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CAN/WILL THE “HARDENING” P&C MARKET CONTINUE ABSENT A CAPITAL EVENT?
IMPLICATIONS FOR (RE)INSURANCE INTERMEDIARIES
12th Annual TMPAA Summit Meeting
Vincent J. Dowling, Jr.
1
AFFILIATIONS WITH MAJOR INSURANCE INDUSTRY PLAYERS
Private Equity
Research & Capital Markets
M&A Advisory
2
Why Nobody Cares About P/C (Re)Insurance…But Should
What Is A Reasonable Return In The Current Environment
How We Think About The Property/Casualty Business
Reinsurance Pricing Pressures Drive Channel Conflict
Where Are We In The Underwriting Cycle?
Can The Industry Earn An “Adequate” Return Without A Decline In Surplus?
Q&A
AGENDA
3
WHY NOBODY CARES ABOUT P/C (RE)INSURANCE… BUT SHOULD
4
U.S. & BERMUDA P&C UNDERWRITER MARKET CAP “ONLY” $248 BB
$60
$160
$260
$360
$460
$560
$660
$760
$860
1997 1999 2001 2003 2005 2007 2009 2011
Composite Property/Casualty Industry Market Cap ($,B)
Total Market Cap. ($557) Less BRK/a ($341) Less BRK/a & AIG ($298) Less BRK/A, AIG & Brokers ($248)
AIG Market Cap Peaked In Late 2000 = Represented ~45% Entire P/C Industry Market Cap
Peak Market Cap Of $755B In
May 2007
AIG
Berkshire
5
$571 $557
$417$341
$298$253 $248 $235 $224 $222 $218 $217 $216 $197
Apple P/C Industry ExxonMobil P/C Ind. LessBRK
PC Ind. LessBRK & AIG
Wal-Mart PC Ind. LessBRK, AIG &
Brokers
Microsoft GeneralElectric
Google ChevronCorp.
IBM BerkshireHathaway
AT&T
TOP 10 LARGEST U.S. COMPANIES BY MARKET CAP VS. P/C INDUSTRY
P/C Insurance Is Roughly The Same Size Of…
LACK OF INTEREST = SIZE ALLOWS INVESTORS TO “AVOID”
$248$216
$180 $158$110 $100
PC Ind. LessBRK, AIG &
Brokers
BerkshireHathaway
Wells Fargo JP Morgan Citi Group Bank ofAmerica
P/C (RE)INSURANCE COMPOSITE & TOP 5 LARGEST U.S. LISTED FINANCIALS BY MARKET CAP
6
CUMULATIVE TOTAL VALUE CREATION (TBV/SH + DIVS) SINCE 2006 15
1%15
0%14
6%14
4%13
8%12
6%11
4%11
3%10
8%10
5%10
4%10
4%10
3%99
%95
%95
%88
%87
%87
%86
%83
%80
%80
%65
%62
%58
%57
%50
%49
%48
%47
%36
%35
%34
%31
%31
%27
%4%
-6%
-12%
-16%
-100%-80%-60%-40%-20%
0%20%40%60%80%
100%120%140%160%
Fairfa
xAl
lied W
orld
Arch
Cap
ital
HCC
Lanc
ashir
eAm
erica
n Fin'
lAc
e Ltd.
Rena
issan
ce R
eTr
avele
rsEn
dura
nce
Partn
er R
eCh
ubb
Aspe
nAX
IS C
apita
lW
.R. B
erkle
yPl
atinu
m U/
W RLI
Navig
ators
Montp
elier
Re
Infini
ty P&
CTo
wer G
roup
Ever
est R
eSa
fety
Alleg
hany
Prog
ress
iveHa
nove
rAr
go G
roup
Whit
e Mou
ntains
Marke
lAl
terra
Mercu
ry Ge
nera
lSe
aBrig
htCN
A Fin
'lAl
lstate
Baldw
in &
Lyon
sOn
eBea
con
Selec
tive
Cinc
innati
Fin'
lHa
rtfor
d Fin'
lGl
obal
Indem
nity
XL G
roup
Source: Company Reports
CUMULATIVE TVC & STOCK PRICE SINCE YEAR-END 2006(YE:06 - Q3:12E)Cumulative TVC (TBV/Sh + Dividends) Cumulative % Chg in Stock Price
48% Cumulative Growth = 7% CAGR
92% Cum. = 12% CAGR
123% Cum.= 15% CAGR
7
CUMULATIVE TOTAL VALUE CREATION (TBV/SH + DIVS) SINCE 2006
Valuation Decline 18%
6%
33%
46%53%
68%
-1%
-25%-21%
-13%-9%
-2%
-35%
-15%
5%
25%
45%
65%
Y2007 Y2008 Y2009 Y2010 Y2011 Q3-12ESource: Company Reports, D&P Analysis
CUMULATIVE GROWTH IN TVC & STOCK PRICE SINCE YEAR-END 2006(41 D&P Composite Companies Ex. BRK & AIG)
Cumulative Growth in TVC (Tang. BV/sh + Dividends)Cumulative Growth in Stock Price
Valuation Decline
8
70%
95%
120%
145%
170%
195%
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
D&P P/C (RE)INSURANCE COMPOSITE PRICE TO STATED BOOK VALUEEx. AIG and Berkshire Hathaway (Includes Bermuda)
HurricaneAndrew
Northridge EQ
Cheating phase "bubble"
WTCRates "roll"
Internet "Bubble" Peak
Rates Begin To Rise
Current = 100%
Katrina
Subprime/Credit hits
Commercial lines pure rate increases peak near 50%
5 Years Ago136%
10 Years Ago132%
15 Years Ago174%
20 Years Ago159%
Source: Bloomberg
100% 100%
25 Years Ago123%
YE'11 = 91%
VALUATIONS REMAIN NEAR HISTORIC LOWS
?
25 Years of Declining Peak Valuations
9
WHAT IS A REASONABLE RETURN IN THE CURRENT ENVIRONMENT?
