November 12th, 2010

Week’s Top Stories: Nov 6 - Nov 12, 2010

Posted at 11:00 AM ET

Update: Hurricane Tomas:  Tomas has re-intensified into a tropical storm having been downgraded to a depression on November 3. The storm is expected to continue to move over the central Caribbean Sea and head towards Haiti, Cuba and Jamaica over the next 24 hours. Tomas is currently located approximately 160 miles (225 kilometers) south-southeast of Kingston in Jamaica and packs sustained winds of around 50 mph (85 kmph), according to the National Hurricane Center (NHC). The storm is currently traveling in a north-northwest direction and a turn towards the north and then the northeast is expected over the next 48 hours. Forecasters said Tomas could re-intensify into a hurricane on November 5. On the forecast track, Tomas is expected to pass between western Haiti and eastern Cuba tonight and early tomorrow before tracking near or over the southeastern Bahamas. The NHC said tropical storm-force winds extend 115 miles (185 kilometers) from the center of the storm.

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Chart: Global Reinsurance Composite: Average Price to Book Ratio:  This chart shows the price to book ratio of the global reinsurance sector over two decades. These valuations are clearly volatile and affected by cyclical pricing, investment returns, and by the impact of large catastrophes. Given the current operating environment and market conditions, investors appear to believe near-term profitability will be low.

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Chart: Bermuda Reinsurance Composite, Annual Return on Common Equity of the Average Constituent: Reinsurers tend to experience broad profit fluctuations. This is evidenced by the data in the chart below, which shows the average historical return on common equity (RoCE) of the Guy Carpenter Bermuda Reinsurance Composite group of companies. Note the recent large losses incurred in years 2001, 2005, and 2008. Although these were followed by periods of above-normal profitability, returns look likely to be lower in 2010 and could deteriorate quickly if losses occur.

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Reinsurance: An Efficient Source of Contingent Capital and Risk Protection: Insurers today are faced with challenges including lower pricing, long-term low interest rates and diminishing reserve redundancies, not to mention increasing natural catastrophe activity in peak risk zones such as Florida. Effective capital allocation and earnings protection are crucial to ensuring profitability and financial flexibility in this environment. The reinsurance purchasing decision is an integral aspect of both risk and capital management. In terms of risk, reinsurance protects insurers against peak or ‘extreme’ events, enabling them to continue providing cover in the wake of disasters. In terms of capital management, reinsurance is an efficient source of contingent capital that allows carriers to enter new business lines, satisfy changing regulatory requirements or simply maintain creditworthiness.

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Third Quarter 2010: P/C M&A Activity Update: 2010 has seen a modest level of property/casualty mergers and acquisitions activity through the third quarter of the year - far less than what Guy Carpenter expected to see going into the year. Twenty eight transactions with an aggregate deal value of almost USD3.2 billion have been announced and closed through the third quarter of 2010. This pace lags 2009 levels and is well off prior years’ activity.

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And, you may have missed…

The Time Profile of Risk: From the Desk of Guy Carpenter’s Chief Actuary: According to the draft European Union Solvency II directives, companies will need to provide an “own risk and solvency assessment” (ORSA). The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has prepared an issues paper that provides guidance to assist (re)insurers in implementing the ORSA.

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