June 5th, 2012

GC Capital Ideas Top Stories: May 2012

Posted at 1:00 AM ET

1. 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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2. Lessons Learned From the Catastrophes of 2011: The Marsh Point of View: Guy Carpenter sister company, Marsh, has just published “Lessons Learned from the Catastrophes of 2011.” According to the report, the scale of the catastrophes experienced in 2011 exceeded previous loss-modeling predictions and has challenged established thinking on the nature of risk. Companies now need to re-examine their risk management strategies and introduce new methodologies to strengthen their operational and financial resilience.

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3. 6.0Mw Earthquake in Northern Italy: A strong 6.0Mw earthquake hit northern Italy at 02:03 UTC on May 20, causing severe shaking in the Emilia Romagna region and surrounding areas. Damage has been reported across Emilia Romagna, particularly to historic buildings, commercial properties and agriculture in towns and cities close to the earthquake’s epicenter.

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4. GC Securities:* Catastrophe Bond Issuance Tops USD1.3 Billion in Q1 2012: The first quarter of 2012 was the most active first quarter on record for the global catastrophe bond market, according to GC Securities. During the quarter, a total of USD1.34 billion of risk capital was issued through eight transactions, exceeding last year’s record of USD1.02 billion for the same time period.

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5. Reinsurance Rates Rise at April 1, 2012 Renewals: Reinsurance rates rose as the market continues to work through the impact of the events of 2011, according to Guy Carpenter. In a briefing released today, Guy Carpenter reports that this year’s April 1 renewals are continuing the general trends observed at January 1, 2012.

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6. Chart: Reinsurance Valuations at a Long-Term Low: The challenging macroeconomic environment of subdued growth and low interest rates meant the reinsurance sector ended 2011 trading near 20-year lows. As the chart below illustrates, the average price to book ratio for the sector of 0.893 is just greater than one and a half standard deviations down from the 20-year average of 1.32.

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7. Oliver Wyman: Strategic Impact of Solvency II: Guy Carpenter sister company Oliver Wyman has published a new report on Solvency II. The road to implementing Solvency II has been longer and more circuitous than expected. In Oliver Wyman’s joint report with Morgan Stanley, Solvency II: A Long and Winding Road, they provide insights on implementation progress thus far.

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8. Catastrophe Bond Update: First Quarter 2012: The first quarter of 2012 was the most active first quarter on record in the catastrophe bond market. Sponsors sought to lock in capital markets capacity for a diverse array of perils and structures in a somewhat uncertain traditional market environment. Capital providers proved up to the task, albeit at slightly increased pricing relative to market levels in late 2011.

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9. Terrorism: Global Terror Attacks and Hotspots: The increasingly diverse and dispersed threat has seen worldwide terrorist activity rise in recent years. The number of global terrorist attacks peaked at more than 14,400 in 2006. Although there has been a slight dip in the number of attacks over the last five years, they remain at historically high levels. Attacks increased dramatically in Afghanistan and Iraq following the deployment of coalition combat troops. Several other countries have also witnessed a big jump in terrorist activity recently, including Pakistan, Yemen and Somalia.

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10. Spring Conditions Suggest Tempered Atlantic Hurricane Season, Part I: On the heels of two very active years, the 2012 April hurricane season forecasts expect that activity will be around 20 percent below the long term average (1950-2011). This briefing discusses how current atmospheric and oceanic patterns will likely reduce storm formation and how these same patterns are expected to contribute to the hurricane steering flow through the heart of the 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, Inc. 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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