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Issue 115 - 19th August 2010
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QBE says patience key in Europe
Australian insurance and reinsurance Group QBE has released its first half figures with a warning it will take discipline and patience in the European markets as the wait for the expected continues. Globally gross written premium was up 6% year on year at £1.57 billion for the first half of they year and the combined operating ration fell to 88.4% from 89.9% in the previous half year. The underwriter said: “European operations produced a strong underwriting result and insurance profit margin for the half year despite challenging market conditions, an increase in large individual risk and catastrophe claims, one-off costs of systems integration and lower interest yields on policyholders’ funds. The London insurance market was subject to increased catastrophe and large individual risk loss activity. Principally the Chilean earthquake, the Deepwater Horizon oil rig disaster and weather-related claims in Europe and Australia. These claims are expected to selectively harden property reinsurance rates and offshore energy rates.” Looking towards the coming months the message was one of caution in Europe. “Patience and discipline are key pending the next cycle upturn with our targeted gross written premium for 2010 remaining stable at £2.6 billion,” said the statement. “Continuing soft market conditions have restricted organic growth, in particular in the UK regional and mainland European markets. Our mainland European base will, however, grow following the successful bid for Secura NV, a Belgian reinsurance company, which is due to complete around the end of September 2010. Secura is expected to contribute approximately US$250 million of gross written premium in the first full year.” QBE said the priority for the year ahead was to “exceed QBE’s minimum return on allocated capital rather than to pursue top line growth”. “This will also mean a continuation of our disciplined underwriting stance and focus on retaining our quality existing business.”. Chief Executive Frank O’Halloran, said: “We are very pleased with the growth and insurance profitability of our businesses around the world and our continued outperformance against the majority of our peers. Unfortunately, the increase in insurance profit was more than offset by the significantly lower investment returns from volatile fixed interest and equity markets.” He continued “We are pleased to confirm our previous guidance of an insurance margin of 16%-18% for the 2010 year. This guidance is subject to the usual caveats relating to claims, interest rates and foreign exchange.”
European underwriters could withstand sovereign debt collapse
Just weeks after a string of European banks failed the EU stress tests, rating agency Fitch has said it believes the European insurers it rates would be able to withstand the collapse of a European sovereign debt default. The firm put its rated underwriters through its own stress scenario which would see the collapse in the value of Greece’s sovereign debt and the knock-on effects on the sovereign debt of Portugal, Ireland, Spain and Italy in terms increased default risk and potentially severe falls in market values. In a report on the result Fitch said; “The agency believes that all companies in this portfolio would be able to withstand an external shock derived from a hypothetical Greek sovereign default, including an assumption of ancillary stress for other key euro zone nations. The agency has therefore not taken any rating actions on its European insurance portfolio as a result of this stress test.” "As significant investors in sovereign debt, insurers want their holdings to provide secure interest receipts and stable values," says Federico Faccio, Director in Fitch's Insurance team. "Fitch's analysis shows the resilience of its rated insurers to a severe euro-zone sovereign stress scenario. One factor is the likelihood, in Fitch's opinion, that in the event of a collapse in the value of a sovereign's debt, the local regulator may flex solvency requirements for insurers investing in that sovereign to match local liabilities, rather than force them to realise mark-to-market losses." The agency's rated portfolio covers the majority of the European insurance market and includes most major European insurance groups. It said it had Fitch implemented the stress test to gauge companies’ ability to withstand a deterioration of the credit quality of certain sovereigns and sharp changes in market values for the securities of these sovereigns. “With Greece as the lowest rated euro zone sovereign and therefore potentially the most likely to default, this hypothetical default situation was the scenario selected.” In the last 12 months, Fitch has downgraded various sovereign debt ratings and commented on a number of others. It added: “While a review and monitoring of sovereign debt ratings levels is useful, ratings are just one element in the overall analysis of how a weakening trend for a sovereign can impose risks on an economy or financial system, or on insurance companies that hold sovereign debt. This is true even when an individual sovereign remains highly rated. Fitch notes too that during periods of broad-based systemic uncertainty, especially when potential tail risks exist, the risk of unexpected ratings migration remains above average.”