10
1. Sustainable Combined Ratio: Ultimate Loss Ratio & Exp. Ratio
2. Duration of Loss & LAE Reserves = “Tail” (How Long You Keep $)
3. New Money Rate - Investment Return
4. Premium: Surplus (> Leverage, > Return if CR < 100%)
5. Tax Rate (Taxes Matter = Bermuda, Ireland, Switzerland, etc.)
SIMPLE ECONOMICS OF THE (RE)INSURANCE BUSINESS
Five Simple Variables = Accident Year ROE
11
6.8% 7.5
% 7.9%
7.9%
8.2%
8.2%
7.7%
7.2%
7.4%
7.4%
7.2%
7.0%
6.4%
5.8%
5.7%
5.8%
5.6%
5.7%
5.1%
4.9%
5.1%
4.8%
4.9%
4.4%
4.1% 4.6
%
4.5%
4.4%
4.2%
4.0%
3.7%
3.8%
3.4%
3.2%
3.1%
11.4%
13.9%
13.0%
11.1% 12
.5%
10.6%
7.7% 8.4
% 8.9%
8.5%
8.6%
7.9%
7.0%
5.9% 7.1
%
6.6%
6.4%
6.4%
5.3%
5.7%
6.0%
5.0%
4.6%
4.0%
4.3%
4.3% 4.8
%
4.6%
3.7%
3.3%
3.2%
2.8%
1.9%
0%
2%
4%
6%
8%
10%
12%
14%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
'12 Y
TD20
13E
2014
E
Source: A.M. Best Aggregates & Averages, Federal Reserve, D&P Analysis
AVG. P/T NII YIELD VS. 10 YEAR TREASURY YIELDAvg. P/t Yield 10 Yr Treasury Yield
LOW INTEREST RATES & LOWER LEVERAGE DRIVES DOWN ROE
Source: A.M. Best Aggregates & Averages; D&P Analysis, D&P Estimates
UPDATE
333%
337%
340%
332% 340%
324% 331%
318%
315%
289%
274%
248%
239%
239% 249% 27
0% 291%
273%
270%
267%
252%
249% 26
2%
245%
232% 239%
243%
247% 253%
0%50%100%150%200%250%300%350%400%
$0$200,000$400,000$600,000$800,000
$1,000,000$1,200,000$1,400,000$1,600,000
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
E20
13E
2014
E
Invested Assets to Surplus
Invested Assets ($, MM) IA/Surplus (%)
12
SINCE 2004 U.S. STATUTORY SURPLUS UP 35% WHILE PREMIUMS FLAT
$271 $288 $290
$276 $262 $263
$313
$354
$384
$442
$475
$430
$475 $491
$479
$280 $284 $290 $304
$330
$380
$418 $438
$438 $453
$452
$444
$426 $430 $447
$200
$250
$300
$350
$400
$450
$500
$550
$600
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Historical P&C Industry Statutory Surplus And Net Premiums Written ($, B) Stat Surplus Ex. NICO
NICO Surplus
Burlington Northern
Net Written Premium
13
2012
Assumptions (1) Duration: 1.8 years (2) Expense Ratio: 28% (3) Surplus p/t Yield = 250bps Over New Money
ECONOMICS OF 12% ACCIDENT YEAR ROE OVER PAST 25 YEARS
1985
SOLVE FOR COMBINED RATIO TO EARN 12% A/T ROENew Money p/t Yield
P:S 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0%70% 80.7% 81.9% 83.2% 84.4% 85.7% 86.9% 89.5% 92.2% 94.9% 97.6% 100.5%80% 83.4% 84.5% 85.7% 86.8% 88.0% 89.2% 91.6% 94.1% 96.7% 99.3% 101.9%90% 85.5% 86.5% 87.6% 88.7% 89.9% 91.0% 93.3% 95.7% 98.1% 100.5% 103.0%
100% 87.1% 88.1% 89.2% 90.3% 91.3% 92.4% 94.6% 96.9% 99.2% 101.6% 104.0%110% 88.5% 89.5% 90.5% 91.5% 92.5% 93.6% 95.7% 97.9% 100.1% 102.4% 104.7%120% 89.6% 90.6% 91.5% 92.5% 93.6% 94.6% 96.6% 98.7% 100.9% 103.1% 105.3%130% 90.5% 91.5% 92.4% 93.4% 94.4% 95.4% 97.4% 99.5% 101.5% 103.7% 105.8%140% 91.3% 92.3% 93.2% 94.2% 95.1% 96.1% 98.1% 100.1% 102.1% 104.2% 106.3%150% 92.1% 93.0% 93.9% 94.8% 95.8% 96.7% 98.6% 100.6% 102.6% 104.6% 106.7%160% 92.7% 93.6% 94.5% 95.4% 96.3% 97.2% 99.1% 101.0% 103.0% 105.0% 107.0%170% 93.2% 94.1% 95.0% 95.9% 96.8% 97.7% 99.6% 101.5% 103.4% 105.3% 107.3%180% 93.7% 94.6% 95.5% 96.3% 97.2% 98.1% 100.0% 101.8% 103.7% 105.6% 107.6%190% 94.1% 95.0% 95.9% 96.7% 97.6% 98.5% 100.3% 102.1% 104.0% 105.9% 107.8%200% 94.5% 95.4% 96.2% 97.1% 98.0% 98.8% 100.6% 102.4% 104.3% 106.1% 108.0%
2001
9% A/T ROE TODAY = 90-94%
14
75%
80%
85%
90%
95%
100%
105%
110%
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
Com
bine
d Ra
tio
New Money P/tax Yields on Underwriting
C. RATIO NEEDED TO ACHIEVE DIFFERENT A-TAX ROEs
Source: A.M. Best A&A, D&P Analysis
TODAY'S NEW MONEY YIELDS
25 YEARS OF LOWER LEVERAGE & LOWER INTEREST RATES
15
25 YEARS OF LOWER LEVERAGE & LOWER INTEREST RATES
1.5%
3.0%
4.5%
6.0%
80%
90%
100%
110%
120%
130%
140%
150%
160%
170%
180%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
AY
Com
bine
d R
atio
Accident Year Duration
C. RATIO NEEDED FOR A 12% A/T ROE AT VARIOUS NEW MONEY RATES C
MP
Wor
kers
Com
p
Oth
er/P
rodu
ct L
iabi
lity
XS W
orke
rs C
omp
Source: D&P Analysis
16
DIFFERENT RETURN HURDLES OVER TIME
9.8%
8.9%
8.9%
75%80%85%90%95%100%105%110%115%120%125%
75%80%85%90%95%
100%105%110%115%120%125%
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
E20
13E
COMBINED RATIO NEEDED FOR ADEQUATE RETURN VS. HISTORICAL ULTIMATE AYAccident Year Return on Surplus Basis (Excluding National Indemnity)
CR Needed for 12% (5 Year Treasury < 5%) CR Needed for 15% ROE CR Needed For 5yr Trs +700bps
12% ROE
15% ROE
10yr Trs +700bps
ROE
Single Digit ROEs?
12% ROE ERA15% ROE ERA
17
9.8%
8.9%
8.9%
75%80%85%90%95%100%105%110%115%120%125%
75%80%85%90%95%
100%105%110%115%120%125%
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
E20
13E
COMBINED RATIO NEEDED FOR ADEQUATE RETURN VS. HISTORICAL ULTIMATE AYAccident Year Return on Surplus Basis (Excluding National Indemnity)
CR Needed for 12% (5 Year Treasury < 5%) Estimated Ultimate AY CRCR Needed for 15% ROE CR Needed For 5yr Trs +700bps
EstimatedUltimate AY CR
12% ROE
15% ROE
10yr Trs +700bps
ROE
Single Digit ROEs?
12% ROE ERA15% ROE ERA
DIFFERENT RETURN HURDLES OVER TIME
18
GOV’TS “DESTROYED INSURANCE INDUSTRY VALUE” TO SAVE BANKS
“The central bankers and policy makers did their best to save the banking
system and we are the collateral victims of the bail out of the banking
system… The ultra low rates policy led by central banks has had an
impact on all the yields for all investments. In order to save the banks,
they destroyed part of the value of the insurance industry... It’s well
known that when the policymakers have a choice between saving a bank or
an insurance company, they will always choose a bank.”
- SCOR Chairman & CEO Denis Kessler
September 2012
19
HOW WE THINK ABOUT THE PROPERTY/CASUALTY BUSINESS
20
6 KEY INVESTMENT THEMES FOR THE P/C SECTOR
1. Over The Long Term The Only Measure Of Financial Success For Owners Of A Property/Casualty (Re)Insurer Is Growth In Tangible Book Value (Equity) Per Share. Share Price Tracks Book Value Over Time. Volatility Matters.
