every wednesday • Issue 21 • 19 november 2014 Nelson promotes Lloyd’s local Indian presence Lloyd’s Asian presence has caused facultative reinsurance to go from “strength to strength” in Asia and it could similarly boost India’s insurance industry, argued Lloyd’s chairman John Nelson at the Indian Insurance International Summit. Lloyd’s could not only boost the Indian (re)insurance industries with a local presence but could also help India to build a stronger economy and gross domestic product (GDP), John Nelson, chairman of Lloyd’s told the summit: “Lloyd's has always been a crucible of innovation in its long history and we are well placed to lead in the innovation of Indian products,” he said. “A strong insurance industry allows entrepreneurs to take risks and fuels innovation. In order to build the infrastructure required to sustain India’s economic growth investors will need sophisticated cover,” said Nelson. Demonstrating this, he compared the earthquakes that hit Haiti and Christchurch, New Zealand, in 2010. New Zealand’s insured losses were $4bn and economic losses were $6.5bn from the quake but by 2012 New Zealand’s GDP had recovered and increased by 2.5%. Comparatively, Haiti’s insured losses were just $200m, while economic losses were estimated at around $7.8bn. “One of the reasons they [New Zealand and Haiti] had such different experience is the take up or insurance and reinsurance. Haiti penetration as below 1%,” said Nelson. He went on to say that the US is one of the most sophisticated insurance markets in the world, with high penetration Continued on page 7 > John Nelson (Centre) talks with Alice Vaidyan, General Manager, GIC Re and Sanath Kumar, Director and General Manager, New India Assurance, at the London India event hosted GIC RE, New India Assurance, Indian Merchants’ Chamber, Reactions and Asia Insurance Post. Talanx investment returns help bottom line German insurance and reinsurance holding group Talanx has reported an operating profit of €1.44bn for the first nine months of 2014, up 4.9% from €1.38bn in 9mo 2013, helped by strong investment returns and improved run-off results. Group net income was €530m, up 0.4% year on year. Gross written premiums reached €21.73bn for the first nine months of 2014, up 1.6% from the €21.38bn recorded in the same period last year. Net premiums earned inched up 0.2% year on year to €17.13bn. The combined ratio edged up Continued on page 4 > ALSO in this issue: in the spotlight: Franz-Josef Hahn, Peak Re page 15 2 EDITORIAL comment 4 TOP STORIES 10 TOP STORIES 13 feature 20NEWS ROUND up 25people moves • Towards a Global Indian Insurance Market • PRA’s Moulder warns on reserving • Hensarling argues for Tria reform • Asset Managers back less liquidity for higher returns • Aquiline takes stake in Beach & Associates •RenRe’s Peter Durhager steps down Corporate Trial Access Interested in a free companywide trial to Reactionsnet.com? Reactions specialises in delivering bespoke, multi-user corporate access. For a limited time we will provide you and your team or firm with full online access free of charge. There is no hitch; we just want to offer you the chance to get to know the site and find out if corporate access is right for your company. And we will set everything up on your behalf. How it works? We will create a branded corporate registration page that will allow all staff within the company to sign up and register for our service. It will give each user their own personalised account allowing staff full access to the website including our daily email alerts and the full online archive. They will also be able to select the frequency of email newsletters they wish to receive. • Breaking news • Daily news briefs • Weekly round up Add our content to your site: If you would rather integrate our news stories into your company intranet or internal newsletter this is also something we can offer for a limited time. Your company logo Start your companywide access today: To set up or discuss your corporate trial please contact Ben Bracken on +44 (0) 20 7779 8754 or email [email protected] Editorial comment EDITORIAL Managing editor Peter Birks Tel: +44 (0)20 7779 8755 Email: [email protected] Deputy Editor Lauren Gow Tel: +44 (0)20 7779 8193 Email: [email protected] Americas editor Christopher Munro Tel: +1 212 224 3473 Email: [email protected] Senior reporter Victoria Beckett Tel: +44 (0)20 7779 8218 Email: [email protected] Towards a Global Indian Insurance Market Last week Reactions was honoured to be one of the hosts of the Indian Insurance International Summit on “Towards a Global Indian Insurance Market”. New India Assurance, Indian Merchants’ Chamber, GIC Re and Asia Insurance Post were also organisers. This is not the time or place to give a complete summary of a fascinating afternoon of speeches, followed by a panel, but there were some interesting takeaways. The inevitable comparison in the Asian market is between India and China, and not infrequently China comes out on top. The opinion is that “China gets things done”. India might be the world’s largest democracy, but a lack of top-down control can be a disadvantage in the business world. To its credit, India seems to have spotted this, and there is less talk these days of the “Indian tiger”. The reference is instead to the “Indian elephant” – an animal that can take its time to get going, but, when at full pelt, is a virtually unstoppable force. One of the most telling points was not about the nature of political control in China and India; it was about demographics. Put simply, China is now an ageing population, while India is still predominantly young. Fifteen years from now, one of India’s great advantages will be its considerably lower average age. Population control remains an issue in India; this was, at it were, one more example of China “getting things done”. But this was also an example of where having first-mover status was far from an advantage. The near-brutal one child per family rule in China failed to anticipate the demographic implications 40 years down the line. In the UK the unimposed decline in fertility has been compensated for through much-needed immigration. China does not have that luxury. Its population has an average age of about 36. India’s is about 26. (By comparison, the UK is about 41, while the US is little more than China’s). Reporter Samuel Kerr Tel: +44 (0)20 7779 8719 Email: [email protected] Contributing editor Garry Booth Email: [email protected] The implications for this in 20 years time are dramatic. China will see a dramatic rise in the cost of human capital, forcing it to become more efficient in terms of production