ILS issuance grows as windstorm coverage tightens
Insurance Linked Securities are seemingly back in vogue as brokers look for new options for clients and investors still see insurance as a area where decent returns can be made. Swiss RE has issued its half yearly ILS global report which found that in the issuances were reaching record levels. In its report the reinsurer said: "The first half of the year had “continued the trend of strong returns for the ILS sector after the financial crisis”. The level of new issuance for the first half of the year stood at $2.5 billion, 40% higher than the same period in 2009 and 73% of all 2009 issuance. “As we anticipate a robust pipeline of transactions for non-US perils in the rest of the year, it seems likely that 2010 new issue totals will meet or exceed 2009 levels,” said the report. Given the underwriters’ conservative approach tot the North Atlantic hurricane season it was little surprise that almost 85% of the new issuance in this period was exposed to US Wind risk. “This heavy concentration contributed to capacity constraints for investors and led spreads for this peak peril to widen in May and June<” explained the report. Meanwhile, spreads for bonds with non-US risk began trading at tighter levels in the secondary market as investors looked to balance their portfolios. Swiss Re said the “dislocation “occurred as a result of a couple of dynamics. “Firstly, many dedicated investors reached their aggregate limits for US Wind risk and were unable to purchase more US Wind bonds despite having the cash to do so. Secondly, the forecasts for the 2010 hurricane season have suggested a very strong storm season ahead for 2010. This caused investors to be more cautious with purchasing new positions,” it stated. “It is our view that this dislocation is temporary. As we enter into the wind season and there is more visibility around the level of hurricane activity, investors are returning to the market. Additionally, as outstanding bonds mature and bonds with non-US Wind risk arrive in the market, we expect constraints to ease for those investors who have reached their maximum aggregate US Wind limit.”
Aon Benfield launches ILS indices
With ILS issuance on the rise Aon Benfield Securities, the securities and investment banking operation of Aon Benfield, has announced the launch of the Aon Benfield ILS Indices, which will provide “a quantitative view of monthly insurance-linked securities (ILS) returns since December 2000”. Paul Schultz, President of Aon Benfield Securities, said: "The launch and ongoing administration of the Aon Benfield ILS Indices demonstrate the firm’s continued leadership in the insurance-linked securities market. Additionally, we believe the added data and transparency will lead to new investment in this market and provide greater capital alternatives for our clients.” The ILS Indices will track the performance of catastrophe bonds in each of four portfolios: All Bond, BB-rated Bond, U.S. Hurricane Bond, and U.S. Earthquake Bond. Each index will be a total return index representing the return an investor would have achieved by allocating an amount of capital weighted to each catastrophe bond available in the market at a particular point in time. The Indices will be calculated by Thomson Reuters. “In addition to demonstrating the ongoing value inherent in the ILS market, the ILS Indices provide a point of comparison with other financial market measures,” said Aon Benfield. “They represent an increase in transparency of returns in the market sector. Over the past year, both ILS issuers and investors have adapted to a new capital markets landscape, which is evidenced by the evolution of the asset class. Despite continued uncertainty and volatility in the global capital markets generally, the global ILS market continues to provide capital value to investors, as demonstrated by the Indices.”
Houston Seminar to be focal point for debate on offshore insurance future
With a month to go before the Houston Marine Insurance Seminar the on-going debate over the liability limits for oil pollution in the United States and the international insurance market’s reaction to the Deepwater Water disaster has seen the event now viewed as the focal point for the discussions on the very future of the offshore energy insurance market. One leading London market energy broker said: “The U.S. Congress is set for midterm elections in November so the issue of the response to the Deepwater spill has become extremely politically important. The issue of the raising of the liability limits from the current level has been going in for some time and the insurance market has been doing what it can to explain the situation as we see it. However if the limits are scrapped altogether or there is a dramatic increase the insurance industry will not be able or prepared to offer coverage which will fully indemnify energy firms and that will throw up all sorts of difficult discussions between clients, brokers and underwriters. We will know a lot more when delegates arrive in Houston so the three days will be vital in terms of the market’s ability to discuss its response.” The seminar which will be staged from September 19-21 at the Westin Galleria Hotel in Houston will see Gordon McBurney, President and CUO of Liberty International Underwriters; deliver the keynote address on systemic risk and insurance. The event covers the breadth of the marine and energy insurance and topics include piracy, the future of the P&I clubs and the pros and cons of the WelCar policy. Further information and registration information can be found at www.houstonmarineseminar.com.
Jon Guy
Editor
Global Broker & Underwriter
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