January 27th, 2009

Book Value Update: Renewals Impact

Posted at 1:00 AM ET

David Flandro, Senior Vice President

The impairment of insurance investment assets, as a result of the financial catastrophe, has pushed capital lower. As of year-end 2008, the GC Global Composite of 141 carriers had lost an estimated 15 percent of implied book value. The banking sector fared worse, with the S&P Banks Supercomposite Index losing 27 percent. The average increase in property-catastrophe reinsurance rates, as measured by the Guy Carpenter World Rate on Line (ROL) Index suggests the loss of capital, though certainly uncomfortable, is hardly catastrophic, particularly in comparison with the banking sector.

The Guy Carpenter Global Composite was created in November 2008 to ascertain the effects of the global financial catastrophe relative to the broader financial services industry. Consisting of 141 publicly traded insurers and reinsurers from around the world, this index uses several factors, including reported figures, market capitalization, and a range of analyst estimates, to calculate implied book value and measure the effects of the financial crisis on the insurance industry as a whole.

The 15 percent implied loss of insurance industry capital for 2008 is consistent with the Guy Carpenter World ROL Index’s increase of 8 percent.

This week, we have expanded the scope of the banks index from the S&P 500 to the S&P Supercomposite, and have used daily, rather than monthly data to give additional detail.

Insurance carriers appear to have implemented more conservative investment strategies, particularly in their more modest use of leverage (compared to the major banks), ultimately softening the blow to balance sheets. While there have been individual insurance company casualties throughout the financial crisis - and more could arise - the industry as a whole has demonstrated it is not in jeopardy.

As the crisis has likely not yet run its course, new developments could continue to reshape the global financial community, including the insurance industry. An early recovery would accelerate a return to stability, while significant losses at other high-profile institutions could have severe repercussions. For insurers and reinsurers, the message is clear: stay the course. A commitment to rigorous risk management practices and the prudent deployment of capital is the most effective way to preserve balance sheets, protect solvency, and gain a competitive edge when financial markets recover.

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