techniques. India, by contrast, will see an expanding workforce, putting wage levels under pressure. India, quite simply MUST expand at a rapid rate even to maintain living standards at their present level. For China, GDP growth will soon be a bonus rather than a necessity. While for the average inhabitant of India this will not be good news, for potential investors in any business that uses large number of staff, India will look more attractive. China’s best way to fight back against this would be to allow more economic immigration. But Chinese society is not a great one for welcoming newcomers. It is not as homogeneous as Japan Look at the Ürümqi riots in 2009, or, of course, at Tibet. Islamic insurgency remains a potential threat. The inevitable result in China will be upward pressure on wages, which could in itself lead to dramatic social unrest. The Black Death in England in 1348 kill perhaps half the population, but for the surviving peasantry it was the equivalent of winning the lottery. Serfdom effectively ended because of a shortage of labour, but it did not do so without resistance. China faces similar potential unrest, while India’s very slowness to change could, in the long run, turn to its advantage. Perhaps even Indian elephant is the wrong animal metaphor. It could be an Indian tortoise against a Chinese hare. Peter Birks, Managing Editor, Reactions Design & production Antony Parselle Email: [email protected] ADVERTISING AND EVENTS SALES Commercial director and publisher Gary Parker Tel: +44 (0)20 7779 8171 Email: [email protected] Deputy publisher Goran Pandzic Tel: +1 212 224 3711 Email: [email protected] Head of Marketing Helen Cherry Tel: +44 (0)20 779 6475 Email: [email protected] SUBSCRIPTION SALES Account Manager Ben Bracken, Tel: +44 (0)20 7779 8754 Email: [email protected] Office manager/reprints Christine Jell, Tel: +44 (0)20 7779 8743 Email: [email protected] Managing director Stewart Brown, Tel: +44 (0)20 7779 8184 Email: [email protected] Divisional director Danny Williams Reactions, Nestor House, Playhouse Yard, London EC4V 5EX, UK Website: www.reactionsnet.com Reactions printed by: Wyndeham Grange, UK Annual subscription rates: Corporate multi-user rates are available, please contact [email protected] Single user: £920 / €1,150/ US$1,475 Subscription hotline: London: +44 (0)20 7779 8999 New York: +1 212 224 3570 Back issues: Tel: +44 (0)20 7779 8999 Subscribers: £27.50; Non-subscribers: £45.00 ISSN 0953-5640 Directors Richard Ensor (chairman), Sir Patrick Sergeant, The Viscount Rothermere, Christopher Fordham (managing director), Neil Osborn, Dan Cohen, John Botts, Colin Jones, Diane Alfano, Jane Wilkinson, Martin Morgan, David Pritchard, Bashar Al-Rehany, Andrew Ballingal, Tristan Hillgarth Customer services: Tel: +44 (0)20 7779 8610 Reactions is a member of the Audit Bureau of Circulations. Reactions (ISSN No. 002-263) is an online information service supported by a print magazine published by Euromoney Institutional Investor PLC. ©Euromoney Institutional Investor PLC London 2014 Although Euromoney Institutional Investor PLC has made every effort to ensure the accuracy of this publication, neither it nor any contributor can accept any legal responsibility whatsoever for consequences that may arise from errors or omissions or any opinions or advice given. This publication is not a substitute for professional advice on a specific transaction. 19 november 2014 |3 top stories PRA’s Moulder warns on reserving The UK Prudential Regulation Authority (PRA) has warned retail insurers against drawing down too far on their reserves in order to bolster present-day profits. In a letter dated November 13 from Chris Moulder, director for general insurance, the PRA said that it would “question the robustness of the underwriting practices at firms that rely unduly on prior-year reserve releases to support ongoing underwriting activity for any substantial period of time”. Moulder also observed that some insurers had been tempting to relax their underwriting criteria in order to protect their market position. That, he said also led to in increase in the risk of mispricing business. The PRA also restated its fear that some claims could end up costing more than expected, including Periodical Payment Orders, even though non-life insurers have pointed out that most of their liabilities are short-tail and that any problems they might face would be very different from those faced by the life sector. Analysts felt that one impact on the nonlife sector could be for them to conservative on reserve releases for full-year 2014, given that the letter was timed to coincide with the period when insurers would begin to prepare their full-year results. That in turn could put pressure on earnings. n Talanx investment returns help bottom line < Continued from page 1 0.1pp to 97.7% Net investment income was up 6.5%, to €3.00bn, from €2.81bn in 9mo 2013. The return on equity was 9.4%, down 0.6pp from the RoE in 9mo 2013. Talanx said that, after excluding a one-off effect from the sale of Swiss Life shares the previous year, profits were up 23% year on year. Talanx chief executive Herbert Haas noted that "business performance was in line with our expectations, despite significant large losses in the Industrial Lines Division and the absence of the one-off effects seen in the previous year. We are confident of reaching our earnings forecast of at least €700m in 2014". Large losses in the reinsurance sector (mainly Hannover Re) were down by nearly 50% year on year to €242m, but they rose in the primary sector to €259m, from €221m in 9mo 2013. This was due to "another unusual accumulation of mid-sized and major cases of property damage". At group level the net large-burden loss was down to €501m, from €668m in 9mo 2013, mainly because of the high level of losses incurred in Germany in 2013 from hail and floods. For the third quarter, operating profit rose to €439m, from €344m in Q3 2013. Group net income was €149m, up 26.3% from the €118m recorded in the same period last year. Gross written premiums were up 5.3% year on year to €6.76bn, while net earned premiums rose 3.9% year on year to €5.82bn. The combined ratio was 100.0%, 0.7pp 4 | 19 november 2014 down on the 100.7% recorded in Q3 2013. Net investment income was €1.05bn, compared with €937m in Q3 last year. Growth in top line across all divisions Division by division, Industrial Lines recorded GWP of €3.2bn, up from €3.1bn, "largely driven by growth of foreign branches and subsidiaries". The underwriting result of minus €66m was an improvement on the minus €93m recorded in the first nine months of 2013. This however was due to an