Transcript Title in Arial bold Subhead in Arial - Marine Seminar

Marine Reinsurance:
Where do we go from here?
Houston, TX
21st September 2009
www.guycarp.com
Impact on Surplus of US Insurers in 2008
$Billions
600
$517.9
$32.2
$21.8
$72.7
$455.6
$ Billions
500
400
300
End 2007
Net Income and
Other Changes
Catastrophes
Capital Loss
End 2008
• Premium / Surplus Ratio: 0.95 X
• Actual Surplus / RBC: 6 X
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USDbn
GC Global Reinsurance Composite – Change in Reported
Shareholders' Funds in 2008
120
100
80
60
SHF YE05
SHF YE06
SHF YE07
Net Income
Shares
Div idends
Unrealized
Forex
Capital
Repurchased
paid
Gains
Mov ements
Increase
Other
SHF YE08
(Losses)
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ROE: Global Reinsurance Composite
15.80%
7.30%
3.50%
End 2007
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End 2008
End First Half 2009
3
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
120
100
80
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in USD bn,
indexed to 2008
Insured catastrophe losses 1970-2008
Earthquake/tsunami
M an-made disasters
Weather-related Nat Cats
To tal
Hurricane Ike,
Gustav
Hurricane Katrina et al
Attack on WTC
Hurricanes Ivan, Charley et al
Winter storm Lothar
Northridge
earthquake
Hurricane Andrew
History of Insured Catastrophe Losses
60
40
20
0
4
Reinsurance: ROL Index, Major Markets
1990 = 100
300.0
250.0
200.0
150.0
100.0
50.0
0.0
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
United Kingdom
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98
19
99
19
00
20
01
20
02
20
Continental Europe
03
20
04
20
05
20
06
20
07
20
P
08
09
20
20
United States
5
United States ROL
Index 1990 = 100
300
200
100
0
90 9 91 9 92 9 93 9 94 9 95 9 96 9 97 9 98 9 99 0 00 0 01 0 02 0 03 0 04 0 05 0 06 0 07 0 08 09 E
19
1
1
1
1
1
1
1
1
1
2
2
2
2
2
2
2
2
2
20
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Global Marine Premium USD Million
25.000
20.000
Liability
Energy
15.000
Hull
Cargo
Total
10.000
5.000
0.000
2000
2001
2002
2003
2004
2005
2006
2007
Accounting Year
IUMI Global Marine Insurance Reports
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Profitability: US Ocean Marine Combined Ratio
Calendar Year
Ratio
2003:
89.85%
2004:
91.68%
“Charley”, “Frances”, “Ivan”, “Jeanne”
2005:
99.23%
“Katrina”, “Rita”, “Wilma”
2006:
86.03%
2007:
85.91%
2008:
105.77%
“Ike”
Source: AIMU
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AIMU Operating Ratios
2004 – 2008
2004
2005
2006
2007
2008
Cargo
(Incl. War Strikes Etc.)
64.69%
74.81%
77.22%
78.90%
90.74%
Ocean Hull
(Incl. War Strikes Etc.)
108.55%
92.50%
98.42%
109.42%
126.47%
All other Hull
(Incl. War Strikes Etc.)
94.13%
104.72%
84.38%
69.69%
97.14%
Com m erical Prim ary
P&I
145.05%
97.01%
112.63%
118.14%
112.73%
Yacht
(Incl. P&I)
120.98%
111.23%
95.89%
89.20%
91.98%
Excess Liabilities
86.08%
88.14%
102.16%
120.77%
154.68%
Prim ary Liabilities
81.19%
78.78%
77.96%
87.96%
101.28%
Offshore & Energy
Risks
102.15%
300.49%
60.22%
27.02%
217.18%
Total All Lines
91.68%
99.23%
86.03%
85.91%
105.77%
Source: AIMU
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Reinsurance
Where are we and where do we go from here?
Macro View
Economic outlook

US economic growth is expected to return to positive
territory in the second half of 2009. Other economies are
expected to recover moderately in 2010.

Inflation will remain very low or negative 2009 and 2010 (at
least) due to large slack in the economy. The longer-term
inflation outlook is more uncertain.

Government bond yields are expected to remain low this
year and rise moderately next year.

Corporate bond and equity markets are likely to remain
volatile.
Americas P&C
Primary market overview –

Recession is reducing exposures and claims frequency in many lines of
business (incl workers comp & engineering but ocean marine and
energy?).

The cost of capital has risen: equity markets are depressed and hybrid
capital is expensive. Reinsurance is currently the most efficient
source of capital.

Capital management has shifted from returning capital to preserving /
raising capital. Primary and reinsurers are de-risking their balance sheets.

