January 14th, 2011

Week’s Top Stories: Jan. 8 - Jan. 14, 2011

Posted at 10:00 AM ET

Floods in Queensland, Australia:   Heavy rain has triggered severe floods across a huge swathe of Queensland State in Australia, affecting around 200,000 people and inundating thousands of buildings in the affected towns and cities. An area the size of France and Germany combined in southern and central Queensland has been badly affected by the floods, with several communities cut off or inundated and coal mine production disrupted. Australian Prime Minister Julia Gillard has described the situation as “a major natural disaster” and said recovery would take “a significant amount of time”. As of January 4, the Australian Bureau of Meteorology has eight flood warnings in place in Queensland. Queensland State Premier Anna Bligh said the economic damage from the floods was likely to run into the billions of dollars. The Insurance Council of Australia has declared the floods a catastrophe but no insured loss estimates have been released.

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Global Reinsurance Outlook: Points of Inflection, Positioning for Change in a Challenging Market: Executive Summary:  Early predictions that January 1, 2011 reinsurance renewal rates were likely to fall have been proven correct.

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2011 Outlook: Preparing for an Inflection Point: The macroeconomic environment as we enter 2011 is a challenging one for the reinsurance industry. A combination of low yields, high levels of sector capital and lower rates on-line has led to a climate of persistent low valuations and stubbornly suppressed forward earnings rates. In addition, there is no clear catalyst on the horizon. Until we see a meaningful change in one of these underlying factors, the forecast is for more of the same.

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2011 Outlook: The Low Valuation Trap:   Another effect of the sector’s growing capital position has been a marked decline in reinsurers’ valuations. The price to book ratio of the Guy Carpenter Global Reinsurance Composite is near twenty-year lows, or over two standard deviations below the long-term mean, at 0.91x. These low valuations have significant implications for reinsurance company managements with regard to company strategy and capital budgeting. They are also important considerations for financial flexibility and the potential for sector consolidation. Figure 4 plots the price to book ratio of the reinsurance sector from 1990 to the present day. The drop-off in the last decade has coincided with higher loss activity, falling interest rates, increased capital requirements and lackluster equity global valuations generally.

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2011 Outlook: Potential Catalysts for a Cycle Turn:  Given low valuations, low yields, macroeconomic instability, inflationary pressures and lower pricing, it is not unreasonable to argue that the current operating environment is among the most challenging in living memory. The question most frequently posed in the reinsurance sector currently is: What will it take to turn the market? Below we discuss several potential scenarios that could expedite the turn. However, it is most likely that a combination of events will ultimately create the inflection point from which the sector will again enter a hard market.

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Micro Risk Management:  Risk, if left unmanaged by people with low incomes, may render their attempts to exit poverty more difficult. It may also increase the likelihood of a return or new entrance to poverty for those who hover just above the poverty line, and may increase the chances of personal loan default for the minority of low-income individuals with current access to microcredit (small value loans usually provided to help the entrepreneurial poor to develop microenterprises).

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