21
“SUCCESS” IN (RE)INSURANCE = COMPOUNDING BOOK VALUE PER SHARE
• Long-term stock price tracks growth in Book Value per share.
• We think about companies in 3 categories:
• WIN
• PLACE
• Just “SHOWing Up”
• (Re)Insurance is all about the magic of compound returns
• Compounding book value at 12% per year = “double” every 6 years
Win Place Show
Length of Time 15% 12% 7% 5-Years 2.0 1.8 1.4
10-Years 4.0 3.1 2.0
15-Years 8.1 5.5 2.8
20-Years 16.4 9.6 3.9
25-Years 32.9 17.0 5.4
22
OVER THE LONG TERM STOCK PRICE PERFORMANCE TRACKS CLOSELY WITH GROWTH IN BV/SH
FFH
PGR
MKLPRA
MCY
WRB
RLI
WTM
CB
CINFSIGI
BWINB
NAVG
XL
R² = 0.73
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
5.0% 10.0% 15.0% 20.0%TO
TAL
RETU
RN C
AGR
TOTAL VALUE CREATION CAGR
20 YEAR VALUE CREATION CAGR VS. TOTAL STOCK RETURN CAGR
(6M:92 - 6M:12)
Source: Company Reports; D&P Analysis
FFHMKL
PGR
MCY
WTM
WRB
RLI
CB
CINF
BWINB
SIGINAVG
R² = 0.86
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
5.0% 10.0% 15.0% 20.0%
TOTA
L RE
TURN
CAG
R
TOTAL VALUE CREATION CAGR
25 YEAR VALUE CREATION CAGR VS. TOTAL STOCK RETURN CAGR
(6M:87 - 6M:12)
Source: Company Reports; D&P Analysis
25 & 20 Year Total Value Creation Vs. Total Stock Return
23
QUALITY U/WERS ARE GROWTH COS IN TERMS OF BV/SH GROWTH
19% 17% 16% 14% 13% 13% 12% 11% 11% 9% 9% 8% 11% 10% 8%
14%
17% 15%
12%12% 12% 13%
11%10% 9%
7%6%
8%
10%9%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Fairfa
x
Marke
l
Prog
ress
ive
Mercu
ry
Whit
e Mou
ntains
W.R
. Ber
kley
RLI C
orp
Chub
b
Cinc
innati
Fina
ncial
Baldw
in &
Lyon
s
Selec
tive
Navig
ators
Zenit
h
Safec
o
Ohio
Casu
alty
25 YEAR TANGIBLE BV/SH + DIVIDENDS (Q2:87 - Q2:12) vs. TOTAL STOCK RETURN (6/30/87 - CURRENT) - CAGR
TBV CAGR Total Stock Return (Price + Dividends)
Source: Company Reports, D&P Analysis
Last Update PriorTo Being Acquired
24
ONLY MEASURE OF MANAGEMENT SUCCESS = GROWTH IN TANGIBLE BOOK VALUE/SHARE OVER TIME
1. Underwriting = #1 Driving Force & Price of Entry To “Win”
5 Levers Available to Management to Build Tangible Book Value/share:
25
Generated Surplus Growth Quintiles By Underwriting Contribution Quintiles (2002-2011) (% of Surplus Growth Quintile in Each Underwriting Quintile)
Generated Surplus Growth Quintile
Top Quintile
Second Quintile
Third Quintile
Fourth Quintile
Bottom Quintile
Top Quintile 61% 29% 10% 0% 0%
Second Quintile 15% 35% 35% 6% 8%
Third Quintile 3% 23% 29% 29% 16%
Fourth Quintile 6% 5% 18% 48% 23%
Bottom Quintile 15% 8% 8% 16% 53%
Total 100% 100% 100% 100% 100%
UNDERWRITING = DRIVER OF PERFORMANCE: 2002 - 2011
Source: Dowling & Partners Analysis of 310 Groups/Companies (Ex. Mtg & Fnc’l Guaranty)
Und
erw
ritin
g
Con
trib
utio
n Q
uint
ile
26
ONLY MEASURE OF MANAGEMENT SUCCESS = GROWTH IN TANGIBLE BOOK VALUE/SHARE OVER TIME
1. Underwriting = #1 Driving Force & Price of Entry To “Win”
2. Investment of “Float” = Loss Reserves/Unearned Premium
5 Levers Available to Management to Build Tangible Book Value/share:
27
ONLY MEASURE OF MANAGEMENT SUCCESS = GROWTH IN TANGIBLE BOOK VALUE/SHARE OVER TIME
1. Underwriting = #1 Driving Force & Price of Entry To “Win”
2. Investment of “Float” = Loss Reserves/Unearned Premium
3. Investment of “Capital/Surplus”
5 Levers Available to Management to Build Tangible Book Value/share:
28
ONLY MEASURE OF MANAGEMENT SUCCESS = GROWTH IN TANGIBLE BOOK VALUE/SHARE OVER TIME
1. Underwriting = #1 Driving Force & Price of Entry To “Win”
2. Investment of “Float” = Loss Reserves/Unearned Premium
3. Investment of “Capital/Surplus”
4. Capital Management
Capital Structure = Appropriate Use of Non-Equity Capital
Sale/Repurchase of Common Shares @ Opportune Times
Dividend Policy
5 Levers Available to Management to Build Tangible Book Value/share:
29
ONLY MEASURE OF MANAGEMENT SUCCESS = GROWTH IN TANGIBLE BOOK VALUE/SHARE OVER TIME
1. Underwriting = #1 Driving Force & Price of Entry To “Win”
2. Investment of “Float” = Loss Reserves/Unearned Premium
3. Investment of “Capital/Surplus”
4. Capital Management
Capital Structure = Appropriate Use of Non-Equity Capital
Sale/Repurchase of Common Shares @ Opportune Times
Dividend Policy
5. Location of Domicile
5 Levers Available to Management to Build Tangible Book Value/share:
30
6 KEY INVESTMENT THEMES FOR THE P/C SECTOR 1. Over The Long Term The Only Measure Of Financial Success For Owners Of
A Property/Casualty (Re)Insurer Is Growth In Tangible Book Value (Equity) Per Share. Share Price Tracks Book Value Over Time. Volatility Matters.
2. Underwriters' Reported Financial Statements Are Always Wrong. Reported Results, With The Income Statement Driving The Balance Sheet, Are Either Too High Or Too Low (Intentionally Or Not) = But Are Always Inaccurate
31
6 KEY INVESTMENT THEMES FOR THE P/C SECTOR 1. Over The Long Term The Only Measure Of Financial Success For Owners Of A
Property/Casualty (Re)Insurer Is Growth In Tangible Book Value (Equity) Per Share. Share Price Tracks Book Value Over Time. Volatility Matters.
