Return on Equity, Guy Carpenter Global Reinsurance Composite, 2004 - Q1 2012
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Alternative risk solutions are used to address the following client motivations: rating agency issues, adverse development, earnings stability, reserve and premium leverage issues, reinsurance recoverables, terrorism risk, capital optimization constraints, mergers and acquisitions, discontinued lines of business, provide coverage for gaps in traditional placements and optimizing costs. The structured risk team designs customized solutions to achieve a particular client’s goals. An optimal reinsurance structure is determined by capacity needs, risk tolerances, capital management, cost of risk and degree of confidence in results. A cedent will need to balance the cost of transferring sources of risk with not only its own capital management strategies but also capital requirements imposed by rating agencies.
M&A Drivers Going Forward
Guy Carpenter sees several potential merger and acquisitions (M&A) drivers in 2012 and beyond:
The challenging macroeconomic environment of subdued growth and low interest rates meant the reinsurance sector ended 2011 trading near 20-year lows. As Figure 1 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. The sovereign debt crisis, threat of a double-dip recession, heavy non-peak zone catastrophe losses during 2011 and concerns about reserve adequacy are among the factors contributing to volatility and low valuations. Additionally, despite the heavy losses incurred during 2011, many reinsurers are still perceived to have excess capital relative to projected earnings and top-line growth.
John Tedeschi, Head of GC Analytics® - Americas
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Taming the “long tail” beast has never been easy, and reinsurance intermediaries - including Guy Carpenter - have long focused on helping cedents quantify these risks. For events that happen only infrequently but come with severe financial consequences, planning, mitigation and measurement of outcomes can be notoriously difficult.
Guy Carpenter European Reinsurance Composite, Return on Equity, Year-End 2010
Source: Guy Carpenter & Company, LLC
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Guy Carpenter Global Reinsurance Composite, Return on Equity, Year-End 2010
Source: Guy Carpenter & Company, LLC
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Guy Carpenter Bermuda Reinsurance Composite, Return on Equity, Year-End 2010
Source: Guy Carpenter & Company, LLC
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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 which 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.
Guy Carpenter Global Head of Business Intelligence David Flandro discusses 3rd Quarter 2010 reinsurance sector financials, their impact on January 1 renewals and a preview of 4th Q data in this new GC Capital Ideas podcast. Click the audio player below to listen to the interview, or download the interview in a file that will work with your iPod.
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