‘In re retail or even in banking, being wi willing to run your business at a loss would be condemned as utter madness’ Ellen Bennett, editor-in-chief G LOBAL RE I NSU RANCE.COM
MONTE CARLO 2011 FROM GLOBAL REINSURANCE MAGAZINE
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Canopius offers 83p a share for Omega
“This is the ‘not yet’ market – clearly it’s economically out of order, but there’s not yet sufficient impetus for a correction to take hold” Mike McGavick, XL
“What we are seeing now is a universal decline in the valuation of insurance companies”
Michael Watson: Haverford’s agreement with Omega is just the beginning
added: “It makes things more complicated.” Watson made it clear yesterday that Canopius would not try to circumvent Omega’s board in trying to acquire the company. “We don’t wish to engage in a hostile transaction, which is why we have been very patient in the process.”
Guests were spoiled for choice last night with delegates ﬂitting between the Fairmont, the Hermitage and the Hotel de Paris
T T O N I G7 H Page
Manfred Seitz, Berkshire Hathaway
Canopius has made an indicative proposal to buy fellow Lloyd’s insurer Omega for 83p a share. Yesterday, Bermudian investment ﬁrm Haverford made an 83p a share offer for 25% of Omega’s shares. But Canopius proposes acquiring Omega’s entire issue and to be issued shares. Speaking to Global Reinsurance after the Haverford deal was announced yesterday, Canopius chief executive Michael Watson suggested that the Haverford offer was just the ﬁrst part of a bigger move. “We are approaching an endgame which is to the beneﬁt of everybody,” Watson said. Watson said at the time that the Haverford offer did not change Canopius’s desire to buy Omega. But he
OM E NC C E E I N S U RS AUN RC A G LOBAL RE I N
changed ten years on How the industry has
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MONTE CARLO 2011
COMMENT READ MORE STAY INFORMED
The market is not turning – but much depends on the USA’s winter storms PAGE 4
Ian Clark, Deloitte PAGE 5
WERE YOU SPOTTED OUT ENJOYING ANOTHER NIGHT AT THE RENDEZ-VOUS? PAGE 7
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‘An interesting set of themes seems to be developing, with the flight to scale being at the top of many people’s strategic agenda, alongside a watching brief on the changes that are taking place in the wholesale broking market’
G LOBAL RE I NSU RANCE
Catastrophe payouts Consolidator Jelf plans to snap up boltareon notacquisitions denting market and increase its sales appetite bonds force for further in a on acquisitions and PAGE 6 increase its sales force further in a on
How the industry has changed ten years on
acquisitions and increase its sales
Montpelier has more private sidecar deals on the horizon PAGE 5
MONTE C ARLO
1 Casino de Monte Carlo 2 Hotel Hermitage 3 Hotel de Paris 4 Fairmont MonteCarlo 5 Hotel Metropole Monte-Carlo 6 Port Palace Hotel 7 Eglise Sainte Devote 8 Gare de Monaco
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GLOBAL REINSURANCE MAGAZINE is published 10 times a year by Newsquest Specialist Media Ltd 30 Cannon Street, London, EC4M 6YJ, UK Tel +44 (0)20 7618 3456 Fax +44 (0)20 7618 3457 www.globalreinsurance.com © 2011 Newsquest Specialist Media Ltd. All rights reserved. No part of this publication may be used, reproduced, stored in an information retrieval system or transmitted in any manner whatsoever without the express written permission of Newsquest Specialist Media Ltd. This publication has been prepared wholly upon information supplied by the contributors and whilst the publishers trust that its content will be of interest to readers, its accuracy cannot be guaranteed. The publishers are unable to accept, and hereby expressly disclaim, any liability for the consequences of any inaccuracies, errors or omissions in such information whether occurring during the processing of such information for the publication or otherwise. No representations, whether within the meaning of the Misrepresentation Act 1967 or otherwise, warranties or endorsements of any information contained herein are given or intended and full verification of all information appearing in this publication must be sought from the respected contributor. The publication of the articles contained herein does not necessarily imply that any opinions therein are necessarily those of the publishers.
