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S&P cites the industry’s ongoing focus on enterprise risk management (ErM) as one M&A activity is beginning to pick up, with deals
reason why it emerged from the crisis in such good shape. “Particularly since 2005, when between validus and IPC re, and Partner re and Paris
US hurricanes Katrina, rita and Wilma led to higher-than-expected reinsurance losses and re looking likely to go ahead. but these deals should
revealed significant weaknesses in the reinsurers’ modelling and risk-mitigation techniques, US not be over-interpreted as a sign that the environment
and bermuda writers have made a concerted effort to improve their capabilities in these areas has changed, warns Inskeep. “A lot of folks push for
and enhance their overall ErM processes.” consolidation, and certainly there have been a couple of
major transactions, but given that we’re in the middle
In Europe, Swiss re was also faced with raising capital at a time when capital was expensive
of hurricane season and the uncertainty about funding,
and largely unavailable. It secured a ChF3.0 billion capital injection from berkshire hathaway
the economics have to be attractive. I don’t think you’re
after reporting a net loss for 2008 of ChF864 million and mark-to-market investment losses of
going to see the huge premium that you saw in some of
approximately ChF5.9 billion for the full year 2008. Swiss re’s problems stemmed from credit
the mergers and acquisitions a couple of years ago, and
default swaps (which accounted for losses of ChF2.0 billion) and other financial products.
the last two deals have been heavily discounted.”
In February, former chief executive officer Jacques Aigrain resigned, saying that Swiss re’s
interests were “best served by a change in executive leadership”. And the hurricane season is far from over, having
just entered its peak period when most storms form.
despite these exceptions, most re/insurers entered 2009 with their balance sheets largely
however, initial forecasts for an above-average season
intact. “global reinsurers’ performance to date could be counted as an achievement, given the
have been downgraded, with the national Oceanic
state of the financial services industry and the economy,” says A.M. best in its report, Reinsurers
and Atmospheric Administration (nOAA) saying that
stay afloat in sinking economy.
it now expects a near normal to below normal season,
“The industry generally now has less capital to deploy, and that capital has become more
as the calming effects of El niño continue to develop.
costly to replace,” continues A.M. best. “This ordinarily would point to a hardening market,
There is now a 70 percent chance of seven to 11 named
but with a few exceptions, significant hardening of the reinsurance market seems to be a dream
storms, of which three to six could become hurricanes,
deferred. reinsurers have been able to regain some of the ground lost last year, when rates still
including one to two major hurricanes (category 3, 4 or
were falling, but in casualty lines, rates are considered far from adequate.”
5), says nOAA.
It is worth noting that hurricane Andrew, which
made landfall in 1992, costing re/insurers a record
$15.5 billion at the time, happened during a period of
At the beginning of 2009, the debt and equity markets had ground to a halt and capital was
low hurricane activity. And a sizeable catastrophe loss
scarce and expensive. The first half of the year has seen the credit crunch ease somewhat,
need not come from a north Atlantic hurricane, with
with a handful of re/insurers raising funds. Capital market investors have also returned to
California overdue a significant earthquake, according
insurance-linked securities. nine cat bonds were issued in the first half of 2009, accounting for
to seismologists. “A very large catastrophic loss (at least
aggregate capital of $1.38 billion, according to guy Carpenter. As first half results for 2009
about $40 billion) could be particularly problematic for
were issued, there was even some talk of share repurchases, an indication perhaps that some
the reinsurance industry in 2009, given current capital
companies believe it will be difficult to achieve an acceptable return on capital in expected
market constraints,” warns S&P.
market conditions, suggests Klein.
going forward, reinsurance rates remain strongly
These ‘green shoots’ will make it more difficult for re/insurers to achieve the dramatic rate
contingent on how the rest of 2009 plays out. despite
increases they had aspired to at the beginning of the year, according to Willis’s mid-year report,
small signs of recovery in the financial markets, it is
unlikely that re/insurers will see strong investment
1st View. “Initial signs of recovery in the financial markets and a lack of major underwriting
returns in 2009 and this should keep a strong focus
losses in the first two quarters of 2009 have worked in tandem to bring greater stability to
on underwriting for profit. however, continued risk
the reinsurance market.” Capacity has eased even in the retrocession and peak catastrophe
retention among cedants will dampen demand at a
reinsurance classes, bringing plentiful supply for cedants.
time when capital and capacity are returning to the
“For six months, the industry has actually regained a lot of capital that it lost,” says devin sector. The main caveat, particularly during September
Inskeep, senior financial analyst at A.M. best. “going into 2009, you were looking at capital and October, is whether the industry will experience
preservation and now you have companies starting their share repurchase programmes again, a large catastrophe loss and how big it would have to
and it looks like the industry could handle a sizable catastrophe.” At the time of writing, be in order to turn the market. “Overall, our feeling is
hurricane bill had made landfall as a weak category 1 hurricane on the coast of newfoundland. the availability of capital is adequate and that certainly
While not expected to cause any significant damage, bill’s original track towards the US suggests that the market will be flat in the shorter
coastline had the industry on high alert. term,” says Klein.
September 2009 | INTELLIGENT INSURER | 21
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