2. Underwriters' Reported Financial Statements Are Always Wrong. Reported Results, With The Income Statement Driving The Balance Sheet, Are Either Too High Or Too Low (Intentionally Or Not) = But Are Always Inaccurate
3. Rating Agencies = Have Been The De-facto Regulators = Flexing Muscles Again Outside The U.S. With Higher Capital Requirements & Increased Oversight
32
Primary CompaniesAA+ AA AA- A+ A A-
Chubb Corp Zurich American Financial Chartis Argo GroupHCC Holdings ACE Arch Capital Allied World CNA Financial
Travelers Group AXIS Capital Catlin Hanover GroupFireman's Fund Cincinnati Fnc'l Liberty Mutual
Lloyd's Endurance OneBeaconNationwide Hartford
Old Republic HiscoxQBE Group NavigatorsRLI Corp. Selective
W.R. Berkley XL Group
S&P FINANCIAL STRENGTH RATINGS TABLE
RATING AGENCIES = THE DEFACTO REGULATORS
Positive OutlookNegative OutlookStable OutlookWatch Negative
Primary CompaniesA++Chubb ACE RLI Corp Allied World Endurance Markel
Arch Capital Travelers American Finc'l Fireman's Fund NavigatorsCincinnati Financial W.R. Berkley Argo Group Hanover OneBeacon
HCC Holdings Zurich AXIS Capital Hartford Old RepublicNationwide Catlin Hiscox QBE Insurance
Chartis Liberty Mutual SelectiveCNA Financial Lloyd's XL Group
A.M. BEST FINANCIAL STRENGTH RATINGS TABLE
A+ A
33
6 KEY INVESTMENT THEMES FOR THE P/C SECTOR
1. Over The Long Term The Only Measure Of Financial Success For Owners Of A Property/Casualty (Re)Insurer Is Growth In Tangible Book Value (Equity) Per Share. Share Price Tracks Book Value Over Time. Volatility Matters.
2. Underwriters' Reported Financial Statements Are Always Wrong. Reported Results, With The Income Statement Driving The Balance Sheet, Are Either Too High Or Too Low (Intentionally Or Not) = But Are Always Inaccurate
3. Rating Agencies = Have Been The De-facto Regulators = Flexing Muscles Again Outside The U.S. With Higher Capital Requirements & Increased Oversight
4. “He Who Controls The Customer Wins” = Intermediaries Capture Outsized Returns Relative To Underwriters On An Absolute & Risk Adjusted Basis.
34
“HE WHO CONTROLS THE CUSTOMER WINS”
0.0x 1.0x 2.0x 3.0x 4.0x
Marsh & McLennan
Aon
AJ Gallagher
Willis Group
Brown & Brown
2011 2012E
ENTERPRISE VALUE TO 2011A & 2012E REVENUE
20%
20%
21%
23%
33%
20%
20%
21%
21%
30%
0% 10% 20% 30% 40%
Marsh &McLennan
Aon
Willis Group
AJ Gallagher
Brown &Brown
2012E BROKER ADJUSTED MARGINSWith and Without Contingent Commissions
AON, MMC, WSH on operating basis, AJG & BRO on EBITDA(C) basis
35
RISE OF LARGE GLOBAL INTERMEDIARIES CHANGES BUSINESS
Only 6 Remain: Marsh McLennan
Aon Willis
Arthur J. Gallagher Gras Savoye
Jardine
Independent
Independent
Relative 1989 1989* Top 20Rank Broker ($, B) Mkt. Sh.
1 Marsh McLennan $2.5 27%2 Alexander & Alexander $1.2 14%3 Sedgwick Group $1.0 12%4 Johnson & Higgins $0.8 9%5 Corroon & Black $0.5 5%6 Willis Faber $0.5 5%7 Frank B. Hall $0.4 4%8 Rollins Burdick Hunter $0.3 4%9 Minet $0.3 3%10 Jardine Insurance Brokers $0.2 3%
TOP 10 $7.7 86%
11 C.E. Heath $0.2 2%12 Arthur J. Gallagher $0.2 2%13 Bain Clarkson PLC $0.2 2%14 Hogg Group PLC $0.2 2%15 Faugere & Jutheau $0.1 1%16 Jauch & Hubener $0.1 1%17 Hudig-Langeveldt Group $0.1 1%18 Gras Savoye SA $0.1 1%19 Sodarcan $0.1 1%20 Hilb, Rogal & Hamilton $0.1 1%
TOP 20 $9.0 100%Source: A.M. Best Review; *Brokerage Revenue
36
RISE OF LARGE GLOBAL INTERMEDIARIES CHANGES BUSINESS Relative
2011 2011* Top 20Rank Broker Ownership ($, B) Mkt. Sh.
1 Marsh & McLennan Public $11.5 30%2 Aon Corp. Public $11.3 29%3 Willis Group Ltd. Public $3.4 9%4 A.J. Gallagher Public $2.1 5%5 Wells Fargo Bank / Public $2.0 5%6 Jardine Lloyd Thompson Public $1.3 3%7 BB&T Bank / Public $1.2 3%8 Brown & Brown Public $1.0 3%9 Lockton Private $0.9 2%
10 Hub Int'l Private Equity $0.9 2%TOP 10 $35.6 91%
11 USI Holdings Private Equity $0.7 2%12 Insphere Ins. Solutions Private Equity $0.7 2%13 AmWins Group Private Equity $0.5 1%14 Alliant Insurance Services Private Equity $0.5 1%15 Cooper Gay Swett & Crawford Private Equity $0.3 1%16 The Leavitt Group Private $0.2 0%17 Confie Seguros Private Equity $0.2 0%18 AssuredPartners Inc. Private Equity $0.2 0%19 Frank Crystal & Co, Inc. Private $0.1 0%20 Hays Group Inc. Private $0.1 0%
Top 20 $39.0 100%Source: A.M. Best, Business Insurance, D&P Analysis; P&C Predominating*Total Revenue for all except: AssuredPartners, Frank Crystal and Hays Group = Brokerage Revenue
37
RISE OF LARGE GLOBAL INTERMEDIARIES CHANGES BUSINESS
Relative Relative 1989 1989* Top 20 2011 2011* Top 20Rank Broker ($, B) Mkt. Sh. Rank Broker Ownership ($, B) Mkt. Sh.
