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2008 Cat Market Update

2008 Cat Market Update. Ken Radigan (212) 266 – 5992 kenneth.radigan@aig.com. Global Reinsurance Division. 2008 Cat Market Update. 2007 and 2008 Catastrophes. Global Reinsurance Division. Swiss Re: Natural catastrophes in 2007. More than 20,000 fatalities

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2008 Cat Market Update

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  1. 2008 Cat Market Update Ken Radigan (212) 266 – 5992 kenneth.radigan@aig.com Global Reinsurance Division

  2. 2008 Cat Market Update 2007 and 2008 Catastrophes Global Reinsurance Division

  3. Swiss Re: Natural catastrophes in 2007 • More than 20,000 fatalities • Losses of roughly $70bn (US$) • $28bn insured losses. • 142 natural catastrophes and 193 man-made disasters. Global Reinsurance Division

  4. Swiss Re: Natural catastrophes in 2007 Global Reinsurance Division

  5. PCS: Natural catastrophes in 2007 Global Reinsurance Division

  6. PCS: Natural catastrophes in 2008 Global Reinsurance Division

  7. 2008 Natural catastrophes • Myanmar Cyclone Nargis • China Earthquake AIR Worldwide estimates that total losses to insured and uninsured property from the M7.9 earthquake that struck near Chengdu, China will likely exceed $20 billion USD Global Reinsurance Division

  8. 2008 Cat Market Update 2008 Reinsurance Market Update Global Reinsurance Division

  9. Guy Carpenter: 2008 Reinsurance Market Review • Casualty treaty reinsurance market is softening in many areas. • Driven by 5 years of underwriting profits. • Difficult lines still subject to tough rating environment. Global Reinsurance Division

  10. Guy Carpenter: 2008 Reinsurance Market Review • Global Reinsurance capital increased to $129B in 2007. • 20.4% higher than end of 2005. • Retained earnings increased from $40.5B in 2005 to $59.3B in 2007. Global Reinsurance Division

  11. Guy Carpenter: 2008 Reinsurance Market Review • Stable Outlook from all rating agencies • Strong balance sheets with record profits in 2006 and 2007. • Threats: underwriting cycle, increase cat activity, subprime crisis Global Reinsurance Division

  12. Reinsurance Discussion 2008 Reinsurance Market Expectations Global Reinsurance Division

  13. AON: Reinsurance Market Update Sept 2007 Global Reinsurance Division

  14. AON: Reinsurance Market Update Sept 2007 Global Reinsurance Division

  15. Reinsurance Discussion Capital Markets Global Reinsurance Division

  16. Capital Markets (cat bonds and sidecars) • $7.2 billion issued in 2007, $6.2 billion issued in 2006. • Insulated from turmoil of broader credit markets. • Diversifying perils • Willing to support indemnity Global Reinsurance Division

  17. Capital Markets (cat bonds and sidecars) • How do they work? • Based on modeled statistics. • Investors assume risk and expect to make a profit. • ROL is multiple of estimated loss. • “Secured” reinsurance, ceded limit held in trust. • Example • $100M X $500M • Probability of attachment 1.0%. • Probability of exhaustion 0.75% • Expected loss 0.875M (LOL 0.875%) • Premium 5.0% + LIBOR, • ROL = 5.7 * LOL Global Reinsurance Division

  18. Capital Markets (cat bonds and sidecars) • Insurer Motivation • Access to additional capacity • Multiyear terms • “Secured” reinsurance • Ideal for short term, high cat exposures • Investor Motivation • High returns • Uncorrelated Exposure • “Modelable” Exposure, easy to analyze and compare statistics • Easy to monitor aggregate exposures Global Reinsurance Division

  19. Capital Markets (cat bonds and sidecars) • Higher Costs • Secured Program • No Leverage • No Reinstatements • Third Party Modeling • Structure Fees (SPV) • “Uncertainty” charge • Time commitments • Indemnity vs parametric vs PCS • Timing concerns with Indemnity Global Reinsurance Division

  20. Reinsurance Discussion Miscellaneous Topics Global Reinsurance Division

  21. Miscellaneous • Reinsurance spreads narrowing, worldwide credit spreads and equity spreads are widening. Insurers more likely to use reinsurance to finance risk. • Capital Markets are currently providing 10 to 25 percent of their catastrophe capacity. This is expected to expand. • Regulatory, rating agency, investor and management emphasis on ERM. Global Reinsurance Division

  22. Reference Sources: • Swiss Re: “Natural catastrophes and man-made disasters in 2007.” • Guy Carpenter: “2008 Reinsurance Market Review” • AON: “Reinsurance Now Materially Reducing Insurer Cost of Capital, Reinsurance Market Update, September 2007” • Deutsche Bank: “2007 Year-end Catastrophe Market Review” Global Reinsurance Division

  23. Reinsurance Discussion Open discussion Global Reinsurance Division

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