Global reinsurance: current challenges and outlook Nikolaj Beck Head Specialties Swiss Re Corporate Solutions
Swiss Re Holding Reinsurance Corporate Solutions Admin Re Mission To be the world's leading reinsurer To be a lean, global player in large commercial business To be a recognised force in the closed life book market Business positioning The foundation of our strengths A key opportunity for growth Providing diversified earnings 2
Agenda 1. Current situation of the reinsurance industry 2. Challenges for the re-insurance industry 3. Outlook for the reinsurance and space insurance industry 3
Capital levels have recovered and are strong Shareholders equity and market capitalization of reinsurer sample* (USD billions) 130 120 110 100 90 80 70 60 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Market cap Shareholders equity * Sample consisting of Arch Capital, Aspen, Axis Capital, Berkshire Hathaway, Endurance, Everest Re, Hannover Re, Lloyd s, Mapfre Re, Montpelier Re, Munich Re, PartnerRe, Platinum, RenaissanceRe, SCOR, Swiss Re, Transatlantic Re, Validus Re, XL Capital. Source: Swiss Re, Economic Research & Consulting 4
2011 was almost the most expensive year for the industry Insured catastrophe losses 1970-2011* (USD billions, at 2011 prices) 140 120 100 80 60 40 1992: Hurricane Andrew 1994: Northridge EQ 1999: Winter storm Lothar 2005: Hurricanes Katrina, Rita, Wilma 2011: Japan, NZ EQs 2004: Hurricanes Ivan, Charley, Frances 2001: WTC 2008: Hurricanes Ike, Gustav 2010: EQs Chile, New Zealand 20 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 * Preliminary estimates for 2011 Source: sigma database, Swiss Re Economic Research & Consulting 5
Q2 & Q3 performance critical for YTD 2011 performance, Q4? Non-life operating results of the reinsurers sample (as a % of net premiums earned, 1Q09-3Q11) 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 U/w result Investment result Operating result Source: Swiss Re, Economic Research & Consulting 6
Premium rates have stabilized during January 2012 renewals NOTE: Pricing is for excess of loss - loss free programs only Property Cat (US) Property Cat (Europe) Property per risk (US) Property per risk (International, excl. US) Casualty (US) Willis* Aon Benfield* Guy Carpenter* -2.5% to +10% Flat to +10% Flat to -5% -15% to +25% -5% to +5% +5% to +10% Flat to +8% Flat to -5% Flat to -5% Flat to -5% Casualty (International, excl. US) Flat * n.a. Marine/ Energy n.a. varied. +5% to +15% -8%to +10% n.a. -10% to +15% Flat to +5% +25% to -10% Modest increase *Directional arrows are based on the average increase or decline in rates Sources: Willis Re 1st View January 2012, AON Benfield Reinsurance Market Outlook Sector Analysis, January 2012 Renewal Report Guy Carp 7
Agenda 1. Current situation of the reinsurance industry 2. Challenges for the re-insurance industry 3. Outlook for the reinsurance and space insurance industry 8
Challenges for the re-insurance industry The interest rate shock Impact of low interest rates: Need to have a lower combined ratio to compensate for lower yields 18% 16% 14% 12% 10% 8% Return on Equity Investment yield 6% 4.3% 4% 2% 3.3% Combined 0% Ratio 95% 100% 105% 110% 1 percentage point lower investment yield requires about a 3 percentage point decline in combined ratio to maintain a return on equity of 4.8% The interest rate shock is far more significant than the 2010-2011 natural cat losses 5.3% Sources: A.M. Best, estimates by Economic Research & Consulting based on 10-year average for the US market. 9
Challenges for the re-insurance industry The Euro debt crisis How can the risk look like: The default of Spain and Italy could trigger the break-up of the Euro and cause a severe asset & liability mismatch. A 50% haircut on sovereign debt issued by Portugal, Ireland and Greece could prompt write-downs of around EUR 25bn, or 4% of European insurers' capital Similar haircuts to Spanish and Italian sovereign debt would be much worse (EUR 143bn, or 24% of capital) Will governments force insurers to buy their government bonds? New taxes? 10
Agenda 1. Current situation of the reinsurance industry 2. Challenges for the re-insurance industry 3. Outlook for the re-insurance and space insurance industry 11
Reinsurance Outlook Markets have slowly started to turn, due to Further improvements expected, driven by Nat cat events Model updates Low interest rates Low investment returns continue Nat cat experience Reserve releases Swiss Re expects a modest, broad market turn over the next 3-15 months 12
Space market conditions and outlook Market within the last four years premium rates halved, but still profitable to date overcapacity of about 50% non correlating with other P&C lines of business new market entries (e.g. Kiln, Argo, Montpellier Re) potential to be very volatile, no spread of risks Outlook capital shift to more profitable lines of business is possible in case of a large launch failure (dual launch) the market is very likely to harden potential of new satellite placements are limited, as majority of satellite launches for the next two years have been placed already (buyer's market) 13
Thank you. 14
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