1 Marsh McLennan $2.5 27% 1 Marsh & McLennan Public $11.5 30%2 Alexander & Alexander $1.2 14% 2 Aon Corp. Public $11.3 29%3 Sedgwick Group $1.0 12% 3 Willis Group Ltd. Public $3.4 9%4 Johnson & Higgins $0.8 9% 4 A.J. Gallagher Public $2.1 5%5 Corroon & Black $0.5 5% 5 Wells Fargo Bank / Public $2.0 5%6 Willis Faber $0.5 5% 6 Jardine Lloyd Thompson Public $1.3 3%7 Frank B. Hall $0.4 4% 7 BB&T Bank / Public $1.2 3%8 Rollins Burdick Hunter $0.3 4% 8 Brown & Brown Public $1.0 3%9 Minet $0.3 3% 9 Lockton Private $0.9 2%10 Jardine Insurance Brokers $0.2 3% 10 Hub Int'l Private Equity $0.9 2%
TOP 10 $7.7 86% TOP 10 $35.6 91%
11 C.E. Heath $0.2 2% 11 USI Holdings Private Equity $0.7 2%12 Arthur J. Gallagher $0.2 2% 12 Insphere Ins. Solutions Private Equity $0.7 2%13 Bain Clarkson PLC $0.2 2% 13 AmWins Group Private Equity $0.5 1%14 Hogg Group PLC $0.2 2% 14 Alliant Insurance Services Private Equity $0.5 1%15 Faugere & Jutheau $0.1 1% 15 Cooper Gay Swett & Crawford Private Equity $0.3 1%16 Jauch & Hubener $0.1 1% 16 The Leavitt Group Private $0.2 0%17 Hudig-Langeveldt Group $0.1 1% 17 Confie Seguros Private Equity $0.2 0%18 Gras Savoye SA $0.1 1% 18 AssuredPartners Inc. Private Equity $0.2 0%19 Sodarcan $0.1 1% 19 Frank Crystal & Co, Inc. Private $0.1 0%20 Hilb, Rogal & Hamilton $0.1 1% 20 Hays Group Inc. Private $0.1 0%
TOP 20 $9.0 100% Top 20 $39.0 100%Source: A.M. Best Review; *Brokerage Revenue Source: A.M. Best, Business Insurance, D&P Analysis; P&C Predominating
*Total Revenue for all except: AssuredPartners, Frank Crystal and Hays Group = Brokerage Revenue
Independent
Independent
38
M&A REBOUNDS OFF RECESSION (2009) LOWS … WITH RISING PRICES
M&A has returned at higher prices given low interest rates and improved pricing
5.5 x
5.3 x
6.8 x
5.6 x
5.6 x 6.2
x
8.0 x
6.5 x
7.8 x
7.1 x
7.7 x
6.9 x
7.4 x
7.3 x
6.7 x 8.7
x 10.5
x
0.0 x
2.5 x
5.0 x
7.5 x
10.0 x
12.5 x
15.0 x
17.5 x
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
YTD
(Re)insurance Broker Industry Transaction Multiples - EBITDA
1.3 x
1.4 x
1.6 x
1.4 x 1.4
x 1.7 x
2.0 x
1.9 x
2.2 x
1.8 x
2.0 x
2.1 x
2.5 x
2.2 x
1.9 x
2.8 x
2.8 x
0.0 x
2.0 x
4.0 x
6.0 x
8.0 x
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
YTD
(Re)insurance Broker Industry Transaction Multiples - Revenue
81 85 81 50 52 75 49
101 57 7039 53
5943
88
5175
3259
71
21
103
7680
50
8283
0
50
100
150
200
250
300
350
400
2006 2007 2008 2009 2010 2011 2012
Q4 Q3 Q2 Q1
Announced Transactions By Quarter
*Data through 8/15/12
Source: Dowling Hales Proprietary Database
39
ORGANIC GROWTH REBOUNDS, BUT STILL INCONSISTENT
Public Brokers’ Organic Growth Turned Positive In H2:10, Led By The “Big 3” Global Brokers = International Diversification And Initiatives To “Enhance Yield.”
Momentum Shifting To The U.S. Middle Market With Economy Stable And Rates Increasingly “+” (Compares To Europe/UK Headwinds & Slower Rate Movement On The International Front).
0.0% 1.0
%
-0.9%
1.0%
2.8% 4.5
%
1.3%
2.9%
1.4%
0.4% 0.8%
0.9%
0.5% 2.0
%
0.0%
-0.3%
-2.6% -1.
1% -1.2%
0.2% 1.2
%
3.2%
3.2%
2.4% 2.7%
2.2%
4.4%
4.3%
2007
2008
2009
2010
2011
2012
E
Q1:07
Q2:07
Q3:07
Q4:07
Q1:08
Q2:08
Q3:08
Q4:08
Q1:09
Q2:09
Q3:09
Q4:09
Q1:10
Q2:10
Q3:10
Q4:10
Q1:11
Q2:11
Q3:11
Q4:11
Q1:12
Q2:12
(Re)Insurance Brokerage Composite Organic Growth
Source: Company Reports; D&P Analysis
40
MARGIN EXPANSION = A FUNCTION OF ORGANIC GROWTH
16.5% 18.3%
21.0% 21.4% 21.0% 23.4% 23.4%
1.5%
2007 2008 2009 2010 2011 H1:12 H1:12 PF
Brokerage Adjusted EBITDA Margin
Source: Company Reports; *Margin assuming 4% yield on cash/investments
Impact of low interest rates costs ~1.5pts*
With “Expense Levers” Pulled (During 2008/2009) Margin Expansion Largely Subject To (Organic) Revenue Growth.
Low Interest Rates have far less impact than on underwriters
41
(RE)INSURANCE INTERMEDIARY BUSINESS REMAINS A GREAT BUSINESS
Not Capital Intensive
Stable Cash-Flow Business
Relationships & People Are Critical
Rating Agencies Not A Factor
Economies of Scale Matter
Constant Consolidation & Regeneration of New Firms
“He Who Controls The Customer Wins”
42
MGA Business: Small But Rapidly Growing As A % Of Commercial Lines
42
Source: D&P Analysis, Statutory Filings, A.M. Best Aggregates & Averages *Statutory Filings = Based on Statutory Disclosures Of Top Commercial Lines Writers
COMMERCIAL LINES DIRECT PREMIUMS WRITTEN ($, BILLIONS)
MGA / PROGRAM BUSINESS SNAPSHOT*
Other Cml Lines
$146.996%
MGA Business*
$6.54%
1999Other Cml
Lines$228.892%
MGA Business*
$20.08%
2011
43 43
MARKEL AS A CASE STUDY = CONTINUES TO BUILD ITS PROGRAM BUSINESS
Announces 3rd “MGA” Acquisition In The Last Year = Buying The Premium Source
$137 $163 $236 $271 $294 $319 $340 $347 $355
$302 $375
$572
$700
$965
$1,075
$0
$200
$400
$600
$800
$1,000
$1,200
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E
MARKEL SPECIALTY ADMITTED SEGMENT GROSS PREMIUMS
Source: Company Reports, D&P Estimates
Specialty Admitted (Historical)
FirstComp (Closed Oct. 2011)
THOMCO (Closed Jan. 2012)
Essentia/Hagerty (Announced Oct. 2012)
44
6 KEY INVESTMENT THEMES FOR THE P/C SECTOR
1. Over The Long Term The Only Measure Of Financial Success For Owners Of A Property/Casualty (Re)Insurer Is Growth In Tangible Book Value (Equity) Per Share. Share Price Tracks Book Value Over Time. Volatility Matters.
2. Underwriters' Reported Financial Statements Are Always Wrong. Reported Results, With The Income Statement Driving The Balance Sheet, Are Either Too High Or Too Low (Intentionally Or Not) = But Are Always Inaccurate
3. Rating Agencies = Have Been The De-facto Regulators = Flexing Muscles Again Outside The U.S. With Higher Capital Requirements & Increased Oversight
4. “He Who Controls The Customer Wins” = Intermediaries Capture Outsized Returns Relative To Underwriters On An Absolute & Risk Adjusted Basis
5. “Bermuda Was a Better Mousetrap” And Underwriters Operating From The U.S., Paying Full U.S. Taxes, Are At A Distinct Competitive Disadvantage
45
BERMUDA WAS DOMICILE OF CHOICE FOR OVER LAST 25 YEARS XL
Pa
rtne
rRe
Axis
Harbor Point
ACE
Mid
-Oce
an
Allied World
Lancashire
IPC
Re
Montpelier
Validus Re G
lob.
