Chart: Sustainability of Loss Reserves: Historically, one of the “big cats” has been sector under-reserving, which served as the backdrop for the last hard market. Over the last four years, reserve releases have featured prominently in the reinsurance sector and have continued to do so up until the third quarter of 2010. The chart below shows the contribution to reserve releases on the Guy Carpenter Bermuda Reinsurance Composite combined ratios from 2005. It is notable that the benefit from reserve releases has ticked up in the first nine months of 2010 by one full percentage point, to 8.8 points on the loss ratio. This has occurred during a year when many projected reserve releases would diminish.
Chart: Incurred But Not Reported Levels a Measure of Reserving Trends: A clue which could point to a shift in reserving trends may be evident in U.S. P&C industry percentage of first year incurred but not reported (IBNR) figures, which, all else equal, is a measure of reserving conservatism. In the chart below, a trend of potentially diminishing conservatism can be seen. It is significant that the industry is, in aggregate, back to levels of around 30 percent - levels previously seen in the last soft market.
Chart: Price to Book Ratio of the Global Reinsurance Sector: 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. The chart below 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.
Chart: Lloyd’s Market Capacity: Lloyd’s capacity for 2011 is expected to be broadly flat compared to 2010, as some syndicates lower capacity and others increase or enter the Market. Operating margins will be squeezed in 2011, although the overall Market profitability will remain driven by the catastrophe losses which may or may not be incurred.
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