improved run-off result. Industrial Lines' contribution to the group's net income was €85m, up from €28m in the corresponding period last year. Retail Germany Division, covering non-life and life, saw premium income down by 2.2% year on year to €3.8bn. Annual Premium Equivalent income was down 2.8% to €313m. Property-casualty was flat at €1.3bn. Talanx observed that the underwriting result was "dominated by the life insurers", and the result fell by 11.9% year on year to minus €1.3m. Although there was a lower run-off result for property, the combined ratio was only 0.1pp higher at 101.7%. The contribution to group net income was €72m, up from €63m In the Retail International Division, GWP was up 5.5% year on year to €3.3bn. Brazil recorded a 13.1% increase in GWP in local currency terms, but only 1.7% in euros, to €640m. Mexico saw a 6.6% gain in local terms, but only 1.4% in euros, to €133m. Turkey saw a 21.7% growth in lo- cal currency, but only by 2.9% in euros to €142m. The underwriting result declined to minus €6m, from plus €23m in 9mo 2013. The contribution made to the Group was €96m, up fractionally from the €93m recorded for 9mo 2013. Non-life reinsurance saw slight premium growth, "amid ongoing strong competition and despite its selective underwriting policy". GWP was up 1.6% year on year to €6.1bn. The combined ratio edged up 0.3pp to 95.3%, "well within the target of below 96%". The underwriting result declined to €224m from €245m. The segment contributed €271m to group net income, up from €247m. Life and health reinsurance saw GWP virtually unchanged at €4.6bn, up by 1.4% year on year. The underwriting result was minus €242m, compared with minus €273m in 9mo 2013. The segment's contribution to group net income was €86m, up from €74m in 9mo 2013. Premium growth anticipated in 2015 Looking ahead, Talanx anticipates premium growth of between 2% and 3% for 2014, "the bulk of which will come from international markets". Talanx maintained its target of at least €700m Group Net Income, equal to a return on equity of between 9% and 10%. The dividend distribution plan of between 35% and 45% of Group Net Income remains unchanged. n TUNIS RE CAPITAL INCREASE RESERVED TO A STRATEGIC PARTNER CALL FOR EXPRESSIONS OF INTEREST OBJECT OF THE TENDER As part of the final step of its development plan for the period 20102014, Société Tunisienne de Réassurance ("Tunis Re" or the "Company") plans to open its capital through a capital increase reserved to a strategic partner ("Strategic Partner"), to 25% of its share capital after increase (the "Transaction"). The extraordinary general meeting held September 19, 2014 decided a capital increase reserved to a Strategic Partner with the amount of 25 million dinars, divided into 5,000,000 shares with a nominal value 5 dinars, from 75 million to 100 million dinars. It’s expected that the Strategic Partner provide strong expertise in order to participate to the improvement of its technical and financial ratings including the strengthening of its financial and commercial capacity at the regional and international levels. KEY HIGHLIGHTS Tunis Re, a leading reinsurer in the Tunisian market, was established March 25, 1981 at the initiative of the authorities with the help of insurance and reinsurance companies as well as some local banks. At the end of June 2014, Tunis Re generates nearly 64% of its sales in the local market and 36% in the MENA region including 14% in Africa. To confirm its status as a regional reinsurer, Tunis Re initiated in 2012, its first representative office in Ivory Coast. Tunis Re has been assigned several national and international missions, including the reduction of remittance flows of reinsurance abroad and contributing to the establishment and development of national reinsurance pools. Tunis Re is in charge of their management on behalf of the Tunisian State. Tunis Re is the first African reinsurance company listed on the stock market. The IPO funds raising was achieved in May 2010. In 2012, a second public offering was performed to increase the capital of Tunis Re from 45 to 75 MTND. Tunis Re is certified to MSI 20000 standards by the Institute of the Paris Stock Exchange since October 2010. The international rating agency AM Best reaffirmed, in July 10, 2014, the technical and financial ratings of Tunis Re B + (Good) with a stable outlook, which confirm the strength of the Company and its ability to overcome difficulties. This confirmation reflects the good capitalization adjusted on the Company risk, better underwriting policy and a strong position in its market. In early 2011, Tunis Re has launched a specialized unit of islamic reinsurance "Retakaful" to target high added value crenel. This structure operates in accordance with the Islamic insurance rules and norms and is followed by a Chariaa supervisor. PRE-QUALIFICATION PROCESS Investors wishing to be pre-qualified to participate in the tender are invited to express their interest individually or by forming a consortium in accordance with the terms and calendar described in the pre-qualification document ("DPQ"). The strategic partner should be an internationally renowned financial institution: A direct insurer or reinsurer interested in a presence in the African and the MENA region markets And/or A bank, a specialized investment fund or an international renowned financial institution those are willing to expand or diversify its insurance and reinsurance activities. Expressions of interest must be submitted at Banque d'Affaires de Tunisie ("BAT") no later than November 14th, 2014 at 17:00 whose contact details are mentioned below. Tunis Re reserves the right, at any time during the process, to not retain one or several Investors to participate in the process of increasing the capital, in case of non-compliance by interested Investor(s) with the current rules of law and public order. REGISTRATION AND WITHDRAWAL OF DPQ Investors interested in participating in the Transaction must register first. To register, Investors should submit to the Advisor, whose details appear at the end of this notice, by fax or email, the Presentation Sheet ("Presentation Sheet") dully filled according to model available at the Advisor. Then, Investors will be invited to: (i) sign the non-disclosure agreement (the "NDA") available at the Advisor (Cf. contact details at the end of this notice. (ii) Pay the non-refundable registration fee, amounting to 3,000 dinars or 1,300 Euros or 1,700 USD. After steps (i) and (ii) Investors will be invited to withdraw DPQ, which presents the investment opportunity, the process and prequalification criteria. Registration fees are payable by