Swiss Re Economic Forum 2011

Transcription

1 Swiss Re Economic Forum 2011 Thursday 1 December 2011 Kurt Karl, Chief Economist, Economic Research & Consulting Darren Pain, Senior Economist, Economic Research & Consulting

2 Global economic and insurance market outlook Kurt Karl, Chief Economist, Economic Research & Consulting 1 December 2011

3 Global Outlook Economic outlook is currently extremely uncertain and depends greatly on the actions of policymakers, particularly in Europe but also US. We assume policymakers will gradually deliver on their duties, but not pro-actively Market volatility will continue for quite some time Low growth, falling inflation and large deficits are keeping monetary policy very accommodative Yields on long-term government bonds will remain low for a prolonged period The insurance industry is well-capitalised, so will weather this storm Slow growth in developed economies will weaken P&C and L&H premium growth, but markets recover partially next year and more fully in 2013 Low yields are reducing profitability, but P&C rates will rise toward end of 2013 Market volatility from euro debt crisis and US fiscal impasse is reducing capital & profits Emerging markets are also slowing in growth, but are still expected to perform well in 2012 and 2013 Both L&H and P&C growing at 7 9% in 2012 and 2013, after inflation 3

4 Economic recovery has been moderate in most developed economies Source: Datastream 4

5 Key economic indicators and forecasts for the major economies Real GDP growth, annual avg., % US Euro area UK Japan China Inflation, all-items CPI, annual avg., % US Euro area UK Japan China Policy rate, year-end, % US Euro area UK Japan Yield, 10-year govt bond, year-end, % US Euro area UK Japan Source: Swiss Re Economic Research & Consulting, forecasts as of 3 November

6 Credit conditions are tightening while demand for credit is falling ECB bank lending survey, quarterly data (Net percentage of domestic respondents expecting to tighten standards/expecting increased credit demand) Are we heading for another credit crunch? Credit conditions for non-financial corporations Non-financial corporations' demand for credit Source: ECB bank lending survey Note: Positive values indicate a tightening, negative values a loosening of banks lending standards. Positive/Negative values indicate increasing/ decreasing demand for credit. 6

7 Fiscal contraction is dampening growth Change in cyclically adjusted general government balance vs. previous year (% of potential GDP) Fiscal tightening Fiscal easing % France Germany Greece Ireland Italy Portugal Spain United Kingdom United States Sources: IMF Fiscal Monitor September 2011, Swiss Re Economic Research & Consulting 7

8 Example of Emerging market risk: China's housing market is much more subdued after monetary tightening % Source: Datastream 8

9 Non-life primary market in developed economies 9

10 Profitability has deteriorated, but is expected to improve Profitability of global non-life insurance industry (% of premiums, shareholder capital) Investment result Operating result Underwriting result ROE after tax Source: Economic Research & Consulting; based on an aggregate of 8 major non-life markets 10

11 European P&C market: Weak, but rates are likely to rise Significant worsening of u/w results since 2006: from 97% to 104% on average. Motor business low point was 2010, rates are now rising In commercial lines, rate softening is slowing Still positive reserve releases, should reverse next year Due to weak economic growth, premium growth is also anaemic (low demand) and competition fierce Due to low interest rates, profitability of insurance will be subdued for next couple of years Given low investment yields, productivity increases will be sought 11

12 Adjusted US combined ratio, % of net premiums: Casualty rates set to rise Headline figure, Points of combined ratio H 2011 based on calendar year 104.0% 101.2% 100.8% 109.6% of which effective cat losses (-) 6.3% 3.4% 4.7% 12.8% normal cat losses (+) 4.0% 4.0% 4.0% 4.0% Cat adjusted combined ratio A&E reserves additions (-) Core reserves releases (+) Adjusted AY combined ratio 101.7% 101.8% 100.1% 100.8% 0.4% 0.4% 0.9% 0.9% 2.2% 3.0% 2.5% 4.0% 103.5% 104.4% 101.7% 103.9% Motor rates rising in Europe, even UK and Italy Cat property rates rising in select markets and losses have reduced industry capital Select surveys in US imply commercial insurance rates are on cusp of hardening In Europe, commercial insurers are attempting to raise rates Source: A.M. Best, Swiss Re Economic Research & Consulting 12

