September 1st, 2011

GC Capital Ideas Top Stories: August 2011

Posted at 1:00 AM ET

1. Terror Attacks at Historically High Levels, Still Pose Threat to (Re)Insurance Industry, According to Guy Carpenter Report: A new report on global terrorism and the terror reinsurance market, released by Guy Carpenter & Company, finds that while recorded incidents of terror around the world remain at historically high levels and terrorism remains a serious risk to the (re)insurance industry, the industry continues to meet the current demands for terrorism risk transfer.

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2. Update: U.S. Credit Downgrade Implications: Standard & Poor’s has downgraded the U.S. sovereign debt rating to AA+ from AAA. Implications for (re)insurers worldwide are mixed. Although there are broad economic implications, markets appear to have anticipated at least some of these, which could forestall rash or catastrophic outcomes. The long-term effects, however, could be profound.

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3. Risk Profile, Appetite, and Tolerance: Fundamental Concepts in Risk Management and Reinsurance Effectiveness: Prior to the recent turbulence in the financial markets, insurers and reinsurers were increasing their use of enterprise risk management to make risk and capital management decisions. While this was driven in part by rating agencies and regulators, many carriers began to recognize the value of metric-based frameworks and capital models in evaluating their portfolios.

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4. Update: Hurricane Irene: Hurricane Irene is currently located approximately 80 miles (130 kilometers) east-southeast of Nassau in the Bahamas and 735 miles (1,180 kilometers) south of Cape Hatteras in North Carolina, according to the National Hurricane Center (NHC). The storm packs sustained winds of around 115 mph (185 kmph), equivalent to a category 3 hurricane. Irene is expected to strengthen over the next 24 hours, potentially reaching category 4 status as it approaches the southeastern coast of the United States. Irene is currently traveling in a northwest direction.

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5. Chart: Pricing Behavior for U.S. Property Cat at June 1 and July 1, 2011: Evaluating the pricing behavior for national and regional renewals excluding Florida at June 1 and July 1, we see that the general market response in both groups was fairly consistent. Pricing for lower layers increased less significantly than upper layers. In both cases, there was some additional pressure on upper layer pricing due to demand for those limits. In particular with regional writers, there was an up tick in minimum capacity charges that had been pushed to fairly low levels in recent years.

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6. Chart: Cat Bond* Risk Capital Issued and Outstanding 1997 - 2011 Q2:  The second quarter of 2011 saw four catastrophe bonds come to market, totaling USD592 million of new bond issuance.

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7. Chart: Percent of Authorized Capacity Utilized at Renewal, Property Cat - 2010 and 2011: A significantly larger percentage of authorized capacity was utilized to fill out the 2011 renewals as compared to 2010. April through June renewals in 2011 signed almost 95 percent of authorized capacity, as opposed to approximately 90 percent in 2010.

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8. First Six Months 2011: Subdued Merger and Acquisition Activity: The recent volatility in the financial markets and the difficult operating environment in general continue to stifle merger and acquisition (M&A) activity. Property/casualty (P&C) M&A activity for risk-bearing entities in the first half of 2011 was at a similar level to that seen in the past two years. There were 22 announced and closed transactions with an aggregate deal value of almost USD3.4 billion during the first half of 2011. In terms of transaction value, this pace is on track to match the level seen during 2009 and 2010. In addition, industry reports indicated there were an additional 15 transactions that had been announced during the first half of the year, but not closed. If these deals were to close at their announced transaction values, this would add an additional USD1.8 billion in transaction value to 2011’s total.

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9. Tropical Storm Emily: Tropical Storm Emily, the fifth named storm of the 2011 Atlantic hurricane season, developed at 23:30 UTC on August 1 and is currently located in the eastern Caribbean Sea, approximately 245 miles (390 kilometers) southeast of San Juan in Puerto Rico, according to the National Hurricane Center (NHC). Emily packs sustained winds of around 40 mph (65 kmph).

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10. Chart: US Prop Cat June and July 2011 Market Quoting Behavior: As reported in the June 1 renewal report, the calculation of risk adjusted pricing is dependent on the method used to calculate the “risk.” RMS v9 provides a consistent measure of the level of risk from 2010 to 2011. However, to some extent, reinsurers also assessed the results of the new version of AIR and the new version of RMS in making their pricing decisions. Consistent with the Florida renewals, the change in risk adjusted pricing is flat when using AIR v12 and down 15 percent when using RMS v11 to measure the amount of risk the reinsurer is assuming for a given price. Unadjusted change in rate-on-line increased approximately 3 percent to 6 percent. Quoting behavior did not demonstrate the same level of deviation from renewal activity seen at June 1 with the Florida renewals. The range in the June and July non-Florida renewals from the average quote for a program was up approximately 5 percent to down 10 percent. This is very close to the overall average for the 2010 renewal season.

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* Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.

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