MONTE CARLO 2011
B Y L A URE N GOW firstname.lastname@example.org (Re)insurance broker BMS is planning to add further operations in the US after it opens its new New York treaty reinsurance division within the next 30 days. “There will be more offices in time,” BMS Group chairman Hugo Crawley says. The New York office adds to BMS’s US headquarters in Minneapolis and its other production operations in Philadelphia, Chicago and Shelton. The company is also continuing to hire in the USA as it grows the business. “We are getting the appropriate people on board and that is not going to stop,” says Crawley. He adds that BMS chief executive Carl Beardmore is not in Monte Carlo this week as he is interviewing potential new employees. Crawley conternds BMS is seeing hiring opportunities as some brokers grow weary of working at the large ﬁrms. “There is a lot of dislocation; there is some pretty experienced talent within the bigger companies who are keen to get into an independent operation,” he says.
Ruxley eyeing three APH deals BY BEN DYS ON email@example.com Run-off buyer Ruxley Ventures is conducting due diligence on three portfolios of US asbestos, pollution and health hazard (APH) liabilities. Having completed the run-off of the liabilities from the two authorised insurance companies it owns – City General Insurance Company and Aviation & General Insurance Company – through a combination of schemes of arrangement and commutation, the company is now looking for new deals. “We are making contact with a number of European companies who are interested in talking business,” Ruxley chief executive John Winter says. Ruxley transferred the Aviation & General run-off book to Berkshire Hathaway at the end of last year. Ruxley has decided to focus solely on buying APH liabilities to run off. While the company has always assumed solely APH, it had been previously open to other forms of liabilities.
Three different parties, three different venues, same old Monte Carlo?
Official Party (Fairmont) v Canopius (Hermitage) Last night’s party offerings under the soft light of the full moon became the ‘Battle of the Buffets’. Between the lavish spread at the Fairmont for the official Rendez-Vous party to the delectable minituare sushi at the Canopius, guests were spoilt for choice. Both parties impressed attendees with sweeping views of the Monte Carlo port but what the Canopius party had in gilted style, the official party made up for in open space – the whipping through of a cool breeze on a balmy night took the official party into the lead. But Canopius fought back with its waiting staff primed to fill glasses after each sip, meaning guests were on the fast track to merriment before the clock struck eight. Canopius’s sushi was delicious but ultimately not stomach-lining, meaning the night’s winner (and clear favourite) was the official party with its tiered food stands and oddly mis-matched fruit offerings. OFFICIAL PARTY 1, CANOPIUS 0
Exit’s that way … let’s high-tail it to the next big party
Ruxley chief John Winter: most run-off companies don’t like APH, making it easier to pick up deals
MATCH OF THE DAY
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Run-off buyer will focus solely on APH liabilities European reinsurers can free up capital here
“That has made it easier in many ways to pick up deals because most run-off companies don’t like APH,” Winter says, though adding notable exceptions are Berkshire Hathaway and Enstar. Through research conducted this year, Ruxley has determined there is an opportunity for European reinsurers to free up capital by selling APH liabilities to those run-off ﬁrms willing to assume them.
C ST O A R TS N E R
BMS plans for more US growth
This was the total amount of shareholder buy-backs in 2011, compared to $16.9bn in 2010 (the historic high was in 2007 at $17.5bn).
Yacht spotting: “We insure that one for £5bn, that one for £10bn …”
Could this be reinsurers’ answer to Reservoir Dogs?
2002-04 1993-96 1986-89
That’s the cycle of the last three hard markets … when will it come back around?
MONTE CARLO 2011
NAT C ATS
MARKET VIE W FROM QFC A C ATA S TR OP H E LO SS E S A N D TH E GC C M A R KE T
Knock-on effects of global losses The impact of natural catastrophe losses has been felt across the industry. Losses have cost insurers and reinsurers $60bn and eroded global reinsurers’ capital, triggering big price rises in the areas affected.