Cap
Endurance
Ariel Re La
Salle
Platinum
Flagstone
Tem
pest
Aspen
Ren
Re
Arch C
entr
e C
at
DaV
inci
$611
$2,892
$8,660
$5,015
$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000
'85-'86
1993
2001
2005
STARTUP CAPITAL BY "WAVE" = POST EVENT(S)
$,M
Class of:
$,M
46
Public (Re)Insurance Stocks Selling Below Book
Class of 2005 Did Not “Work” For P/E Investors
Rating Agency Capital Model Changes Dampen Returns
Acceptance of Other Risk Transfer Mechanisms
Cat Bonds – No Longer “An Eloquent Solution In Search of Demand”
Sidecars
Fully Collateralized Reinsurers
Exception: Tax Driven “Hedge Fund” Strategies
THERE WILL NOT BE A BERMUDA CLASS OF 201X POST EVENT
47
6 KEY INVESTMENT THEMES FOR THE P/C SECTOR 1. Over The Long Term The Only Measure Of Financial Success For Owners Of A
Property/Casualty (Re)Insurer Is Growth In Tangible Book Value (Equity) Per Share. Share Price Tracks Book Value Over Time. Volatility Matters.
2. Underwriters' Reported Financial Statements Are Always Wrong. Reported Results, With The Income Statement Driving The Balance Sheet, Are Either Too High Or Too Low (Intentionally Or Not) = But Are Always Inaccurate
3. Rating Agencies = Have Been The De-facto Regulators = Flexing Muscles Again Outside The U.S. With Higher Capital Requirements & Increased Oversight
4. “He Who Controls The Customer Wins” = Intermediaries Capture Outsized Returns Relative To Underwriters On An Absolute & Risk Adjusted Basis.
5. “Bermuda Was a Better Mousetrap” And Underwriters Operating From The U.S., Paying Full U.S. Taxes, Are At A Distinct Competitive Disadvantage.
6. In The Aggregate (Re)insurance Has Been/Is/And For The Invest-able Future Will Be A Lousy Business (Fails To Earn Its Cost Of Capital Over Time).
48
97.7% 98
.2% 98.6% 99
.1%10
2.0%
103.2
%10
2.6%
99.0%
100.2
% 101.5
%10
2.5%
100.1
%96
.4%96
.2%99
.2%10
5.4% 10
7.9%
102.4
%97
.2% 97.5%
100.6
% 103.1
%10
6.0%
109.6
% 112.0
%11
7.8%
116.2
%10
8.0%
104.6
%10
5.4%
109.2
%10
9.5%
108.9
%11
5.8%
108.2
%10
9.2%
107.2
%10
6.6%
101.3
%10
5.4% 10
7.5% 10
9.6%
115.3
%10
7.3%
99.9%
98.5%
100.8
%92
.6%95
.5%10
5.1%
101.1
%10
2.2%
108.2
%10
5.6%
105.4
%10
5.2%
90%
95%
100%
105%
110%
115%
120%
125%
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
E20
13E
2014
E
U.S. P&C Industry Reported Combined Ratio (Calendar Year)
COMBINED RATIOS RISING AGAIN. 2012 RESULTS ARE “BAKED IN”
Best in 50 Years
4th Best
4pts from Financial/ Mortgage Guaranty
2003-2007 Great Results
1979 – 2003 = 25 YEARS Average Combined Ratio = 108.3%
Source: A.M. Best Aggregates & Averages, D&P Estimates
Sarbanes- Oxley ERA
49
1985 – 2010: 25 YEARS WITH ONLY 7 YEARS OF 10%+ ROE -1
%
11%
12%
12%
7% 7% 7%
0%
7% 5% 8% 8% 11%
6% 4% 3%
-4%
3% 8% 9% 10%
14%
10%
3% 7% 6% 3%
90%
100%
110%
120%
130% -4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1985
19
86
1987
19
88
1989
19
90
1991
19
92
1993
19
94
1995
19
96
1997
19
98
1999
20
00
2001
20
02
2003
20
04
2005
20
06
2007
20
08
2009
20
10
2011
P/C INDUSTRY RETURN ON SURPLUS AND STAT COMBINED RATIO Operating Return on Surplus Stat. Combined Ratio
50
PROPERTY/CASUALTY INSURANCE ROEs VS. FORTUNE 500
* Excludes Mortgage & Financial Guarantee in 2008 - 2012. Source: Insurance Information Institute
P/C ROEs Are Lower And More Volatile
51
8.3%
8.8%
12.2%
15.0%
17.1%
23.1%
InvestmentCompanies
P&C*
Life & Health*
Bank
Broker/Dealer
AssetManager
Pre Financial Crisis1996-2007 Avg. Trailing ROE
% By Industry
Source: SNL Financial; * Statutory Filings
UNDERWRITING IS/WAS/WILL BE A LOW RETURN BUSINESS
After Subsequent
Losses, Non-P/C Returns Were All
Overstated
3.6%
4.6%
5.9%
8.1%
9.4%
10.0%
InvestmentCompanies
Bank
P&C*
Asset Manager
Broker/Dealer
Life & Health*
Post Financial Crisis2009-2011 Avg. Trailing ROE
% By Industry
Source: SNL Financial; * Statutory Filings
52
2%
5%
7%
10%
15%
FifthQuintile
FourthQuintile
ThirdQuintile
SecondQuintile
TopPerforming
Quintile
2001-2011 Average Return On Statutory Surplus
(Top 250 U.S. (Re)Insurance Groups)
15%
12%
10%
7%
3%
TopPerforming
Quintile
SecondQuintile
ThirdQuintile
FourthQuintile
FifthQuintile
2001-2011 Avg. Operating ROEGAAP Equity
(D&P (Re)Insurance Composite of 30*)
RELATIVE RETURNS IMPROVE IN “NEW WORLD” & “SPREAD” IS WIDE
Our Job
* Underwriters under coverage with applicable history Source: D&P Analysis, Company Reports Source: SNL Financial
53
WHY P/C IS DIFFERENT & WELL POSITIONED RELATIVE TO OTHER FINANCIALS
Less Invested Asset Leverage
P&C Companies Usually Take Risk On Liability Side, Not Asset Side
Largest Liability (Loss Reserves) Have No Covenants = No “Run On The Bank”
“Matching” Of Assets To Liabilities = Ability To Hold To Maturity
Economic “Distress” Less A Negative On Operating Results
Business Model Not Required to Change Post 2008-2009
Last Man Standing In Time of Financial Distress
RELATIVE RETURNS OF P/C UNDERWRITERS WILL IMPROVE GOING FORWARD
54
REINSURANCE PRICING PRESSURES DRIVE CHANNEL CONFLICT
55
REINSURANCE PRICING PRESSURES
Excess Capital (Industry Wide)
56
(RE)INSURANCE CAPITAL UP DESPITE 2011 CAT LOSSES
Reinsured Loss From 2011 Cat Events = ~$45B*
$411
$342
$402
$470$455
$480
$200
$250
$300
$350
$400
$450
$500
2007 2008 2009 2010 2011 Q2:12
Reinsurer Capital ($, Billions)
Source: Aon Benfield
Source: Guy Carpenter
57
POST 2011 … NO REINSURERS RAISE CAPITAL/GO OUT OF BUSINESS
USE CHART WE ALREADY HAVE BERMUDIAN/REINSURER - KRW LOSSES
Katrina/Rita/Wilma Losses as % of Q2 Sh. Equity. Total A/T Net Impact = ~$12BB.