certified check or by bank transfer to BAT in its account #10.010.124.1085140.788.94 (STB Bank). DUE DILIGENCE Pre-qualified investors will have access to the tender document ("DAO") and the Rules of data room, and have the opportunity to (i) conduct due diligence works as part of a virtual data room that will be open according to a timetable and specific rules (rules of the data room and list of available documents), (ii) to visit the Company buildings and (iii) meet with its management. The closing of the Transaction is planned for February 2015. Contacts and information: Banque d’Affaires de Tunisie ("BAT" or le "Advisor") was retained by Tunis Re as exclusive advisor to realize the Transaction. Any request for information, NDA, presentation Sheet or DPQ must be sent to: Mr Thameur CHAGOUR / Mr Tarek MANSOUR 10 bis, Rue Mahmoud El Materi, Mutuelleville, 1002 Tunis, Tunisie Tel.: +216 71 143 804 / +216 71 143 806 Fax: +216 71 891 678 Emails: [email protected] / [email protected] Web site: www.bat.com.tn top stories Catlin reports 11% rise in GWP Bermuda-based Catlin group have reported an 11% rise to $4.89bn in gross written premiums for the first nine months of the year. ceded to third-party capital providers. Catlin incurred claims from two catastrophe events during the third quarter: Hurricane Odile, which struck the Baja California peninsula of Mexico in September, and the flooding in the state of Jammu and Kashmir in northern India in September. Three large single-risk losses were also sustained during the quarter: the loss of Malaysian Airlines Flight MH17 over Ukraine in July, the aircraft losses caused by fighting at the Tripoli airport in July and a fire at a US sawmill in July. The group said it is also likely to incur losses from Cyclone Hudhud, which caused damage to eastern India and Nepal in October. Operating expenditures remained broadly in line with expectations during the third quarter, according to the insurer. Catlin chief executive, Stephen Catlin said: “The Group incurred two catastrophe losses and three large single-risk losses during the third quarter, including the two Aviation-related losses on which we commented in the first-half results announcement. Despite these events, aggregate catastrophe and large single-risk losses are still below expectations for the nine-month period. “Rating levels are still adequate for most classes of business, and rates across our entire portfolio decreased by 2.9 per cent during the nine-month period. We still firmly believe that our highly diversified portfolio – both by underwriting hub and by class of business – provides Catlin with significant advantages during a period of decreasing rates in wholesale markets.” n profitable, despite softer non-life pricing”. She added: “Assets under management are growing and the voluntary health market is expanding”, but she noted that insurers’ profitability was “vulnerable to shocks to the wider economy”. Slovenia is dominated by the agency distribution channel in motor, which accounts for 50% of non-life business in Slovenia. The top three insurers in the country account for 62% of the market by GWP. New line from Argo Intl Lloyd’s insurer Argo International (has launched a contingency business line. David Boyle has been appointed Contingency Underwriter, with immediate effect. Boyle will report to John Moffatt, Head of Specialty. He joins from Sportscover Syndicate 3334 where he was Class Underwriter for its Contingency account. Lloyd’s insurer Argo International (has launched a contingency business line. David Boyle has been appointed Contingency Underwriter, with immediate effect. Boyle will report to John Moffatt, Head of Specialty. He joins from Sportscover Syndicate 3334 where he was Class Underwriter for its Contingency account. Moffatt said that “the contingency market is an area in which we have identified significant potential for expansion, which dovetails with our existing expertise and growing suite of specialist products. David has focused on this area throughout his career and developed a body of experience, as well as a network of contacts, which will be invaluable in developing our new offering. I am very pleased to welcome him to Argo.” Stephen Catlin at this year’s Reactions London Awards Net premiums earned during the first nine months increased by 6% to $3.08bn with underlying growth calculated to be 3%. Catlin had previously advised that growth in net earned premiums at year-end 2014 would likely be 4 to 5 absolute percentage points less than the growth in gross premiums written due to increased amounts News in brief Solvency II rules helping Slovenian players The implementation of Solvency II rules in Slovenia is improving the risk management of insurers “by driving a greater diversification of their investment portfolios”, according to rating agency Fitch, in a snapshot analysis of the Slovenian market. Clara Hughes, Senior Director in Fitch’s insurance team, said that “we expect the Slovenian insurance market to remain 6 | 19 november 2014 top stories UK and Bermuda reinsurers handed US boost Trading conditions in the US are set to improve for reinsurers in the UK and Bermuda after the National Association of Insurance Commissioners (NAIC) recommended the two countries’ supervisors are granted approval as qualified jurisdictions. That would mean reinsurers from the UK and Bermuda would be able to operate in the US with lower collateral requirements than they currently face. A total of five international reinsurance supervisory authorities have been recommended by the NAIC’s Qualified Jurisdiction Working Group for approval: the UK’s Prudential Regulation Authority of the Bank of England (PRA); the Bermuda Monetary Authority (BMA); the German Federal Financial Supervisory Authority (BaFin); the French Autorité de Contrôle Prudentiel et de Résolution (ACPR) and the Central Bank of Ireland (Central Bank). The NAIC’s entire membership needs to back the proposals for the five authorities to be granted the status. If that occurs, then the quintet of regulators will find themselves on the NAIC’s list of qualified jurisdictions from the beginning of next year. Reinsurers licensed and domiciled in the five jurisdictions will all then be eligible to be certified for reduced collateral requirements under the NAIC’s Credit for Reinsurance Model Law. “Another important step forward” “The timely evaluation of these jurisdictions represents another important step forward in implementing reinsurance modernisation by the states,” said John Huff, the chair of the NAIC’s Reinsurance Task Force, as well as the director of the Missouri Department of Insurance, Financial