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Issue 89 - 18th Feb 2010
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Swiss Re sets 12% ROE target as profits return
As Swiss Re reported net income of CHF 506 million for the full year 2009 its Chief Executive said he now had “confidence in the future”. The underwriter said there had been significant progress in its efforts to rid itself of the legacy issues with a “significant reduction in legacy exposure”, as it “terminated substantially all of its exposures in the Portfolio CDS, and liquidated several positions from the former Structured CDS. Financial Guarantee Re exposure was significantly reduced by the commutation of CHF 9.2 billion notional protection”. “Swiss Re expects a further significant reduction in the remaining Legacy exposures in 2010,” it said. “For the full year, Legacy generated operating income of CHF 139 million, compared to a net operating loss of CHF 5.9 billion in 2008.” It is also on track to redeem the investment made by Berkshire Hathaway on time. Chief Executive Stefan Lippe added: “Today, I am proud to say: we have come a long way. First, we have fully restored our capital position. Second, we have significantly de-risked and strengthened our balance sheet. And third, we have maintained the strong earnings power of our core business through underwriting profitability and cost discipline throughout the Group. These robust achievements for the year enable us to continue to support our clients and generate value for our shareholders.” Having made considerable progress in the past year, the Group said it now believes it is an appropriate time to re-establish targets. “Swiss Re aims to achieve a return on equity of 12% over the cycle,” it said. “This target reflects the lower yield environment and the shift in the company’s asset portfolio towards lower-risk and shorter duration assets. There is still work to be done in 2010, including the continuing optimisation of the investment portfolio and the further unwinding of the remaining Legacy positions. Swiss Re expects this process to be largely completed in the course of the year.” Mr Lippe added: “The strong fundamentals of our business underpin my confidence in the future. Few reinsurers can match the size and diversification of our portfolio. And fewer still can match our capital strength, our underwriting performance and our ability to innovate. Based on these strengths, we are well placed to reinforce our competitive edge.” The company said it had taken a hard stance at January 1 renewal at a time when the absence of a major catastrophe loss in 2009 was putting pressure in rates. It therefore reduced its January renewals premium volume by 15%, boosting the long-term rate adequacy of its portfolio to 108%, compared to 106% in 2008. “Consequently, Swiss Re estimates a 2010 treaty year combined ratio for Property & Casualty of 93%, assuming a normal level of natural catastrophes,” it stated.
Captives high on agenda for National Oil Companies
The head of the Global Energy Practice for Marsh, Jim Pierce has said the use of captives has the potential to play an increasing role in the way in which the world’s National Oil Companies manage their risks. Mr Pierce made his comments as delegates from the world’s NOCs and a large number of International Oil Companies headed to Dubai for next week’s third Marsh National Oil Companies Conference. It comes as the energy industry examines the impact of the global recession on their markets and faces up to the renewed challenges of climate change and the scarcity if natural resources such as oil. The event will see senior figures from the insurance and energy industries tackle a range of topics and captives is amongst those which are high on the agenda. Mr Pierce said: “While we have not yet witnessed a surge in captive use, we do see the possibilities that captive utilisation hold for NOCs that are globalizing their businesses. A captive can be a very effective risk retention and premium allocation tool. Generally, the more complex the risk and the more countries the risk is in, the more a captive can be brought into play. We see many NOCs at a ‘tipping point’ in their evolution where captives have the potential to become an important part of their risk management and transfer strategy.” The event will also see an address by British MP Sir Nicholas Soames on the “Politics of Oil” the time of which could not be more appropriate. Headlines in the UK say that the government has despatched warships to the South Atlantic amid rising tension off the Falklands Islands where drilling is scheduled to start next week on a new field - “Liz” - authority over which is disputed between Britain and Argentina.