Rates have begun to harden. Reinsurance will lead the rate dynamics;
primary markets will follow with a lag. Property prices are firming first;
casualty is still soft. There will be a moderately hard market through 2011.
Deterioration of combined ratios
(excl cat)
…different business lines but clear trends….
Large cap
Auto
Regional
Specialty
Reinsurance
110%
105%
100%
95%
90%
85%
80%
Source: Dowling & Partners
1Q09
3Q08
1Q08
3Q07
1Q07
3Q06
1Q06
1Q09
3Q08
1Q08
3Q07
1Q07
3Q06
1Q06
1Q09
3Q08
1Q08
3Q07
1Q07
3Q06
1Q06
1Q09
3Q08
1Q08
3Q07
1Q07
3Q06
1Q06
1Q09
3Q08
1Q08
3Q07
1Q07
3Q06
70%
1Q06
75%
Low yield environment reduces
the profit potential
2008 industry assumptions:
Asset leverage: 291%
Tax rate [1]
25.4%
NPW/surplus
96%
[2]
Inv yield
4.0%
ROE
Sources: A.M. Best,
estimates by Economic
Research &
Consulting.
[1] based on 1H08
effective statutory tax
rates.
[2] 9M08 total
investment yield was
3.0% and CR was 105
10%
8%
6%
4%
5%
4%
2%
3%
0%
97%
98%
99%
100% 101% 102% 103% 104% 105% 106% 107%
Combined Ratio
 A 100 bps reduction in yield can imply a 2.9 point combined ratio move to achieve
the same ROE
Renewal: January 2010
Expected European price trends
REINSURANCE
Property non-proportional
Property proportional
Property Nat Cat
Casualty
Motor
Marine, Energy and Engineering
Aviation

Property prices are improving while Casualty levels do not yet reflect loss trends
and reduced yields

The low interest rate environment, soft industry underwriting results and depletion
of industry capital all point towards further price increases
Renewal: January 2010
European Property & Specialty trends
Property

Peak nat cat capacity remains scarce and valuable

No strong global trends: price increases in some loss-affected
regions and industries

Industrial risks remain competitive and threaten to underperfom
Marine and Energy

Marine results are fragile in light of economic downturn

Energy will continue to seek opportunities outside of Gulf

Gulf Product sustainability questions
Reinsurance
Where are we and where do we go from here?
Micro View
Capacity changes
Entrants

Rumoured some Lloyd’s start ups projected for 2010

Novae Re already announced
Exits

Axis Re

Endurance Re
Some Reinsurers expanding into primary business

Flagstone creates Mosaic

Montpelier Re writing insurance
Mergers and Acquisitions

Partner Re and Paris Re

Validus and IPC
Recent Losses

ACL barge collided with a boat on the Mississippi River
near New Orleans with more than 400,000 gallons of fuel
oil spilled into the Mississippi River.

Cosco Busan Left the Port of Oakland on November 7,
2007, and hit the Bay Bridge

Ike

Sempra October 2007, 3 wildfires in San Diego county
California broke out and resulted in extensive property
damage and disruption to business.
Rates terms and conditions for 2009

Excl GOM 7.5% increase

GOM re underwritten extensively

Limits and retentions constant with GOM again an
exception

Amended Liability exclusion clause introduced

Review of wind related property claims in the XS liability
market discussed
Projected Rates terms and conditions for
2010
Constant pricing.
– Adverse claims experience will see higher rates
Overall upward pressure on reinsurance pricing caused by:
– Increasing Cost of Capital
– Low interest rate environment
– Investors demanding improved ROE
Potential further disconnect between clients and reinsurers:
– Particularly in Gulf of Mexico
– Further discussion and review of wind related property
claims in the XS liability market
www.guycarp.com
The Future Lies with Analytics?
Opportunities to Understand and Protect Your Portfolio
 Yachts and Cargo Risk Accumulations
– Personal Yachts
 Risk identification and evaluation
- Management tools
- Hazard simulation modeling
– Cargo Accumulation
 Risk identification and evaluation
 Making the latest technology productive
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Understanding Exposure Accumulation
 Marine risks are often associated with geographical concentration
 Geographically co-located insureds
increase concentration
 The accumulation of risk in one place escalates
potential losses
For marine writers, personal yacht and cargo accumulations are
risks that can be mitigated through simulation modeling. The
technology exists, and in many cases data is available.
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Advancing Marine Modeling
 Today, we have the technology to improve (not replace) traditional
marine risk management concepts
– but, it is not being widely used
 The models and techniques used for other property catastrophe lines
can be applied to Marine
– and reinsurers are requiring more quantitative input
Manage marine risk more effectively with modeling technology
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