Managing the Underwriting Cycle with Reference to the Energy Market
Market Dynamics
Cycle Management Strategies
•RoE•Cost of Capital / Excess Capital•Consolidation acquisition•Share repurchase•Dividend strategy•Reserve releases•Combined ratios•Diversification•Value
Global Economy
•GDP Growth•Recession•Developing markets•Sovereign debt•Interest rates•Inflation•Global economies – emergence of new powers such as China, India & Brazil•Eurozone
Regulation
•Solvency II•China, India & Brazil not open markets to trade in•RMS v11•Capital models•Recent Californian workers reform package
State of the Market
•Pricing•Coverage•Reserves•Capital Markets•Supply•Demand•Risk•Talent•Softening
Old
•WTC•Hurricane Andrew•Asbestos•Hurricanes Katrina, Rita & Wilma
Recent
•Japan•Chile•New Zealand•Australia•USA hail / tornados•Macondo•Thailand•Oil sands•Maersk
Catastrophe Losses
1983 Hurricane Alicia and Cat 24 1987 ROE’s were in the region of 17.3%* Significant losses from LMX in the late 1980’s caused huge
claims “the spiral” Significant losses include:
Piper Alpha Exxon Valdez Hurricane Hugo Liability claims on an occurrence form in the back
years still deteriorate Culminated in 1992 with Hurricane Andrew The market turned on a global basis
1983 - 1992
Global Cycle Management
*Source: Insurance Information Institute
Benign loss period in the early 1990’s Renewal & restoration at Lloyd’s Introduction of corporate capital Global stock market boom / rising interest rates Introduction of Australian low level reinsurance capacity,
e.g. New Cap Re, REAC, G.I.O., Rhine Re, etc. All started to drive down underwriting discipline culminating
in marginal rating going into 2001, which saw significant losses from Petrobras (platform sinking), Sri Lanka (airport attack) & World Trade Center
The market turned on a global basis
1992 - 2001
Global Cycle Management
From a global hardening at the end of 2001 rates drop off again until Hurricanes Katrina, Rita and Wilma in 2005
At this point note that even with losses of this magnitude ($100.7bn) this is the first non-global hardening of the market
Territories such as Asia continue to reduce in pricing Singapore market size by written premium:
2001: $9bn 2006: $10bn
2002 - 2005
Global Cycle Management
Global rates have been reducing since 2006 with the occasional blip Hurricane Ike in 2008 Global financial crisis in 2008
Withdrawal of circa $80bn of capital in the first half of 2009 is re-injected in July 2009
Ascot’s rate renewal index for 2009: 1 January – 30 June: +9.0% 1 July – 31 December: 0.0%
2011 had $110bn of claims – with the amount of excess capital only territories with specific losses are hardening, e.g. Japan, New Zealand and Thailand
Earnings event not a capital event Singapore market size in 2011 was $16bn Will we ever again see a global hardening from a single event?
2005 - Present
Global Cycle Management
Source: Aon Benfield
US P&C Total Capital & Surplus
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Capital & Surplus USD billions
300 299 360 404 432 500 528 462 522 566 563 574
ABA of 31 companies for first half of 2012: $480bn An increase of $25bn from end of 2011
Access to capital Florida March / April 2012: initial estimates were $2bn of
reinsurance capital would be required; this was filled within 6 weeks by various sidecars, cat bonds, etc.
Capital models encourage markets to stay within certain classes with poor combined ratios because they offer diversification credit enabling them to write more catastrophe business
*Source: Aon Benfield
Lloyd’s
WTC Attacks: 26.9%
Hurricanes Katrina, Rita,
Wilma: 30.8%
NZ, Japan EQ, Thai
Floods: 25.5%
Ove
rall co
mb
ine
d ra
tio
Major losses can have a severe impact in a soft market
*Courtesy of Lloyd’s, from the 2012 May Market Presentation. Source: Lloyd's Annual Reports. Lloyd’s started to collect prior years’ result movements in 2002, the figures prior to 2002 are Lloyd’s estimates based on prior years’ claims movements.