LOSSES Estimated total H1 catastrophe loss for industry
CLAIMS Estimate for Japanese eathquake
STORM LOSS Possible tipping point to hardening market
Industry braced for year-end US storms Losses and profit warnings creeping up A $10bn US storm could harden the market Despite the succession of natural catastrophe losses in the ﬁrst half of 2011, there is little sign of a major turn in the market. First-half results have revealed winners and losers, but there is still talk of excess capital in the global reinsurance market, even though it is much reduced from the start of the year. Nevertheless, by the end of June the industry was facing catastrophe claims in the region of $60bn and most reinsurers’ annual cat budgets had been exhausted. The biggest impact by far came from the Japanese earthquake ($30bn-plus of
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claims), while severe weather in the US cost insurers up to $15bn and losses from the Christchurch earthquake are put at $12bn. While reinsurers were quick to describe these events as earnings not capital issues, ﬁrst-half results have revealed creeping losses and even the odd proﬁt warning. “At the mid-point this year the underwriting half of the balance sheet has been burnt. There’s expectation of proﬁtability for the remainder of 2011, but nobody knows where we are on the North American cat season,” says Deloitte partner Ian Clark. What type or size loss
would it take to deplete remaining capital and ensure a hard market for 2012? Some experts believe a $10bn storm loss would prompt a widespread hardening of rates, not just a ﬁrming on loss-hit accounts. Something unexpected, such as an earthquake in California, could prove even more decisive. Swiss Re head of division globals and member of the group management board at Swiss Re Thierry Léger is in no doubt of the market’s direction. “Whether we are talking in September or November, there’s no question about certain trends. If there is a big loss, it will only accelerate price increases on the cat side.”
They’ve also hit countries not directly affected by cat events. The GCC Reinsurance Barometer – issued twice yearly by the Qatar Financial Centre Authority – shows GCC reinsurance managers expect pricing to stabilise or rise. A majority (54%) think global cat losses will lead to moderate rises. The greatest impact is expected on terms and conditions, with exclusions, clarifications and event limits hardening the market. Nat cat awareness among GCC-based cedants has risen with the frequency of floods and typhoons there, yet no respondents expect hardening of prices. GCC reinsurance pricing has been below long-term averages and technical levels. Capacity has grown faster than demand, as reinsurers respond to its high economic growth and under-developed insurance markets. Despite the imbalance of capacity and demand, reinsurers see regional prices as satisfactory. A big shift in outlook has taken place. In March’s Reinsurance Barometer 71% of respondents expected price erosion, 29% predicting stabilisation. But now a third of interviewees expect a moderate rise in pricing. The share of those anticipating stabilisation has risen to 59% and only 8% believe prices will soften. The share of those considering prices ‘very low’ has slumped from 32% to 8%. As in March, almost 50% of respondents believe prices are ‘low’, but the share of those describing them as ‘rather low’ has doubled. Reinsurance is a global industry. Following recent cat losses, the outlook for the GCC reinsurers has improved significantly.
MONTE CARLO 2011
“Has the famous market cycle turned for the last time?”
n the absence of a major event or theme to characterise this year’s Rendez-Vous, chatter has inevitably centred on rates. What will it take to turn the market? One hell of a lot, according to those in the know. If even the heaviest string of cat losses on record can’t shift rates, it’s going to take something truly extraordinary. Reinsurers are quietly acknowledging that rates are
ELL EN BENNE TT
gently ticking upwards, but this is unlikely to do more than correct last year’s softening at the 1/1 renewals. The new RMS V 11 model is also having an affect, but it’s limited and localised. So reinsurers are writing business at a loss in a low interest rate environment with poor investment returns. Small wonder potential investors are left scratching their heads and businesses are trading at
80% of book value. As long as the people ﬁlling the cafes and bars of Monte Carlo this week are willing to run their businesses at a loss, they will continue to do so. In retail or even in banking, it would be condemned as utter madness. The over capacity ﬂooding the market and the lack of underwriting discipline have been perennial problems, but in previous cycles they’ve been counter-balanced by
Montpelier seeks more ‘private sidecar’ deals
major events. But thanks to technology and expertise driving a new sophistication in pricing, a major event in one part of the world no longer tips rates on the other side. Has the famous market cycle ﬁnally turned for the last time, or will sanity return to reinsurance pricing? Apparently, we’re not going to ﬁnd out this year.