13 Non-life insurers can compensate for lower yields with a lower combined ratio (example US) ROE 14% 12% 2011 industry assumptions: Asset leverage: 313% Tax rate [1] 25% NPE/ avg. surplus 97% 10% 8% 6% 4% 2% Investment yield 5.3% 4.3% 3.3% 2011 ROE was 4.8%; total yield was 4.1%, and CR 106% [US as an example] 0% 95% 97% 99% 101% 103% 105% 107% Combined Ratio A 1 percentage point lower investment yield requires about a 3 ppt decline in CR to maintain ROE (5% in example) Sources: A.M. Best, estimates by Economic Research & Consulting. [1] based on 10-year average. 13

14 Non-life: Insurers and policyholders share the low yield burden If low nominal interest rates reflect lower inflation, the negative effect from lower investment yields gets fully compensated by lower claims. If the drop in interest rates is real (not only due to change in inflation), insurers need to charge higher premium rates to compensate for lower investment yields. In theory, this should be possible as there are usually no substitutes for non-life insurance products. In practice, insurers are reluctant to take investment returns fully into account for pricing, as they are afraid of losing clients. A prolonged period of low interest rates is usually not favourable for nonlife insurers' profitability. Nevertheless, the insolvency risk resulting from low interest rates is low. 14

15 Life & Health primary market in developed economies 15

16 The shareholder equity of 32 mainly life and global companies (IFRS/GAAP data), 2007Q4 = Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 Market cap weighted average Source: Company reports, Bloomberg, Swiss Re Economic Research & Consulting AFLAC; Allianz; Assurant Inc; Aviva; AXA; China Life; CNP; Delphi Financial; Generali; Genworth Financial; Great-West Lifeco; Hartford; Legal & General; Lincoln National; Manulife; Metlife Group; Phoenix Companies; Ping An; Principal Financial Group; Protective Life; Prudential (UK); Prudential (US); St. James Place ; StanCorp Financial Group; Standard Life; Storebrand ASA; Sun Life; Swiss Life; Torchmark; Zurich 16

17 Return on equity of 32 mainly life and global companies (IFRS/GAAP data), % Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 3 Canadian companies 7 European Globals 6 UK companies 2 Chinese companies 14 US companies Market cap weighted Source: Company reports, Bloomberg, Swiss Re Economic Research & Consulting AFLAC; Allianz; Assurant Inc; Aviva; AXA; China Life; CNP; Delphi Financial; Generali; Genworth Financial; Great-West Lifeco; Hartford; Legal & General; Lincoln National; Manulife; Metlife Group; Phoenix Companies; Ping An; Principal Financial Group; Protective Life; Prudential (UK); Prudential (US); St. James Place ; StanCorp Financial Group; Standard Life; Storebrand ASA; Sun Life; Swiss Life; Torchmark; Zurich 17

18 Life insurance and the low interest rate environment: The key issue is in-force business Risk products: They have similar characteristics to non-life products, since there are few substitutes to mortality or disability products: Insurers can maintain profitability via higher risk charges. Though a long-tail business, interest rates have only a small effect on the price of pure mortality risk. Savings products: As investment yields drop, insurers have to face lower profitability and/or reduce guaranteed interest rates. But low guarantees impair the attractiveness of savings products. In-force business: If the duration of assets and liabilities is not adequately matched, a sustained decline in interest rates lowers profitability and if this continues it increases the risk of insurers defaulting. Some of the low investment yields may be shared with policyholders, depending on product New business: If guarantees are not adjusted in a timely manner, the risk increases of writing unprofitable business 18

19 8% 7% 6% 5% 4% 3% 2% 1% 0% Interest rate guarantees in life contracts vs. insurers' investment returns and 10y government bond yields USA Insurers' investment result 10y government bond yield Guaranteed rate y-government bond yield new business guarantee Germany investment yield life insurers average guarantee 8% 7% 6% 5% 4% 3% 2% 1% 0% France Insurers' investment result 10y government bond yield Guaranteed rate ST Guaranteed rate LT 8% 7% 6% 5% 4% 3% 2% 1% 0% Switzerland Insurers' investment result 10y government bond yield Guaranteed rate individual Guaranteed rate Group 19

