regulations
•
Other Concerns
– Group captive credit concerns
•
Still a growing marketplace
Impact of Current Economic Environment
Collateral
•
Gap collateral requirements a bigger disincentive to
entering into a captive arrangement
– Less financial flexibility for most firms
– Credit is less available and more expensive
•
Movement to Reinsurance Trusts vs. LOCs
– LOC is most common form of collateral used
– LOCs, even those asset backed, are becoming
more expensive
•
Other alternatives also being explored
– 3rd party investor
– Credit risk products
•
A bigger push to release collateral and distribute
profits from captive programs
Impact of Current Economic Environment
Viability and Interest in Captive Approach
•
Most companies are seeing a decline in revenue
and payroll with certain industries, such as
residential construction, seeing a significant
impact
– Premiums no longer at a level where a
captive program is viable
– Certain companies are in survival mode and
can no longer take a long term view
• Company focusing on ‘core’ business
and less willing to invest time and capital
in new areas
Impact of Current Economic Environment
Viability and Interest in Captive Approach (Cont.)
Impact
•
Some captive programs have been discontinued
– 3 out of 10 of our CA focused programs have been discontinued.
•
One group program focusing on CA residential contractors
had over 1/3 of its members discontinue operations. This
along with significant exposure decreases and rate
competition saw the program dissolve.
•
Another individual entity program saw its premium decrease
by 95% due to exposure and rate decreases, thus making a
individual captive program no longer viable.
•
More difficult to attract new members, all else being equal, although
perception of hard market is resulting in more interest
•
Accounts looking to close-out programs to release profits and
collateral
•
For many of the programs in run-off, we have been
contacted concerning a commutation
Impact of Current Economic Environment
Investments
•
A large percentage of captives are revisiting their
investment approach
– Some are deciding to become more conservative
– Others are seeing this as an opportunity to invest
in high-grade corporate securities
Impact of Current Economic Environment
Fronting Carriers
•
Captive community generally view availability and
cost as reasonable
•
However, fronting carriers are impacted by the
economic environment, some more than others
•
Many fronting companies have seen staff reductions
which may impact service and current relationships
Impact of Current Economic Environment
Credit Risk to Insureds
•
Insurer or Captive bankruptcy – Some discussions
occurring
•
Group member bankruptcy
– Understanding of who pays
– Little discussion to-date, but could have significant
impact on certain groups
Impact of Current Insurance Marketplace
Assessment of Current Insurance Marketplace
•
Numerous discussions about hardening market, but limited ‘true’
evidence
•
Rates have flattened, but no general increase in rates
•
Most rate increases are for accounts with exposure decreases
– Flat or lower premium, but higher rates on a per exposure basis
•
Concerns over certain carriers
•
Perception is that market will harden, it just is not happening yet
– Significant CA work comp rate increases on the horizon
•
State fund just filed for a 15% rate increase
•
Bureau recommended rate change of +25%
•
Medical trends and reverse of negative trends may start to
drive Work Comp rate increases elsewhere
– More signs of hardening market in the large account arena
Impact of Current Insurance Marketplace
Impact
•
More insureds exploring captive options.
– Perception and some early signs of a hardening market
are driving this
– For one of our CA Work Comp captives, we saw three
new members in 2009, which were the first new members
in over a year
•
Start-up captives are still happening, but difficult to get the
focus of key start-up members
– Collateral issues, competitive rates, and general
economic conditions are driving this
Summary
•
Captive options generally viewed as a valuable tool in
overall risk management
•
Captive market is growing, but growth has been
slowed by
– Economic Environment
– Insurance Marketplace
•
Early signs of pending hard market increasing interest
level in captive alternatives
– Hardening market seems to be starting in large
accounts, but little sign in mid-sized accounts
•
Expect more activity as economy stabilizes and
insurance ‘hard’ market starts to take hold
Questions
Questions?
Forward looking statement
•
•
•
•
•
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward−looking statements. This
presentation or any other written or oral statements made by or on behalf of Arch Capital Group Ltd. and its
subsidiaries may include forward−looking statements, which reflect our current views with respect to future events
and financial performance. All statements other than statements of historical fact included in or incorporated by
reference in this presentation are forward−looking statements.
Forward−looking statements can generally be identified by the use of forward−looking terminology such as "may,"
"will," "expect," "intend," "estimate," "anticipate," "believe" or "continue" or their negative or variations or similar
terminology. Forward−looking statements involve our current assessment of risks and uncertainties. Actual events
and results may differ materially from those expressed or implied in these statements. A non-exclusive list of the
important factors that could cause actual results to differ materially from those in such forward-looking statements
includes the following: adverse general economic and market conditions; increased competition; pricing and policy
term trends; fluctuations in the actions of rating agencies and our ability to maintain and improve our ratings;
investment performance; the loss of key personnel; the adequacy of our loss reserves, severity and/or frequency of
losses, greater than expected loss ratios and adverse development on claim and/or claim expense liabilities; greater
frequency or severity of unpredictable natural and man-made catastrophic events; the impact of acts of terrorism
and acts of war; changes in regulations and/or tax laws in the United States or elsewhere; our ability to successfully
integrate, establish and maintain operating procedures as well as integrate the businesses we have acquired or may
acquire into the existing operations; changes in accounting principles or policies; material differences between
actual and expected assessments for guaranty funds and mandatory pooling arrangements; availability and cost to
us of reinsurance to manage our gross and net exposures; the failure of others to meet their obligations to us; and
other factors identified in our filings with the U.S. Securities and Exchange Commission.
The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction
with other cautionary statements that are included herein or elsewhere. All subsequent written and oral
forward−looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety
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obligation to publicly update or revise ay information contained herein.
Insurance coverage is underwritten by one or more member companies of Arch Insurance Group in North America,
which consists of Arch Insurance Company (a Missouri corporation, NAIC # 11150), Arch Specialty Insurance
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