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2 Guy Carpenter
The Financial Crisis A Greek Tragedy
§ Hubris: The Bubble
§ Nemesis: Collapse and Insolvency
§ Catharsis: Purge and Recovery
3 Guy Carpenter
1 January 2009 Renewal Guy Carpenter World Property Catastrophe Rate-on-line Index
0
50
100
150
200
250
300
350
400
450
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009P
1990 = 100
4 Guy Carpenter
1 January 2009 Renewal Regional Property Catastrophe Rate-on-Line Indices
1990 = 100
0
50
100
150
200
250
300
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009P
United Kingdom Continental Europe United States
5 Guy Carpenter
Florida 1 June 09 Renewal
Source: Guy Carpenter
Florida 1 June 2009 Cat Price Changes
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Higer Layers Middle Layers Lower Layers
06-05 07-06 08-07 09-08
6 Guy Carpenter
2009 Risk Adjusted Pricing US Nationals at 7.1 – 09 FOT vs. 08 FOT
Approx. 11% - 14% Increase in 09 FOT as compared to 08
FOT
Approx. 14% - 16% Increase in 09 FOT as compared to 08
FOT
Higher Layers Lower Layers
Max Quote Avg Quote Min Quote89% 96% 117%
2009 Firm Order Terms as a % of
7 Guy Carpenter
“A” Brave New World S&P Reinsurance Ratings Distribution
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
YE07 Current/YE08
AA- A+ A A- Not Rated
Source: Guy Carpenter, Standard & Poor’s
Standard & Poor’s rating distribution for 31 reinsurers based on shareholders’ funds.
8 Guy Carpenter
Guy Carpenter Global Reinsurance Composite 1st Half 2009 Earnings
(25)
(20)
(15)
(10)
(5)
-
5
10
15
20
6M08 6M09
USDb
n
Non-Life Underwriting Result Life Underwriting Result Investment Income
Realized Gains (Losses) Unrealized Gains (Losses) Interest Expense
Other Taxes Net Income
Source: Guy Carpenter
9 Guy Carpenter
Guy Carpenter Global Reinsurance Composite Change in Shareholders’ Funds 1st Half 2009
70
75
80
85
90
95
100
SHF YE08 Net Income SharesRepurchased
Dividends paid UnrealizedGains (Losses)
ForexMovements
CapitalIncrease
Other SHF 6M09
USDb
n
Source: Guy Carpenter
Note: Provisional showing 16/20 companies. The “Other” category is likely to include unrealised gains and will be updated when more detained accounts are disclosed.
10 Guy Carpenter
Guy Carpenter Global Reinsurance Composite Cashflow 1st Half 2009 v 1st Half 2008
Source: Guy Carpenter
(15)
(10)
(5)
-
5
10
Operating CashFlow
Investing CashFlow
Financing CashFlow
Other Cash Flow Net Increase inCash
USDbn
6M08 6M09
11 Guy Carpenter
Change in Shareholders’ Funds
-40%-30%-20%-10%
0%10%20%30%40%50%60%70%80%90%
100%110%
Validu
s
CNA Financia
l
Fairfax XL
America
n Fina
ncial
Hartfor
d
Libert
y Mutu
al
Arch R
eACE
Partne
r Re
Zurich
Swiss R
eAW
AC
Montpe
lier
Transatl
antic
Hanno
ver R
e
White M
ountai
ns
Endura
nce
Everes
t Re
Ren R
eAxis
Max C
apita
l
Lanc
ashir
e
Mapfre
Platinum
W.R. B
erkley
Aspen
Chubb
Flagsto
ne HCC
Traveler
sSCOR
Munich
Re
Old Rep
ublic
Change in YE08 Change in 9M09
Source: Guy Carpenter
12 Guy Carpenter
OIS Spread below 30 bps
0
50
100
150
200
250
300
350
400
450
500A
pr 0
5
Jun
05
Aug
05
Oct
05
Dec
05
Feb
06
Apr 0
6
Jun
06
Aug
06
Oct
06
Dec
06
Feb
07
Apr 0
7
Jun
07
Aug
07
Oct
07
Dec
07
Feb
08
Apr
08
Jun
08
Aug
08
Oct
08
Dec
08
Feb
09
Apr
09
Jun
09
Debt financing unavailable
Source : Guy Carpenter, Bloomberg data
13 Guy Carpenter
US 10 year AA corporate spreads approaching 100 bps
Source : Guy Carpenter, Bloomberg Data
0
50
100
150
200
250
300
350
400
450A
ug 0
7
Sep
07
Oct
07
Nov
07
Dec
07
Jan
08
Feb
08
Mar
08
Apr 0
8
May
08
Jun
08
Jul 0
8
Aug
08
Sep
08
Oct
08
Nov
08
Dec
08
Jan
09
Feb
09
Mar
09
Apr 0
9
May
09
Jun
09
Jul 0
9
10 year US AA corporate spread over Treasury bonds
15 Guy Carpenter
0
10
20
30
40
50
60
70
80
901990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: Guy Carpenter/Bloomberg
Capital markets markets closed
LTCM
“Asian Contagion”
Tech Bubble Bursts
11 September
Enron
VIX Index - a measure of implied stock market volatility
Back to “normal”?