Ascot account
Rate Rises
Global Cycle Management
2006 2011
Overall Syndicate +17.1% +2.1%
P/C Insurance Industry Combined Ratios 2001 - 2011
Global Cycle
As recently as 2001 insurers paid out
nearly $1.16 for every $1 in earned premiums
Heavy use of reinsurance lowered net
losses
Best combined ratio since 1949 (87.6)
Relatively low Cat losses,
reserve releases
Cyclical deterioration
Relatively low Cat losses,
reserve releases
Average Cat
losses, more
reserve releases
Higher Cat losses, shrinking reserve releases, toll of
soft market
*Source: Insurance Information Institute (from A.M. Best, ISO). *Excludes Mortgage & Financial Guaranty insurers 2008 – 2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=106.4
107.5
100.1
98.4
100.8
92.6
95.7
101.0
99.3
100.8
108.2
115.8
*2009 – 2011 Back year reserve releases stripped out very poor pure accident years
Combined RatiosA 100 Combined Ratio isn’t what it once was: Investment impact on ROE’s
*Source: Insurance Information Institute (from A.M. Best and ISO data). *2008 – 2011 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%
Combined ratios must be lower in today’s depressed investment environment to generate risk appropriate ROE’s
Global Cycle Summary
Back year reserve redundancy estimated at $11.7bn 2011 release estimated at $12.5bn 2010 release estimated at $12bn
Interest rates (or lack thereof) Claims inflation Senior management and shareholders more aware of poor return on
capital by underwriting class
What will cause the market to turn?
The points above combined with External factors such as the Eurozone and low GDP growth in
developed countries A $50bn - $75bn event (Fitch: $50bn - $60bn event) in a country
with high pure insurance premium
Green Shoots of Opportunity
Source: Aon Benfield
Rationale
Ascot Cycle Management
Not all doom and gloom: for example Bermuda market stats after Q2 estimate 11.5% ROC
Aon Benfield Aggregate (ABA) group combined ratio is 90.1% for the first half of 2012
Cycle management critical over the next 2-3 years given market conditions and each company’s cycle management will be driven by its corporate objectives
Ascot Ascot was incorporated in 2001 Offices in London, Houston, Chicago, Hartford & Singapore 2012 GWP $1,075,000,000 137 staff worldwide Aim over 5 years is a 15% return on capital Over the 10 year cycle Ascot has achieved in the region of 29% return on capital In our opinion the biggest single contributor towards the underwriting cycle is the
supply of capacity against the demand for capacity
Source: Aon Benfield
Tools
Ascot Cycle Management
Fixed expenses linked to GWP per employee and by underwriting unit KPI’s that are linked to the return on capital and attritional loss ratios
rather than retention rate and GWP Technical premium for each risk written, benchmarked vs. exit price
and the cost of capital for each specific risk written Pure premium per territory – Chile, New Zealand, Thailand
Even if market increases by 50% is it enough against the aggregate deployed; one of the vagaries of capital models
Rate renewal terms New business benchmarked vs. current portfolio All of these require significant investment in Management Information
(MI) and quality reporting and give Ascot the ability to flex up and down in classes and sub-classes as the market dictates
Ascot Cycle Management
Aggregate systems that mitigate reliance on models and control tail risk Collegiate underwriting teams – allowing deployment of aggregate
to the class with the best return on capital (GOM wind one of largest clash scenarios)
Strong Risk Committee to review external risk factors, e.g. the global economy, recession (including moral risk), downgrading of corporate bonds, etc.