Institutions and Professional Registration. Currently, 23 US states have adopted reinsurance collateral reforms which equates to around 60% of primary insurance premium in the US. The NAIC hopes to add another five states to that list next year, taking the primary premium total to around 80%. The BMA has welcomed the announcement, with the regulator’s chief executive, Jeremy Cox, calling it a considerable achievement. “The US remains Bermuda’s largest trading partner,” Cox said. “As such, being approved as a qualified jurisdiction is highly relevant for Bermuda in terms of potentially facilitat- ing efficiencies in the cross-border operations of Bermuda reinsurers with the US insurance market. While we recognise the process is not yet complete, we look forward to receiving the NAIC’s final approval in the coming weeks.” The Association of Bermuda Insurers and Reinsurers (ABIR) was similarly full of praise at the news. Brad Kading, the ABIR’s president, said the NAIC’s recommendation for Bermuda to be named a qualified jurisdiction “is an endorsement of the BMA’s robust and comprehensive supervisory regime applied to commercial insurers and reinsurers domiciled in Bermuda”. “The BMA shows leadership in many ways, it is an important financial markets regulator which is committed to meeting international standards. Its strong risk based capital requirements, mandatory stress testing, public disclosure requirements, enterprise and catastrophe risk management assessments put it at the forefront of supervisory authorities globally.” The five jurisdictions must now wait to see if the recommendations will be approved by the rest of the NAIC – a vote that will take place before the end of the year. Should a jurisdiction be approved, it will be re-evaluated every five years, subject to any material change in operations which would require a reassessment in the shorter term. While the BMA, BaFin, ACPR, Central Bank and the PRA will now all be waiting to see how the NAIC membership responds to the recommendations, the Qualified Jurisdiction Working Group is also currently evaluating whether the Swiss Financial Market Supervisory Authority (FINMA) and the Financial Services Agency of Japan (FSA) should be added to the list. As the NAIC explained, these reviews should be completed before the end of the year. n Nelson promotes Lloyd’s local Indian presence < Continued from page 1 levels while China has one of the lowest, but both have very high levels of risk. “But both economies have diversified their cover into the international capital markets precisely so they can retain their GDP if and when a disaster strikes,” said Nelson. “If you look at the US, 67% of 9/11 losses were insured. The US is still the world’s largest economy, just,” he added. Lloyd’s would be able to provide an intellectual power, pricing metrics, product development, risk management and claims management, Nelson argued at the summit last week. “The reinsurance services which Lloyd’s provides can reduce the capital costs for any insurer as well as the volatility of loss that they may be exposed to. Thus allowing them the freedom and certainty to invest more in developing their businesses,” he said. n 19 november 2014 |7 top stories News in brief IRDA warns on group rates India’s Insurance Regulatory & Development Authority (IRDA) has warned insurers against offering significant group-wide discounts, a move which could see companies forced to deduct more from the pay-packets of their employees to pay for group health cover. In its guidelines on risk-pricing, IRDA said that industry-wide loss averages should be the guide. The authority has said that it would monitor compliance closely. It noted that, despite increases in loss ratios for fire, property and group health, premiums had been cut for group offerings. Health insurance is understood to have booked an incurred claims ratio of 96.43% in full-year 2013, up from 94% in 2012. Munich Re’s diversification strategy praised Munich Re’s diversification strategy has been praised by AM Best in its report affirming the reinsurer’s ratings. Crabel Re established in Bermuda on Multi-Strat platform Los Angeles based capital management company Crabel Capital has launched a Bermudian reinsurance entity, Crabel Re, which will operate as part of the Multi-Strat Re platform. Multi-Strat Re was established by Taussig Capital to allow hedge funds to outsource most aspects of setting up and running a reinsurance firm. The Bermudabased Multi-Strat Re is designed to allow smaller companies to enter the reinsurance market by taking away some of the costs and time restraints by outsourcing many aspects of the set up such as underwriting various risks, structuring policies and processing claims . AM Best revises outlook to negative for Century Casualty US ratings agency AM Best has revised the outlook to negative from stable and affirmed the financial strength rating of B+ (Good) of Century Casualty Company. The ratings agency said the revised outlook reflects Century Casualty’s unfavorable underwriting results year-to-date in 2014 and challenges the company faces to improve near term results. The weakness in underwriting performance has primarily stemmed from newly written hotel/ motel and convenience store accounts. As a result, recent operating losses have impacted Century Casualty’s risk-adjusted capitalisation. AIG closes Georgia claims site AIG’s latest move in its bid to cut costs and streamline its operations will see the company shed around 420 jobs after the company decided to close one of its US offices. The Alpharetta, Georgia-based operation provides AIG, which is the largest insurer in the US and Canada, with various back-office services such as claims administration, Reactions understands. The company refers to the site as its Georgia Shared Service Centre. According to reports, it is hoped some of the staff working at the Alpharetta office will move to other AIG operations such as one in Olathe, Kansas. 