20 Risk heat map life insurance Country US Risks Interest rate sovereign equity macro-economy marginal exposure to downgraded European low equity exposure on general account, sovereign debt exposure through VA with guarantees long-term guarantees mainly in UL and fixed annuities, reinvestment risk for DI and LTC business exposure through sales, group business, disability claims, mortgage investments UK Germany annuities contain long-term guarantees, other products not very rate sensitive long-term savings products with long-term guarantees minimal direct sovereign debt exposure, significant indirect exposure via holdings of corporate bonds some direct & indirect exposure to sovereign defaults relatively high equity exposure on general accounts low equity exposure on general accounts exposure through housing market for mortgage related products sales are not very macro sensitive France low and flexible guarantees (60% of the prevailing 10y bond yield or annual crediting rates), fairly short duration of liabilities significant direct debt exposure to vulnerable sovereigns, plus indirect exposure via bank bonds Italy relatively low guarantee level significant direct debt exposure to vulnerable sovereigns, plus indirect exposure via bank bonds low equity exposure on general accounts low equity exposure on general accounts sales are not very macro sensitive; however unit-linked products would likely be impacted if the financial market situation deteriorates bankassurance sales might drop if the banking sector has troubles Spain some guaranteed savings products (new business guarantees linked to Spanish government bond yields) significant direct debt exposure to vulnerable sovereigns, plus indirect exposure via bank bonds low equity exposure on general accounts continuing high unemployment and weak domestic demand, housing market still under pressure Japan lingering but diminishing problem on guaranteed savings products (the problems in companies that were most vulnerable to guarantees have been resolved) marginal exposure to downgraded European sovereign debt some equity exposure on general account, exposure through VA mainly limited to foreign insurers vulnerable if unemployment increases; demographic trend is believed to be a more important driver (particular on 3rd sector products) China limited impact from new business and strong growth will dilute the negative spread problem on older business very limited impact; investment mostly confined to domestic debts/equity small but increasing exposure to equity markets relatively sensitive to overall economic and income growth; bancassurance also a major channel vulnerable to economic downturn 20

21 Conclusions 21

22 Conclusions The economic and financial outlook is currently extremely uncertain, particularly in Europe and US Premium growth has been modest, but will improve next year and further in 2013 The value of assets have been volatile, challenging insurers' capacity Interest rates will remain low, reducing profitability until 2013 It will be a bumpy ride, but insurers are well capitalised, so will perform well P&C rates, particularly casualty rates, are expected to improve next year The low interest rate environment reduces profits through low investment yields The P&C sector is less affected than life segment Life insurers not only have low investment yields, but some products have return guarantees, so are really challenged by low yields In addition, life insurance products tend to be very long in duration, so most of the profits often come from investment returns 22

23 Emerging markets Kurt Karl, Chief Economist, Swiss Re Economic Research & Consulting 1 December 2011

24 Emerging market economies continue to outperform 10% 8% 6% 4% 2% 0% -2% -4% -6% Real GDP growth Emerging markets Industrialised countries Slowing economic growth Moderating inflationary pressure Interest rates staying at low levels Slowing capital inflows and currency appreciations Sources: Oxford Economics; Swiss Re Economic Research & Consulting. 24

25 Growth in life premiums has stalled in 2011; a recovery expected in 2012 Life insurance premium real growth rate, % 20% 15% 10% 5% 0% -5% -10% % -20% Emerging Asia Middle East Latin America Central & Eastern Europe Industrialised markets 2012 Source: Swiss Re Economic Research & Consulting 25

26 Weak performance of the Chinese and Indian markets led the global slowdown 60% 50% 40% Year-on-year growth of life insurance premiums in China Introduction of new bancassurance regulations in Nov % 250% 200% Year-on-year growth of new life insurance premiums (individual business) in India Introduction of new unit-linked insurance product regulations 30% 150% 20% 100% 10% 50% 0% 0% -10% -50% -20% Jan.09 Mar.09 May.09 Jul.09 Sep.09 Nov.09 Jan.10 Mar.10 May.10 Jul.10 Sep.10 Nov.10 Jan.11 Mar.11 May.11 Jul.11 Sep % Jan.10 Mar.10 May.10 Jul.10 Sep.10 Nov.10 Jan.11 Mar.11 May.11 Jul.11 Sep.11 Sources: CIRC, IRDA Single Premium Non-Single Premium 26

27 Developments in 2011 and trends in 2012/13 Developments in 2011 Premiums increased by 0.6% in 2011 (2010: 10.5%) in real terms Premiums declined in China and grew slower in India in 2011 due to regulatory changes Other emerging regions continued to report robust growth, in particular the Middle East (+12.0%) and Latin America (+9.9%) Central and Eastern Europe is lagging behind but Poland and Russia reported further premium growth Trends in 2012/13 Growth of premiums will recover in 2012, lead by China and India Premiums are projected to increase by 8.4% in real terms in 2012 Other regions will maintain stable growth, supported by rising affordability, health and pension reforms as well as increasing awareness Protection type products will likely gain popularity as rising financial and economic risks will dampen interests in investment products 27

