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A crisis, what’s the use,
what’s the purpose?
Impact of the Crisis on Insurance and Reinsurance
Michel M. Liès
Member of the Executive Committee, Swiss Re
Monte Carlo, 8 September 09
Agenda
RVS Monte Carlo 2009
Michel M. Liès
Slide 2

Looking back: impact of the crisis on insurance and
reinsurance

The here and now

Looking ahead: winners and opportunities
The world has not seen many
crises like this
2008
1998 - 2007
1988 - 1997
1978 - 1987
1968 - 1977
1958 - 1967
1948 - 1957
Normal
distribution fit
1825 - 1947
We are here
RVS Monte Carlo 2009
Michel M. Liès
Slide 3
Source: Axa
Market value loss was universal
across sectors
Financial Services Industry: after-crisis market value loss
Across FS sub-industries
Across geographies
Central and Eastern Europe
-72%
Consumer finance/monolines
-75%
China
-52%
India
-38%
Diversifieds/ Bancassurers
-64%
Canada
-44%
Capital markets players
-61%
Australasia
-46%
Banks
-56%
Japan
-41%
P&C/Mixed insurance
-46%
-36%
-39%
-52%
-80%
RVS Monte Carlo 2009
Michel M. Liès
Slide 4
-60%
Reinsurance
0%
Other Asia
-50%
Service providers
-20%
Middle East and Africa
-45%
US
-55%
Wealth mgmt. & Life insurance
-40%
Latin America
-46%
Western Europe
-60%
-80%
-60%
-40%
-20%
Market value loss of top-400 FS companies between 31 July 2007 and 31 December 2008
Source: Datastream, Oliver Wyman
0%
Banking versus insurance - systemic
crisis versus solvency issue
RVS Monte Carlo 2009
Michel M. Liès
Slide 5
Issues
Insurers
Banks
Main problem
Losses on investment
portfolio and on
shareholder capital
Interbank market
collapsed
Operational problems
Business as “normal”:
cover provided and
claims paid
Banking system close to
collapse
Trust in the system
No indication for
Run on the bank
policyholders losing trust prevented by Central
– no run on insurers
banks’ guarantees
Government support
Confined to very few
cases
Broad intervention of
central banks and
governments
Pressure on both sides of the insurers’
balance sheet
Non-life
insurers were
much less
affected than
life insurers
Insurers
Drop in asset values
Illiquidity of assets,
increased correlation of
different asset classes
Assets
Short term funding
drying up, imperfect function
of hedges
D&O and E&O losses
Liabilities
RVS Monte Carlo 2009
Michel M. Liès
Slide 6
Shareholder
equity
Difficulties to manage risk
and raise capital
Strong drop in shareholder equity
Shareholder’s Equity,
Key aspects
Index June 2007=100, USD*
110

Non-life insurers lost 15-20% and Life
insurers 30-40% of their shareholder
capital

Capital costs to remain high; access to
capital markets likely to remain
restricted

Reinsurance is available – but
capacities are limited, as well

The government as capital provider of
last resort – a wild card
100
90
80
70
60
Dez 06
Jun 07
*30 major insurers
RVS Monte Carlo 2009
Michel M. Liès
Slide 7
Dez 07
Jun 08
Dez 08
Jun 09E
Sources: Company reports, Bloomberg,
Swiss Re Economic Research & Consulting
Agenda
RVS Monte Carlo 2009
Michel M. Liès
Slide 8

Looking back: impact of the crisis on insurance and
reinsurance

The here and now

Looking ahead: winners and opportunities
The here and now
ROE
20%
18%
16%
14%
10%
8%
When interest rates are at 3.5% it
needs combined ratios
substantially below 100 in the US
to earn the cost of capital
6%
4%
5%
4%
3%
2%
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
Slide 9
7%
6%
10
5%
10
4%
3%
2%
10
1%
10
0%
10
%
%
%
%
%
%
10
99
98
97
96
95
94
%
93
%
0%
%
Low yield environment
creates profitability gap
Low interest rates in the
medium-term
12%
91

Hardening of market is in
most primary insurance
areas still outstanding,
meanwhile competition
remains fierce
92