IN PICTURES Revellers watch sundown on the Fairmont terrace. Does it get any better than this?
Potential deals are always in the pipeline Could increase probable losses by 20% B Y BE N DYS ON firstname.lastname@example.org Bermuda-based property-cat reinsurer Montpelier Re is aiming to do more so-called private sidecar deals, where private investors provide capital to allow the company to write more business. The company has three such arrangements in place. Two were announced at the beginning of the year, although the investors were not disclosed. And last month (re)insurer Torus agreed to provide sidecar capacity to Montpelier from 1 January 2012, after Montpelier acquired the renewal rights to Torus’s property catastrophe reinsurance business. “We would like to do more deals like that,” Montpelier Group chief corporate development and strategy officer Bill Pollett says. “It’s a winwin for all parties. We can
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with a leading property cat specialist.” Pollett says Montpelier is always speaking to new provide additional capacity to potential sidecar partners. our clients, we earn fees and “You have always got other our partners gain access to an deals in the pipeline in case attractive cat book aligned the existing ones don’t step up when you need them to, and we have got room for a couple “We would like to do in any case as well.” more deals like Torus. more While Montpelier is seekIt’s a win-win for all ing additional sidecar partparties. We can ners, it has no lack of its provide additional own capacity to write capacity to our clients, more business, according to we earn fees and our Pollett. “We have the ﬂexibility to partners gain access increase probable maximum to an attractive cat losses by between 15% and book aligned with a 20% but we are not going to leading property cat today because we don’t think the market environment is specialist.” there yet,” he says. Bill Pollett, Montpelier “If the environment doesn’t get there, deploying excess capital into buying back shares at a 30% discount to book value is an extremely attractive option.”
HEAR NO EVIL The question for underwriters as technology develops is: what could be the next asbestos out there? Willis’s Martin Sullivan predicted at the PricewaterhouseCoopers briefing yesterday morning that hearing issues caused by excessive use of earphones could spark the next wave of litigation claims for lawyers
MONTE CARLO 2011
C AT BONDS
Cat bond appetite grows despite claims Q1 bonds issue breaks previous records July issue marks break from US storms Capital market appetite for insurance risk continues to build in 2011, with cat losses proving a minor hiccup. The ﬁrst quarter issuance of catastrophe bonds broke records, securing $1.02bn of new and renewal risk transfer capacity, according to Guy Carpenter. The four issuances in Q1 securitised US hurricane risk perils – although the big story of the ﬁrst quarter was the Tohoku earthquake in Japan. “In the aftermath of one of the largest earthquakes in recorded history, the cat bond market continued to trade in an orderly and disciplined fashion,” says Guy Carpenter chief executive of global analytics and advisory Bill Kennedy. Activity in the second quarter was lighter – a reﬂection of unprecedented natural catastrophe losses coinciding with uncertainty surrounding new cat model releases, according to Willis. Only four deals came to market (totalling $592bn),
“After one of the largest earthquakes in history, the market continued to trade in an orderly fashion” Bill Kennedy, Guy Carpenter down from the same period in 2010 when eight cat bonds totalling $2.1bn were issued. Nevertheless, investors remain eager to invest in cat bonds, reﬂecting a growing comfort with insurancelinked securities (ILS). “Investors have cash to invest and remain keen on risk in cat bond form, but are
somewhat starved of new issuance, particularly non-US wind-exposed deals,” says Willis Capital Markets & Advisory head of ILS Bill Dubinsky. In July, the ﬁrst bond of 2011 to be purely unexposed to US hurricanes was issued. Queen Street III Capital Limited was structured and arranged by Munich Re to provide the reinsurer with $150m of European windstorm protection. The risk modelling was developed by AIR Worldwide and losses will be set by PERILS AG. “This transaction was priced signiﬁcantly lower than the initial price guidance, while tripling in size from the initially announced transaction size. It highlights investor demand for diversifying peril exposure away from US hurricane,” says GC Securities global head of ILW distribution Chi Hum, whose company placed the cat bond. “We found that investors – none of which were reinsurers – were eager to support a repeat issuer with diversifying peril risk.”
