One of the more popular features of GC Capital Ideas is the Chart Room. Here we highlight the top ten Chart Room entries, year-to-date 2011.
1. Chart: Guy Carpenter Global Property Catastrophe Rate on Line Index: Early predictions that January 1, 2011 reinsurance renewal rates were likely to fall have been proven correct. The Guy Carpenter Global Property Catastrophe Rate on Line Index lost 7.5 percent - the second consecutive annual decline. Contributing to this move has been a combination of factors, including moderate loss activity and abundant levels of industry surplus.
2. Chart: Typical Reinsurance Rate Changes by Business Segment, Jan. 1, 2011: 2011 renewal rates varied widely by business segment - yet most trended overall flat to negative to their levels last year. The only sectors with a clear upward bias were marine & energy and credit, bond & political risk.
3. Chart: Property & Casualty Accident Year Reserve Development: Accident year loss experience is beginning to show signs of lower reserve margins. The chart below shows U.S. P&C industry reserve development by accident year since 2000. The reserving cycle is evident in the graph with adverse accident year loss development during the “soft market” years of 2000 and 2001 and favorable development between 2003 and 2007. The orange line in the graph shows the average initial loss ratio pick. The old reserving adage that “good years get better and bad years get worse” appears to be borne out here.
4. 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 that may or may not be incurred.
5. 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.
6. Chart: Incurred But Not Reported Levels a Measure of Reserving Trends: A clue that 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.
7. Chart: U.S. Property Catastrophe Rate on Line Index Update: Chart presents historical pricing activity through July 1, 2011.
8. Chart: Reinsurance Sector Price to Book Multiples and Forward ROE: Low valuation of the reinsurance sector may prove to be a catalyst for change by driving reinsurance sector consolidation. The chart below plots quoted reinsurance companies on price to book ratios and forward consensus returns on equity. The shaded area below 0.9x book value that now comprises the majority of the sector, is where mergers and acquisitions (M&A) have tended to take place in the recent past. Combined with significant share buybacks already taking place in the sector, additional M&A could slow the growth of dedicated reinsurance sector capital, thereby restricting the supply of reinsurance. This, in turn, could eventually drive rates higher.
9. Chart: Pricing Behavior for US 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.
10. Chart: Cat Bond* Risk Capital Issued and Outstanding 1997 - 2011 Q2: The second quarter of 2011 saw four catastrophe bonds came to market, totaling USD592 million of new bond issuance.
* 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.