10
Working on de-risking
asset portfolio, cost saving
and recapitalization
10

2008 industry assumptions:
Asset leverage:
278%
Tax rate [1]
24%
NPW/surplus
94%
Combined Ratio
Capital markets situation improved
but risks remain
 Improved equity valuations in recent months
European equities, (June 2007=100)
 Defaults still on the rise
Global speculative-grade default rates
(BBB or below)
120
+9%
-2%
22%
100
-46%
Pessimistic scenario
17%
80
+11%
Moody's forecast:
Baseline scenario
Optimistic
scenario
60
12%
40
7%
20
Jul 09
Apr 09
Jan 09
Okt 08
Jul 08
Apr 08
Jan 08
Okt 07
Jul 07
Apr 07
Jan 07
0
2%
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
-3%
Banking sector
Life insurance
Non-life insurance
DJ Euro Stoxx 50
Source: Bloomberg
Slide 10
Global speculative grade default rate
Source: Moody’s
10
“Advantage reinsurance!”

Reinsurance surprises positively
– Reinsurance shows resilience through out the crisis
– It is and was available when needed most
– It provides quick and very flexible short term solutions in
the crisis
– For many capital market instruments the same cannot
be said
RVS Monte Carlo 2009
Michel M. Liès
Slide 11
The industry surprises through superior
resilience in the most severe crisis since
the 30s – drawing the right lessons from
the mistakes made makes it even stronger
Agenda
RVS Monte Carlo 2009
Michel M. Liès
Slide 12

Looking back: impact of the crisis on insurance and
reinsurance

The here and now

Looking ahead: winners and opportunities
Looking ahead

Cost management and solid underwriting remain key for nonlife insurance and reinsurance
– It is the basis for restoring sustained profitability
– It is needed for getting investors back on board
– If not now, when should we make progress?

Outlook:
– Strong capitalisation respectively access to capital at favourable
conditions is key for using investment opportunities and the
consolidation opportunity to expand
– The ultimate winners will be those that take action on emerging
demand trends
– The current situation demands for vision and clear leadership
RVS Monte Carlo 2009
Michel M. Liès
Slide 13

Firms will need to quickly refocus from pre-crisis to post-crisis
priorities
Quick re-focus from pre-crisis to
post-crisis priorities needed
Pre-crisis priorities
Post-crisis priorities
Short-term tactical priority
Short-term tactical priority

Refine core value proposition and
respond to competitor initiatives
Long-term strategic priority

Continually improve competitive
positioning in a stable and fastgrowing dynamic equilibrium
Required skill set

Exceptional execution

Gearing to controlled growth
RVS Monte Carlo 2009
Michel M. Liès
Slide 14
Source: Swiss Re, Oliver Wyman

Exploit discontinuities and futureproof business model
Long-term strategic priority

Continually evolve business model to
a changing eco-system
Required skill set

Exceptional execution

Cost and risk management, merger
and customer integration

Agility and cycle-adaptiveness

Simultaneous strategies to hedge an
uncertain environment
Immediate priorities: exploiting
discontinuities and future-proofing
Exploiting discontinuities
Future-proofing
Exploit flight-to-quality
Upgrading risk capabilities
 Communicating brand safety to
customers
 Investing in more comprehensive risk
measurement and analysis
 Capturing the best customers and
staff from weaker competitors
Right-risking
Opportunistic M&A
 Bargain hunting to take advantage
of depressed valuations and
forbearance on competition
regulations
 Aligning risk taking behaviour to
stakeholder expectations
Building on strengths
 Making the most of existing
businesses via re-pricing and cost
management
Diversifying funding and earning
sources
 Improving solid-funding base and
diversifying into less volatile
businesses
RVS Monte Carlo 2009
Michel M. Liès
Slide 15
Source: Swiss Re, Oliver Wyman
Conclusions
Manage crisis
Focus in insurance shifts from crisis management towards capturing
market opportunities
Insurers
Ensure capital
strengths
Participate
in
Drop
in asset values
the recovery
Assets
Capture
opportunities
Drive the priorities
on insurance risks
RVS Monte Carlo 2009
Michel M. Liès
Slide 16
Liabilities
Shareholder
equity
Financing opportunities