Rating agency says underwriters deserve credit for trade cover outlook
After two years of rising claims and difficult underwriting Fitch Ratings says it expects credit insurers to return to profitability in 2010. The firm said much of the reason for the move back into the black is due to measures taken since 2008 to reduce their risk profiles. "Given the extensive actions taken by credit insurers, the recovery in net income could be comparable to that seen after the previous crisis in 2002/2003. Moreover, their underwriting performance is less dependent on the economic cycle in the short term as policy terms and conditions have now been tightened to reduce exposure and enhance earnings," says Vanessa Andre, Director in Fitch's Insurance team. The three main credit insurers, Coface, Atradius and Euler-Hermes, are expected to have posted their worst net income in 2009 for the past decade, surpassing the poor results recorded in 2002. Between them the trio control some 90% of the global credit insurance market. The performance over the past two years contrast starkly with the record net income achieved in 2007: Atradius made EUR164.2m, Coface EUR163.5m and Euler-Hermes EUR407m. The fortunes of these companies reversed and at end-H109 Atradius reported a loss of EUR105m, Coface a loss of EUR117m and Euler Hermes a profit of EUR0.7m. It is not surprising given that the worldwide number of corporate insolvencies dramatically increased in 2008 and 2009 with the Euler-Hermes Global Insolvency Index increasing 35% in 2009, following a 27% gain in 2008. Countries such as Spain, Ireland, the Netherlands, and the US, and sectors such as construction, retail, and metals have been particularly affected. “The suddenness and magnitude of the economic crisis have drastically altered credit insurers' underwriting results,” added Fitch. The firm expects technical profitability to have stabilised in Q409, paving the way for the expected recovery in 2010, believing the various remedial measures undertaken by credit insurers in response to the economic crisis are now beginning to bear fruit. It added: “There are signs that are pointing to more positive prospects for the credit insurance market. Coface has recorded a declining number of corporate failures since October 2009 while the Euler-Hermes Global Insolvency Index is expected to stabilise in 2010, albeit at a relatively high level. The expected economic recovery, while weak, should benefit credit insurers' profitability and bring modest relief to corporate balance sheets and performance. Nevertheless, challenges remain in managing the increased cost of reinsurance covers, persuading policyholders to continue accepting higher prices and not resort to self-insurance, historically credit insurers' toughest competitor.”
Brokers strike deals with US regulators but move angers RIMS
Willis Group, Marsh and Aon have announced this week that all have reached agreement with a number of US state regulators over the issues of remuneration and business practice to the dismay of risk managers. Willis said it had entered into agreement with the Attorney General and the Superintendent of Insurance of the State of New York to amend and restate the 2005 Assurance of Discontinuance and Stipulation, as amended (the AOD). Willis said its new agreement “specifically recognises that Willis substantially has met our obligations under the AOD over the last half decade, and ends many of the requirements imposed by the current agreement”. The new agreement no longer limits the types of compensation Willis can receive and has lowered the compensation disclosure requirements to clients that the AOD originally imposed. Aon announced that it has reached an amended and restated agreement on the issue of compensation business practices with the Attorney General of the State of New York, the Superintendent of Insurance of the State of New York, the Attorney General of the State of Connecticut, the Illinois Attorney General and the Director of the Illinois Department of Insurance. In its statement Willis said its stand “is clear” on issues of trust, transparency and disclosure. “We have been guided by principle – doing what is right – rather than waiting for regulation to tell us what we must do,” It said.” Indeed, we voluntarily began disclosing compensation to our retail clients and refusing to take contingent compensation in our retail brokerage business before we signed the AOD in 2005. Neither of those commitments will change today, whether or not our competitors follow our lead.” The statement added: “Willis will continue to disclose to our retail clients the compensation we receive from insurance carriers. Willis also will continue to refuse to accept contingent commissions from carriers in our retail brokerage business.” Aon released its statement revealing it had reached an amended and restated agreement on the issue of compensation business practices with t New York, Connecticut, and Illinois Under its agreements the firm is required to provide, in New York and the other 49 states, “compensation disclosure to purchasers of insurance contracts that complies at a minimum with New York State Insurance Department regulations and also with the laws of Illinois, Connecticut and the remaining states”. "Aon very much appreciates the moves made toward consistent business practices for all brokers,” said group President and Chief Executive Greg Case. “However, our overriding consideration is to act in the best interests of our clients at all times.” However US risk managers have been less then impressed with the news. The Risk and Insurance Management Society, (RIMS) expressed its “ dismay at a decision by the New York Insurance Department and Attorney General to allow Aon, Marsh, and Willis, to resume accepting contingent commissions”. In a statement RIMS added: “This decision comes on the heels of disclosure requirements that do not afford consumers appropriate protections. “Without strong consumer protections in place, RIMS has strong reservations about a policy that permits contingent commissions again, and this development illustrates why RIMS so vigorously fought for a stronger rule.” “When Arthur J. Gallagher and Company was released from its agreement in Illinois in 2009, RIMS expected that New York would shortly follow suit,” said Scott Clark, director of RIMS External Affairs Committee and risk and benefits officer for Miami-Dade County Public Schools. “RIMS had hoped that in the absence of a contingent commission ban, brokers would be required to provide full compensation disclosure, allowing the consumer to decide whether the broker is acting in their best interest,” added Mr Clark. “Unfortunately, the final regulation does not live up to that standard, and instead the burden to request full disclosure has been placed squarely on the consumer.”
Jon Guy
Editor
Global Broker & Underwriter
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