79%61%
39%20% 26% 20% 29% 21% 14% 15% 16% 9% 14% 9% 7% 7% 6%
9%
10%
4%5%
4%
18%
5%
6%
14% 6% 12%
106%
77%
49%37% 36% 36% 33% 29% 24% 23% 23%
17% 17% 15% 12% 11% 10%7%
0%
20%
40%
60%
80%
100%
PXRe
Montp
elier
IPCR
e
RenR
e
Endu
rance
Plati
num
Aspe
n
Axis
Evere
st Re
Partn
erRe
XL C
apita
l
Odys
sey
Allie
d Worl
d
Max R
e
Arch
Tran
satla
ntic
ACE
Katrina Rita Wilma
34%
23%
19%
19%
15%
12%
13%
13%
15%
10%
10%
8% 7% 9% 8% 8% 7% 6% 5% 4% 2%
40%
26%
23%
23%
18%
17%
17%
17%
16%
13%
13%
13%
13%
11%
10%
10%
9% 9% 6% 5% 3%
0.0%5.0%
10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%
Flag
stone
Plat
inum
U/W
Partn
er R
e
Mon
tpeli
er R
e
AXIS
Cap
ital
Valid
us
Endu
ranc
e
Aspe
n
RenR
e
Ever
est R
e
Tran
satla
ntic
Odys
seyR
e
Lanc
ashir
e
Argo
Gro
up
Arch
Cap
ital
Allie
d W
orld
Alte
rra
Fairf
ax
XL G
roup
Whit
e M
tns
ACE
Ltd.
A/T
Loss
es as
% o
f 201
0 S/E
BERMUDA/REINSURANCE - 2011 CATASTROPHE LOSSES2011 RDE Q4 Losses as % of 2010 S/E 9M Losses as % of 2010 S/E
Source: Company Reports, D&P Analysis* Excluding 2011 RDE: MRH (22%), PRE (23%), VR (15%), RE (13%)
2011 INTERNATIONAL CAT LOSSES REVEAL “DEWORSIFIERS”
"It's only when the tide goes out that you learn who's been swimming naked.” [Warren Buffett]
3.0%4.5%
6.4%9.0%9.2%9.5%9.6%
11.4%12.7%12.9%13.5%
16.3%16.6%16.7%17.0%18.0%
22.8%23.4%
25.8%39.9%
ACE Ltd.White Mtns
XL GroupAlterraFairfax
Allied WorldArch CapitalArgo GroupLancashire
TransatlanticEverest Re
RenReAspen
EnduranceValidus
AXIS CapitalMontpelier Re
Partner RePlatinum U/W
Flagstone
2011 Catastrophe Losses as % of Beginning S/E
Source: Company Reports; D&P Analysis
59
REINSURANCE PRICING PRESSURES
Excess Capital (Industry Wide)
Increased Retention By Clients
60
REINSURANCE PRICING PRESSURES
Excess Capital (Industry
Increased Retention By Clients
Ajit Jain = The “Cycle” Killer?
61
AJIT JAIN = THE “CYCLE” KILLER? NICO AS % OF P/C SURPLUS
Source: A.M. Best Aggregates & Averages, SNL Financial
$271 $288 $290
$276 $262 $263
$313
$354
$384
$442 $475 $430
$475
$491 $479
12%
14% 13% 13%
9%
10%
12% 12% 12%
12% 12% 11%
12%
16% 17%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
$200
$250
$300
$350
$400
$450
$500
$550
$600
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Historical P&C Industry Statutory Surplus And Net Premiums Written ($, B)
Stat Surplus Ex. NICO NICO Surplus Burlington Northern NICO as % of PC Surplus
62
BURLINGTON NORTHERN = SECOND LARGEST GLOBAL REINSURER
Source: A.M. Best, Statutory Filings
$34.7
$95.1
$31.3 $30.2 $28.2
$7.3 $6.5 $6.1 $6.0 $5.7 $4.1 $0
$10 $20 $30 $40 $50 $60 $70 $80 $90
$100
NIC
O
Sw
iss
Re
Mun
ich
Re
Lloy
d’s
Han
nove
r Re
Par
tner
Re
Eve
rest
Re
CR
C C
orp
SC
OR
S.E
.
Tran
satla
ntic
Top Global Reinsurance Groups (P/C Gross Premiums >$3B)
Ranked By Total Shareholders' Funds ($,B)
Burlington Northern
63
AJIT JAIN = THE CYCLE KILLER?
64
REINSURANCE PRICING PRESSURES
Excess Capital (Industry Wide)
Increased Retention By Clients
Ajit Jain = The “Cycle” Killer?
“Tipping Point” For Alternative Sources Of Capital
65
ALTERNATIVE CAPACITY BECOMING A BIGGER PLAYER IN THE MARKET
$5 $7 $7 $8 $9
$12 $13
$16 $33
$43
$0
$10
$20
$30
$40
$50
2012* 2015E
NON-TRADITIONAL P/CAT LIMITS BY TYPECat Bond Collateralized Re Retro ILW
Source: Guy Carpenter; *As Of 4/1
• A major reinsurance broker predicts alternative capacity will ultimately comprise 20-30% of total reinsurance spend.
• Currently non-traditional capacity is estimated to provide ~13% of total worldwide cat limits.
66
Willis Re Chairman Peter Hearn – 7/1/12 “… It is clear that the damping impact on rates due to the influx of new capital is frustrating for existing reinsurers who are battling concerns over falling investment income and dwindling reserve releases.”
Validus Re CEO Ed Noonan – 7/27/12 “There are places where third party capital or institutional money has a disproportional impact and right now we would point to Florida…”
RenaissanceRe CEO Neill Currie – 8/1/12 “We had anticipated additional firming at June 1 renewals, but as it turned out, pricing was relatively flat. We believe this was due primarily to new supply entering the market...”
“The ‘Tipping Point’ For The P/Cat Market May Have Been Reached at 6/1.”
66
[IBNR Weekly 6/14/12]
67
REINSURANCE GOES MAINSTREAM = CAT GAINS INSTITUTIONAL ACCEPTANCE
Source: Towers Watson Global Pension Assets Study 2012
Non-U.S.$11.442%
Defined Benefit
$6.925%
Defined Contribution
$9.233%
U.S.$16.158%
PENSION FUND ASSETS$27.5 trillion
PENSION FUND ASSETS RELATIVE TO GLOBAL PROPERTY CAT LIMITS
Global P/Cat Limits
($240B)
U.S. Defined Benefit Pension
Assets (~$7 Trillion)
2% Allocation to “Reinsurance”
($140B)
Traditional Reinsurance
Market?
69
Direct Global Equity£4,95923%
Private Equity£1,193
5%
Credit£5,69826%
Property£8054%
Hedge Funds£5883%
Reinsurance£3952%
Infrastructure£2001% ILS & liability
hedging£6,03227%
Cash & Liquid Assets£2,059
9%
RBS Group Pension Fund Distribution of Assets as of 3/31/12
RBS GROUP PENSION FUND ALLOCATES 1.8% TO NEW ASSET CLASS: “REINSURANCE”
“The new strategic benchmark is being phased in through 2011 and 2012. So far the Fund has reduced its equity exposure by £2 billion to reduce investment risk and introduced two new asset classes – reinsurance and infrastructure.”