8 | 19 november 2014 The ratings agency said that the reinsurer’s diversified operations have allowed it to withstand negative pressure from soft market conditions in some large property reinsurance segments over recent years. Over the medium term, AM Best says that it expects that Munich Re’s diversification will continue to allow it to survive negative market pressures. “Having diverse primary and reinsurance operations also distinguishes Munich Re from many other global reinsurers,” said AM Best. “Furthermore, the group’s good balance between life and non-life business allows it to maintain good overall performance in spite of pressure from the prolonged low interest rate environment on its life operations.” In its report AM Best affirmed all debt ratings of Munich Re; the reinsurer has a financial strength rating (FSR) of A+ (Superior) and an issuer credit ratings (ICR) of “aa-”. The agency said that the ratings reflected Munich Re’s excellent risk-adjusted capitalisation, strong competitive market position, resilient operating performance and robust risk-management framework. AM Best says it expects the reinsurer to post a positive result at the end of the year. “Munich Re is expected to report strong overall earnings in 2014, broadly in line with those of 2013 and 2012,” said AM Best. “Property and casualty reinsurance operations typically drive the group’s overall earnings. “Moderate levels of catastrophe losses throughout 2012, 2013 and 2014-to-date have allowed the group to maintain a combined ratio for this segment comfortably below 95%. “Earnings from the group’s life reinsurance, primary and international health operations are more modest; however, provide stability over the longer term, particularly during years of high catastrophe losses.” AM Best said that upward rating movement could occur if financial performance and risk-adjusted capitalisation remained at an excellent level and compared favourably to Munich Re’s peer group of global reinsurers. However it added that downward rating movement could occur if risk-adjusted capitalisation or financial performance were to deteriorate substantially. n top stories R&Q 2014 profits to be below expectations Randall & Quilter Investment Holdings expects its pretax profit for 2014 to be materially below market expectations, mainly because of asbestos related claims. Ken Randall The company has received preliminary indications from external consulting actuaries suggesting a need to increase net provisions for asbestos-related claims at R&Q Re US. The US insurance services division also recorded a disappointing trading performance, and lower-than-anticipated investment income because of poor financial market conditions in recent months. "These developments will only have a limited cash impact on the group and will not affect its ability to pay dividends in line with current market expectations," the company said. Deteriorating net provisions for asbestos related claims in R&Q Re US was a risk highlighted in the interim results, and the currently estimated extent of the deterioration is now above the Board's previous expectations. The drop in investment income expectations was because of a widening in credit spreads, particularly in structured and high yield credit. The US service operations' disappointing trading performance was caused by its recent failure to secure certain large anticipated service contract wins. "The group has correctly indicated that the above have only a limited impact on cash and hence will not affect its dividend paying ability," commented Eamonn Flanagan, a Shore Capital analyst. Randall & Quilter's board has signed two EU-based portfolio transfer agreements and an agreement to acquire two Bermuda based captives in recent weeks, which Flanagan described as encouraging. All of these transactions remain subject to regulatory approval, which is expected, though not guaranteed, by year end. This means that Randall & Quilter Investment Holdings (RQIH) should still achieve its target of completed legacy related transactions for the year. The UK based insurance services operations have traded slightly ahead of expectations whilst the underwriting management operations are broadly meeting expectations. Trading prospects for 2015 remain encouraging, with a continued strong pipeline Australian insurers benefit from Chinese trade deal Australian insurers are expected to gain increased access to the expanding Chinese market under a new free trade deal signed today. The deal is expected to open up opportunities for insurance companies and banks, as well as other sectors, and will reportedly include access to China’s lucrative thirdparty motor schemes. The two nations agreed to start negotiations on a free trade agreement in 2005 after a preliminary feasibility study. IAG was one of several companies which submitted papers to the Australian Federal government outlining areas of focus for negotiations including foreign ownership rules and access to the compulsory motor insurance market. A spokesman for the insurer told insuranceNEWS.com.au IAG welcomes the agreement “and we look forward to seeing the detail”. In 2012 IAG bought a 20% stake in China’s Bohai Property Insurance Company – which is primarily a motor insurer – as part of its wider expansion in Asia. n of legacy acquisition opportunities. Some of these are already reasonably progressed. Recent new business wins in underwriting management and UK insurance services is set to boost results in these divisions meeting previous expectations. The board anticipates an overall positive contribution from a small number of business and asset disposals in the UK and the US, which are already being actively progressed to bring greater focus to Randall & Quilter and address some of the challenges detailed above. Following the trading report Shore Capital is downgrading Randall & Quilter's 2014 pre-tax profits to nil from £8.4m and 2014 net tangible asset value (NTAV) to 106p from 117p. "We leave our 2015F pre-tax profits unchanged at £11.9m reflecting the positive statement the group has made regarding its pipeline but the NTAV reduces to 109p from 121p," said Flanagan. "Crucially we retain our 2014 and 2015 dividend forecasts at 8.4p and 8.7p respectively. "We fully expect weakness in the stock in today’s trading, with the shares trading at c1.2x our previous 2014F NTAV at the close of play last night," he said. n News in brief LMA Academy launches climate change course The educational arm of the Lloyd’s Market Association – the LMA Academy – has launched “2025: Strategic Risk Implications for Chief Executives in Lloyd’s”, a programme in association with the University of Cambridge that will “explore the strategic implications of climate change for the insurance industry”. The programme is the first collaboration between the LMA Academy and the University of Cambridge Institute for Sustainability Leadership. It will consist of four modules and a guest lecture, presenting the latest science on climate change and examining the challenges this entails for the insurance and financial investment markets. Al Gore, ex vice-president of the US, will join the programme in April 2015 and will address a wider audience of senior market practitioners in the Old Library at Lloyd’s. 19 november 2014 |9 top stories Hensarling argues