Lloyd’s Lloyd’s Franchise Board Subscription market
Tools
Track record of strong underwriting performance
Lloyd’s Combined Ratio
93
102
95
101
91
107 108 107
101
105
60
80
100
120
Lloyd's US P/C Industry (i) US Reinsurers (ii) European(Re)Insurers (iii)
Bermudian(Re)Insurers (iii)
2007 2008 2009 2010 2011
*Courtesy of Lloyd’s, from the 2012 May Market Presentation. Sources i) Insurance Information Institute (estimate-2011), ii) Reinsurance Association of America, iii) Company data (8 European companies: 17 Bermudian companies).
Combined Ratio Versus Peers
E&P Property – Market UpdateGeneral Energy Losses 1990 – 2011 Excess of $5mn
0.0
5.0
10.0
15.0
20.0
25.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110.0
5.0
10.0
15.0
20.0
25.0
Losses excess US$5m Estimated Worldwide Premium (US$)
4 Profitable Years out of 21 …….. “bad risk or over-capacity”
*Source: Aon Benfield
2000 – 2012 (ex GoM windstorm)
Upstream Insurer Capacities
0
1,000
2,000
3,000
4,000
5,000
6,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Operating
Construction
Estimated “realistic” market capacities
2012 upstream capacity highest since records began
*Source: Willis
2012 upstream capacity is the highest since records began For quality business at realistic prices the market can provide program
limits of $4bn for operating risks $3.6bn for offshore construction
Post Hurricane Ike Energy risk losses2010 accident year to current
Year Loss Insured Loss Estimate
2010 Deepwater Horizon U$560m
2010 Macondo Well US$1.0bn to US$3.0bn
2010 Oil Pipeline leak into Michigan River (Liability) US$500m
2010 Aban Pearl US$235m
2010 California gas pipeline explosion US$1.0bn
2011 Canadian Oil Sands US$740m
2011 Maersk floating production, storage and offloading unit (FPSO) US$960m
2011 Jupiter I US$230m
2011 Chevron Brazil oil spill Unknown
2011 Petrojarl FPSO US$300m
2011 Kolskaya jack-up US$125m
2011 KS Endeavour jack up US$235m
2012 Elgin North Sea Platform Unknown
*Source: Aon Benfield
(ex Gulf of Mexico windstorm)
Year on Year Trend - 2002
90%
Spread ROL 15.00%Equiv ROL increase 230%
10%8%
xs 2.5% of NML
Energy Upstream GoM Wind
Reinsurance Product
First loss attachment point
Available reinsurance capacity for
Attach % of NML
Limit % of NML
Energy Upstream
GoM Wind
Metrics Max Line Increase
50%
Income
Prior Year Loss Impact
WTC
SummarySignificant price increase
Core program metrics unchanged
Diminishing appetite for low level cover
*Source: Aon Benfield
(ex Gulf of Mexico windstorm)
Year on Year Trend - 2006
90%
Spread ROL 22.50%Equiv ROL increase Flat
10%10%
Second loss below 10%
Energy Upstream
Limit % of NML
Attach % of NML
First loss attachment point
Reinsurance capacity for
Reinsurance ProductGoM Wind
Reinsurance Product
80%
Spread ROL 30.00%Equiv ROL increase Flat
20%
GoM Wind
Limit % of RDS
Attach % of RDS
*Source: Aon Benfield Alternative RI “Cat in a Box”
Ascot Upstream Reinsurance 2002 vs 2006
Global Cycle Management
Max Line Retention(s) in USD Percentage Spend
2002 $40,000,000A.O. Platform
$5,000,000(One combined retention)
29.85%
2006 $60,000,000A.O. Platform
GOM Wind Lloyd’s RDS
$5,000,000$15,000,000 (GOM Wind)
39.18%
(ex Gulf of Mexico windstorm)
Year on Year Trend - 2012
87.50%
Spread ROL 27.50%Equiv ROL increased by 10%
12.50%
Energy Upstream
Limit % of NML
Attach % of NML
Limit % of RDS
Attach % of RDS
*Source: Aon Benfield
Reinsurance Product GoM Wind Reinsurance Product