28 Non-life premiums sustained broad-based growth in 2011; growth is however slowing Non-life insurance premium real growth rate, % 20% 15% % % 0% % -10% Emerging Asia Middle East Latin America Central & Eastern Europe Industrialised 2012 Source: Swiss Re Economic Research & Consulting 28

29 Developments in 2011 and trends in 2012/13 Developments in 2011 Steady premium growth by 8.9% in real terms in 2011 (2010: 9.6%) Strong growth in Emerging Asia in particular China (+15%), Indonesia (+10.3%) and Vietnam (+6.9%) Nat cat has limited impacts on emerging Asian insurers but raised awareness and demand Other regions saw broad-based improvement Motor, health, personal accidents and agricultural insurance have contributed to growth Trends in 2012/13 Growth is expected to stabilise at 7-9% in 2012/13 Trade and investment related insurance will be negatively affected by evolving crisis in Europe Central and Eastern European markets face significant downside risk in terms of both economic and insurance business growth Emerging Asia and Latin America will perform relatively well, supported by strong demand for personal and speciality lines 29

30 Major regulatory changes expected in 2012/13 Further convergence of emerging market regulations Move towards risk-sensitive solvency regimes (eg Solvency II in CEE) Further liberalisation in key emerging markets China Planned opening of the motor third party liability insurance market to foreign participation India A bill to raise foreign investment ceiling to 49% from current 26% could be passed by the parliament in 2012 Russia There are proposals to increase the 25% limit of foreign capital in the insurance industry, as this limit has been reached 30

31 Euro sovereign debt crisis Implications for the insurance industry Darren Pain, Senior Economist, Economic Research & Consulting 1 December 2011

32 Selected European sovereign credit spreads yr yield spreads over German bunds (pp) Greece Ireland Italy Portugal Spain Source: Datastream 32

33 Sovereign debt maturing in 2012 bn Portugal Ireland Greece Spain Italy Source: Bloomberg 33

34 Potential direct effects on European insurers 50% haircut on sovereign bonds issued by: Potential losses for European insurers ( bn) % of shareholders funds Greece Greece, Ireland, Portugal (GIP) Greece, Ireland, Portugal and Spain (GIPS) Greece, Ireland, Portugal, Spain and Italy (GIIPS)

35 Distribution of exposure is important European Insurers gross exposure to sovereign bonds (% of shareholders equity) Greece Ireland Portugal Spain Italy Ist quartile average nd quartile average rd quartile average th quartile average Average Weighted average Source: Moody's 35

36 Distribution of exposure is important European Insurers gross exposure to sovereign bonds (% of shareholders equity) Greece Ireland Portugal Spain Italy Ist quartile average nd quartile average rd quartile average th quartile average Average Weighted average Source: Moody's 36

37 Mitigating factors Policyholder participation but the "devil is in the detail" and there are considerable differences across jurisdictions. Losses could be offset against future taxes yet there may be limits on deferability of tax/carrying forward losses indefinitely. Many insurers would have already have taken "mark-to-market" (ie unrealised) losses against equity although not to the same degree as in the extreme stress scenario involving multiple defaults. 37

38 Indirect effects on European insurers Indirect effects operate through impacts on: values of other investments/assets overall economic activity and revenue generation. Depending on the scenario, these could be very significant (and may be greater than the direct effects). Multiple defaults and/or persistently high costs of borrowing for vulnerable sovereigns (especially Spain and Italy) would increase uncertainty about the break-up of the euro. The resulting market volatility would reduce the value of other assets (through higher risk premia) and intensify funding pressures on banks. In turn, this would likely lead to a further pull back in credit supply accentuating recessionary forces. Again, some mitigating factors: "safe haven" assets could rise in value and some insurers might have hedged some forms of extreme market risk. 38

39 Conclusions European insurers capital buffers appear adequate to cope with direct losses on their sovereign bond holdings provided any debt restructurings are limited to the smaller peripheral European countries. But the direct and indirect implications would be much more serious if write-downs on Spanish, and especially Italian bonds, were ultimately required. In such a scenario, the prospect for heightened volatility, disorderly markets and a severe recession appear high, imposing additional realised and unrealised losses on insurers investment portfolios as well as restricting revenue and earnings generation. 39

40 Thank you

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