for Tria reform The driving force behind reforming the Terrorism Risk Insurance Act (Tria), Chairman Jeb Hensarling (R-TX) of the House Financial Services Committee, has written in an op-ed for the Washington Times a defence of his attempts to change the programme. Hensarling argued in the piece that, despite supporters of Tria asserting that the programme makes up a vital part of the nation’s security effort, the fact that the programme does not do anything to prevent attacks means that this is not the case. He also argues that the programme was always meant to be transitional and temporary, following the devastating attacks of September 11, and that it should not make up a part of the US's national security framework. “The Terrorism Risk Insurance Act was designed to be temporary and transitional so, over time, insurance companies could resume pricing terrorism insurance and develop better forecasting models to absorb any future losses,” writes Hensarling in the Times’ op-ed. “The law initially accomplished this by gradually increasing Tria’s thresholds, and each year insurance companies covered a little more of their own risks so taxpayers were responsible for covering a little less.” Hensarling argues that the programme forces tax payers to take on the majority of the burden for terrorism risk, and that the industry has admitted that the burden on the tax payer is incalculable under the programme. And far from reforms being unpatriotic, as some critics have said, Hensarling argues that the best thing for the country would be to reform the programme and to transition insurers into writing terrorism risk without the backstop. “The federal government, free from competition Jeb Hensarling and unable to make hard choices, has a long and ugly history of insurance schemes that underestimate and misprice risk. Each time the purported beneficiaries end up more at risk while taxpayers end up footing the bill,” writes Hensarling in the op-ed. “Passing a Terrorism Risk Insurance Act reform bill now is the only way to stop that vicious circle and help prepare insurers and commercial property owners for a less risky future.” The piece shows a lack of movement in Hensarling’s position over reforming the bill since his committee's Tria reform bill failed to pass the House of Representatives in June. If both sides remain intransigent, then any further progress could be halted and Tria may have to be extended for a short period of time; Rep. Paul Ryan (R-Wis) suggested a one year extension before Congress broke up for election campaigning, to allow legislators more wiggle room for negotiation. It could also be the case that, if no agreement can be found, the programme may not be extended at all, and Hensarling's position makes a straight extension of the programme during the lame duck session increasingly unlikely. n Enstar reports $26.4m Q3 consolidated net earnings Bermuda-based Enstar Group has reported consolidated net earnings of $26.4m for 2014’s third quarter and $107.8m for the first nine months of the year. The quarterly results are big drop from 2013’s third quarter with consolidated net earnings of $40m, but its 2014 first nine month results are streets ahead of 2013’s $71.1m. Enstar’s shareholders’ equity at September 30, 2014, reached $2.21bn, up from $1.76bn at December 31, 2013. Enstar and its operating subsidiaries acquire and manage diversified insurance businesses through a network of service companies in Bermuda, the US, the UK, Europe, Australia, and other international locations. Stones settle $12.9m court claim The Rolling Stones pop group has resolved an insurance dispute relating to the cancellation of tour dates following the death of lead singer Mick Jagger’s girlfriend L’Wren Scott. The case had been scheduled to be held in London. However, a subpoena issued in Utah to Ms Scott’s brother, seeking evidence relating to what was known about Ms Scott’s mental health, also printed the entire insurance policy, including details of group members’ personal health. The group said that the publicising of these details had caused it immense hurt. The 12 underwriters include Swiss Re, Talbot, Brit, WRBC, Catlin, Sportscover, Prosight Specialty, Liberty Corporate Capital, RSA, Partner Re, Great Lakes Reinsurance and Cathedral Capital. Details of the out-of-court settlement were not disclosed. News in brief Arch acquires Resource Underwriting Pacific Arch Insurance Europe has acquired 100% of Resource Underwriting Pacific, a Melbourne-based managing general agent. Resource Underwriting Pacific will be added to Arch Insurance Europe’s current holdings in Australia. Paul Muller, the former managing director of Resource Underwriting Pacific will become senior vice-president of Arch Underwriting’s Australian affiliate in Australia. Muller said: “This is fantastic news for both Resource Underwriting Pacific and our broker partners. “We have been searching for a partner for a couple of years who would share our vision to develop an all commercial lines platform in Australia. “This strategic step will give Arch in Australia the best possible platform with which to achieve our ambitions for growth in this region,” Muller added 10 | 19 november 2014 top stories Liberty Mutual boosts Q3 profits Warning hits A positive third quarter for Liberty Mutual Holding Company saw FBD share price the US-based insurer increase its net profit by over a quarter year on year after its revenues jumped up by $247m during the period. Net profit for the Boston, Massachusettsheadquartered business reached $609m for the three months to September 30, 2014, an increase of $128m compared with the same period last year. That result was achieved partly because the group grew its revenues for the third quarter of 2014 to almost $10.1bn, a rise of 2.5% over the same stretch in the prior year. Net written premium grew at a similar rate to revenue, with the $9.45bn it generated in the three months to the end of September, 2014 an increase of 2.8%, or $253m, compared with 2013’s third quarter. Its final net profit figure also benefited from a lower level of catastrophe losses during the third quarter, although this reduction was marginal. During 2013’s third quarter, catastrophe losses hit Liberty Mu- tual to the tune of $292m, but that dropped by 1.4% year on year to $288m in the most recent quarter. “We had a solid third quarter, with net written premium growth of 2.8%, net income of $609m and an improvement of 2.4 points in the combined ratio,” said David Long, Liberty Mutual’s chairman and chief executive. Aside from its results, the third quarter of 2014 also saw Liberty Mutual enter into a specialist deal