Note: £395M = $640M, or ~ the entire size of Flagstone @ take out.
70
32%
P/CAT PRICE SPIKES MITIGATED. PRICING ON SECULAR DECLINE
Source: Guy Carpenter; 2013 = D&P Estimate
26%
86%
65%
-16% -11% -12%
-20% -15% -12%
1%
28% 24%
5%
-9% -8%
32%
-6% -10%
8%
-6% -8%
10%
-40%
-20%
0%
20%
40%
60%
80%
100%
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
2009
2010
2011
2012
2013
Guy Carpenter World Property Cat Reinsurance Rate on Line Index* * 1990 = 100
? Post KRW
Post 2011 Cat Losses
10%
71
WHERE ARE WE IN THE UNDERWRITING CYCLE?
72
CYCLE MANAGEMENT = WELL INTO THE “CHEATING PHASE”
Phases of P/C Cycle Reported results are always wrong Reported results are a lagging indicator of true profitability 2 main drivers • Initial AY Loss ratio “pick” • Prior period reserve adjustments Reported results (Calendar Year) worse than underlying results (Accident Year) = Restoration Phase Reported results (Calendar Year) better than underlying results (Accident Year) = Cheating Phase
73
($6)($0)
$12 $19
$24
$11 $2
($15)
($26) ($23) ($23)($17)
($13) ($11)($7)
-$30-$20-$10
$0$10$20$30
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E
Source: A.M. Best Aggregates & Averages; D&P Analysis
Cumulative Accident Year Development Difference Between Initial and Estimated Ultimate Incurred Loss ($,BB)
Ultimate Development Remaining
Actual Development To Date
($3) ($6) ($9) ($5) ($0)
$11 $22
$14 $10 $7 ($6) ($9)
($13) ($14)($10) ($12)
-$20
-$10
$0
$10
$20
$30
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011A 2012E 2013E 2014ESource: A.M. Best Aggregates & Averages; D&P Estimates
Prior Period Reserve DevelopmentBy Calendar Year ($,B)
AY – How initial is setup vs. what we ultimately think
REPORTED RESULTS ARE ALWAYS WRONG.
-$23B
~$64B
-$64B
74
$3
($6)
($21)($24) ($24)
$0
$20
$29
$36 $31
$16
$9
($0)($3) ($3)
($15)
-$30
-$20
-$10
$0
$10
$20
$30
$40
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011A 2012E 2013E 2014E
Implicit Strengthening/(Weakening) of Overall Industry Balance Sheet By Calendar Year Impact in $, B: Estimated Ultimate Redundancy/Shortfall Created by Accident Year +Prior Year Reserve Development
Total Weakening (1997-2000)
= $75B
Total Strengthening (2001-2008) = $145B
Weakening
Source: A.M. Best Aggregates & Averages; D&P Analysis
"Soft" "Soft""Hard"
THE “CYCLE” = INCOME STATEMENT LAGS Declining Conservatism In Initial Loss Ratio Picks Combined With Reserve Releases = Cheating Phase
75
10% 12
% 13% 14% 15
%15
%14
%19
%24
%24
%23
%20
%16
%12
%10
%8% 7%
4%2%
0%-1
%-1
%-2
% -1%
0%-1
%-1
%-1
%-2
%-3
%-4
%-5
%-5
%-6
% -4% -3%
1% 2% 3% 2% 1% 0%-1
%-1
%0%
2%4%
6%8% 9% 8%
13% 17% 19% 23% 30
% 34%
36% 46
%61
% 67%
67% 76
%87
%87
%84
% 90% 10
0%94
%88
% 90% 98
%92
%84
% 88% 98
%90
%82
% 86% 94
%84
%75
%77
% 84%
73%
68% 72% 86
%77
%73
% 75% 88
%77
%71
% 73% 88
%80
%78
% 84%
103%
97%
92%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Q1:00
Q2:00
Q3:00
Q4:00
Q1:01
Q2:01
Q3:01
Q4:01
Q1:02
Q2:02
Q3:02
Q4:02
Q1:03
Q2:03
Q3:03
Q4:03
Q1:04
Q2:04
Q3:04
Q4:04
Q1:05
Q2:05
Q3:05
Q4:05
Q1:06
Q2:06
Q3:06
Q4:06
Q1:07
Q2:07
Q3:07
Q4:07
Q1:08
Q2:08
Q3:08
Q4:08
Q1:09
Q2:09
Q3:09
Q4:09
Q1:10
Q2:10
Q3:10
Q4:10
Q1:11
Q2:11
Q3:11
Q4:11
Q1:12
Q2:12
Q3:12
Rate Change (Left Axis) Cumulative Rate Change (Right Axis)
CHUBB STANDARD MARKET COMMERCIAL LINES INCREASES
U.S. COMMERCIAL LINES PRICING NOW BACK TO 2004 LEVELS Doubled in 2 years
Flat for 7
Year-Over-Year % ChangeCOMMERCIAL LINES RATE CHANGES BY SURVEY
-20%
-10%
0%
10%
20%
30%
40%
Q4:99
Q1:00
Q2:00
Q3:00
Q4:00
Q1:01
Q2:01
Q3:01
Q4:01
Q1:02
Q2:02
Q3:02
Q4:02
Q1:03
Q2:03
Q3:03
Q4:03
Q1:04
Q2:04
Q3:04
Q4:04
Q1:05
Q2:05
Q3:05
Q4:05
Q1:06
Q2:06
Q3:06
Q4:06
Q1:07
Q2:07
Q3:07
Q4:07
Q1:08
Q2:08
Q3:08
Q4:08
CIAB AdvisenMarketScout* CLIPS
Source: Advisen, CIAB, MarketScout, Towers Watson
-10%-8%-6%-4%-2%0%2%4%6%8%
Q1:09
Q2:09
Q3:09
Q4:09
Q1:10
Q2:10
Q3:10
Q4:10
Q1:11
Q2:11
Q3:11
Q4:11
Q1:12
Q2:12
Q3:12
* Reported monthly. Monthy average used
76 76
CAN THE INDUSTRY EARN AN “ADEQUATE” RETURN
WITHOUT A DECLINE IN SURPLUS?
77
-30%
-20%
-10%
0%
10%
20%
30%
-30%
-20%
-10%
0%
10%
20%
30%
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
E20
13E
2014
E
P/C Industry P/T Net Return On Surplus Vs. YOY Chg. In SurplusReturn on Surplus (Left Axis) Change In Surplus (Right Axis)
Source: A.M. Best Aggregates & Averages; D&P Analysis
Hoped For Turn
Driven By Investments
St. PaulLiberty Mutual Sell Common
Stocks @ Bottom
No "Turn" Without A Decline In Surplus
CAN THERE BE A MAJOR MARKET TURN WITHOUT A DECLINE IN SURPLUS?
77
?
78
Price Increases vs. Loss Costs
Investment Returns
Reserve Adjustments
VARIABLES FOR 2013 - 2014
79
Q&A
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