THE FENCE How will recent events affect cat bonds? THOMAS BLUNCK, MUNICH RE “Munich Re is taking advantage of the favourable market environment for cat bonds to obtain cover for the peak risk ‘Storm Europe’.”
HAIR SCARE Lloyd’s developed a policy to cover loss of chest hair that could adversely impact one’s image or career. Under the terms of the policy, the policyholder would have to lose more than 85% of his chest hair through an injury to his chest in order to make a claim.
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BILL DUBINSKY, WCMA “The cat bond market should see an VS uptick in deals in the second half of 2011 as investors get more certainty around how the new RMS hurricane model will affect pricing.”
BRACE YOURSELF The smile of America Ferrara, star of the hit television show Ugly Betty, was insured for $10m. The policy was bought by teeth-whitening product Aquafresh White Trays as part of a promotion involving the celebrity.
QUESTION TIME WITH ... IAN CL ARK Ian, how have you found this year’s Rendez-Vous? IC: As enjoyable, entertaining and draining as ever. An interesting set of themes seems to be developing, with the flight to scale being at the top of many people’s strategic agenda, alongside a watching brief on the changes that are taking place in the wholesale broking market. Can you explain the flight to scale? IC: We seem to be in a position where stock market analysts are attributing premium to scale with many of the smaller floated stocks in both sides of the Atlantic trading at a discount to their larger peers. Given that many of these businesses are trading healthy discount to their net asset position, it is difficult to see how shareholders are getting an accurate return on their investment. This is quite likely to result in some consolidation among the smaller players as they seek greater scale. Is there really the drive to merge when trading below book? IC: When trading individual parcels of shares, this will reflect the discounts to net asset value. However, when a transaction is contemplated there is a premium for ownership and control, which will in effect take the price above net asset value. What’s been your best night out this year? IC: Chèvre d’Or in Èze, which was absolutely stunning on both the eyes and the wallet. Ian Clark is an insurance partner at Deloitte
TONGUE TWISTER In 2009, Gennaro Pelliccia, Costa Coffee’s chief taster, insured his tongue for £10m. The average tongue has approximately 10,000 taste buds, which means Costa has in effect insured each on Pelliccia’s tongue for £1,000.
MONTE CARLO 2011
“So Swiss Re’s Higginbotham gets referred to as The Gherkin Master? Someone needs to get him a t-shirt with this printed on it.”
A wise idea my friends – swapping coffees at Cafe de Paris for drinks on the Fairmont terrace
It all kicked off at the White Mountains cocktail party last year, Canopius’s Michael Watson tells me. At first I thought he meant there had been a bit of trouble from some brokers hitting the G&Ts too hard, but it turns out this was when he first made his intentions to buy Omega known to the wider world. Swiss Re’s iconic Gherkin building on the UK has probably done more to raise the profile of reinsurance among the general public than anything else. Unfortunately for Swiss Re UK chief Russell Higginbotham, it means he occasionally gets referred to as The Gherkin Master. Someone needs to get him a t-shirt with this printed on it.
L A ST NIGHT Will this be the last time we see Lord Levene and Richard Ward posing together?
It’s Ian Dilks’s last Monte Carlo. Possibly. Ian, who was PwC’s global insurance leader, became global leader of public policy and regulation last July and so gave up much of his insurance responsibilities. It was supposed to be his last year in 2010, but having personally invited Martin Sullivan to speak at this year’s PwC conference in Monte, he thought it rude not to come along. See you next year then, Ian?
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TONIGHT G O T O … If you can manage to
stay awake until the clock strikes midnight, the White Mountains party at the Hermitage is definitely worth a look in.
S E E … The sun is shining once again so head to the SCOR lounge and relax with a cold drink. With winter on the way, it may well be the last sunshine you’ll see for months.
D R I N K … It’s day three and
everyone is looking a little worse for wear so head to the nearest cafe and ask for your coffee to go. Take a moment to sit in the gardens. We guarantee you’ll feel better.
What looks to be a delightful chocolate scroll filled with cream at the Hermitage is in fact filled with blue cheese. Not to everyone’s taste.
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