S&L crisis
16 Guy Carpenter
30
40
50
60
70
80
90
1002000
2000
2001
2001
2002
2002
2003
2003
2004
2004
2005
2005
2006
2006
2007
2007
2008
2008
2009
Russell 3000 P&C Insurance Index Book Value
Market falls
No marked decline after KRW because
companies were able to recapitalise easily
Slow awareness of the problem of legacy
reserves/ deterioration of reserves
Bull market
Major decline explained by credit crunch/ fall in asset
values/ major catastrohes
A long term trend?
Source: Guy Carpenter/Bloomberg
2Q capital rebound
Source : Guy Carpenter, Bloomberg data
17 Guy Carpenter
World P&C Insurance Growth 2008 Industrialised countries hit by recession, emerging markets solid
Source: Swiss Re
-4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%
World
Industrial countries Average
North America
Western Europe
Continental Europe
Japan
Oceania
Emerging Markets
SE Asia
Latin America/Caribbean
CEE
Africa
Middle East/Central Asia
2008 Annual average 1998-2007
18 Guy Carpenter
US P&C Premiums 2001-2008
250
300
350
400
450
500
550
600
2001 2002 2003 2004 2005 2006 2007 2008
US
Dbn
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
NP
W/G
PW
GPW NPW Retention Rate
GPW down 1.9%
NPW down 1.8%
Source: Guy Carpenter, Highline
19 Guy Carpenter
US P&C Sector Gross Premium Written Growth Rates 2001-2008
-10%
-5%
0%
5%
10%
15%
20%
25%
2008200720062005200420032002
Industry Aggregate Personal Auto Liability Commercial Auto Liability
Workers' Comp Comm Multi-Peril General Liability
Med Mal Fire & Allied
Source: Guy Carpenter, Highline
20 Guy Carpenter
Long-tail clouds on the horizon? US P&C initial accident year loss ratios & subsequent development
Source : Guy Carpenter, Highline Data
-‐10%
-‐5%
0%
5%
10%
1999 2000 2001 2002 2003 200 4 2005 2006 2007 200845%
50%
55%
60%
65%
70%
75%
80%
Accident year loss ra tio development % (LHS ) Initial los s ratio pic k (RH S )
?
21 Guy Carpenter
EU inflation expectations
Inflation linked to nominal sovereign spread Implied forward rate of inflation at Yi
Source: Bloomberg data, Guy Carpenter
%
2%
4%
6%
8%
10%Y1 Y2 Y3
Y4 Y5 Y6
Y7 Y8 Y9 Y10
22 Guy Carpenter
Outlook - absent shocks
§ Balance sheet restoration
§ Diversification
§ Demand pressure
§ Generic single “A” market
§ Capital markets thawing: – Cheap debt – Stabilising stock markets – Buoyant catastrophe bonds
§ Capital: returns or retirement
§ Long-tail cloud
Ample Capacity = Market Drift
www.guycarp.com
Contact: Chris Klein
T: +44 (0)207 357 3514
“Capitals are increased by parsimony, and diminished by prodigality and misconduct.” Adam Smith, The Wealth of Nations, Book II, Chapter III
24 Guy Carpenter
Important Disclosure
The information contained in this presentation provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insureds should consult their insurance and legal advisors regarding specific coverage issues.
This document or any portion of the information it contains may not be copied or reproduced in any form without the permission of Guy Carpenter, except that clients of Guy Carpenter need not obtain such permission when using this report for their internal purposes.
© Copyright - 2009 Guy Carpenter and Company Ltd. All rights reserved.
Guy Carpenter and Company Ltd is an Appointed Representative of Marsh Ltd, which is authorised and regulated by the Financial Services Authority.