with Berkshire Hathaway’s National Indemnity Company that provides it with a combined aggregate adverse development coverage for all of the insurer’s US workers’ compensation, asbestos and environmental liabilities. “[This] reinsurance agreement with National Indemnity Company substantially mitigates the uncertainty of certain longtail liabilities,” said Long. On top of this, Liberty Mutual also raised $1.05bn in debt in another significant capital-related deal. “These transactions further strengthened the balance sheet and the overall financial position of the company,” Long added. n Pimco could withstand $300-350bn of outflows over 2 years Markel’s comprehensive income saw a drop to $36.5m for the third quarter, compared to $144.4m for the same period of 2013. Allianz subsidiary Pacific Investment Management Co (Pimco), the world’s largest bond house, could withstand a further $300-$350bn of outflows over the next two years, according to research firm Morningstar. Pimco is currently attempting to control a flow of departing investors following the sudden departure of company co-founder Bill Gross on September 26. Gross’s acrimonious and unexpected departure triggered a round of speculation in the bond market over Pimco’s leadership stability and a possible separation from Allianz. Despite this, research firm Morningstar is confident in Pimco’s ability to persevere in the face of even further redemptions. Analyst Sumit Desai, an analyst at Chicagobased Morningstar, said that the company’s outflow estimate is based on the assumption that Pimco has strong firm-wide fund performance, redemptions remain orderly and that Allianz continues its support of the bond house. Doug Hodge, chief executive (CEO) of Pimco, said at a conference on Monday that outflows have lessened somewhat since a large spike on September 26. Many of Pimco’s firm-wide outflows in October stemmed from investors pulling money from Pimco Total Return Fund, the bond house’s flagship entity, which was managed by Gross. Sources close to the company told Reactions in October that Gross’ departure came as a complete shock to the leadership team at Allianz, and had led to the early announcement of the departure of Allianz CEO Michael Diekmann. Despite the tribulations that have taken place at the investment manager following the resignation of Mohamed El-Erian in January, Diekmann in particular had been vocally supportive of Gross during the last few months and had expressed his support for Pimco in a call to investors in May. n Ireland-based non-life player FBD reported yesterday that the claims environment in recent months had been “far more challenging than expected”. As a result it predicted a full-year per share operating loss for 2014 of between 0 cents and 10 cents (from a previous gain of 70 cents to 80 cents). It cut its earnings guidance for Q4 by €10m. In an update on performance, FBD said that its gross written premium (GWP) was up about 4% year on year, marginally increasing FBD’s share of the Irish non-life market. It added that in H2 2014 this increase in premiums had been entirely rate-led. FBD added that “in the second half to date, the frequency of attritional bodily injury claims relating to car insurance was in line with expectation. FBD has taken the rating and underwriting actions necessary to compensate for the increased frequency of claims associated with economic recovery.” However, there had been a development pattern in H2 on “a small number” of prioryear medium-sized injury claims, of a cost of between €200,000 and €1m net of reinsurance, which had been “significantly higher than normally expected”. The adverse development related to accidents that happened in 2011 and 2012. FBD said that, following a detailed review, there was “no reason to believe that this development is systemic or that the experience will recur in future periods”. However, the combined cost of the adverse development and maintenance of the reserve level has generated a charge of €13m. In addition to this, FBD reported an increase in large claims costs (greater than €1m net of reinsurance) for a very small number of large accident and liability claims. They cost €7m more than expected in the four months to end-October. The dividend policy was left unchanged. Shares in FBD fell sharply on the news, down 20% on the day. Investec’s Victoria Geoghegan said that FBD’s guidance “had disappointed for the third time this year”, and attributed the share decline to fears of a repeat of the reserving increases in the future. “We cut our forecasts and target price (to €13.80 from €18.60), but with the company trading at 1.5x 2015E NAV and a supportive 2015E dividend yield of 5.0% (the group’s progressive dividend policy was reaffirmed), we remain Buyers (with implied upside of 24.9%)”. n 19 november 2014 | 11 top stories Novae expands in MAP Specialist Lloyd’s insurer and reinsurer Novae has reported a 6% rise in gross written premiums (GWP) for 9mo 2014 to £515.1m, from £484.6m in the same period last year. The investment return for the first nine months of the year was 1.0%, up from 0.7% in 9mo 2013. Novae said that the weighted average rates on premium renewal were down 3.3% year on year. The insurer said that there had been "particularly pronounced rate reductions" in US property casualty reinsurance, which were down by 10% year on year. Sector by sector, Property saw a 6.3% decline in volume, to £206.5m from £220.3m Casualty declined by 7.1% year on year, to £114.8m, from £123.6m. But Marine, Aviation & Political Risk was up by 37.7%, to £193.8m, from £140.7m. In property, Novae said that the division continued to generate profitable new business opportunities in, for example, UK and US property insurance units. Novae had taken "increased participation on selected risks". In casualty, Novae said that it had reduced its exposure across international liability, direct motor and professional indemnity classes, "in response to challenging market conditions". The cutbacks here were partially compensated for by growth in direct UK liability business and general liability reinsurance, "where good opportunities for profitable growth were identified". In the one division where growth was recorded, Marine, Aviation & Political Risk (MAP) Novae said that there had been growth across all units, despite increased competition in a number of marine, energy and political classes. Claims experience for the year to date had been favourable, the re/ insurer said. Attritional losses were within expectations and exposure to catastrophe events remained limited, with Q3 being "another quarter of benign experience". The anticipated losses as a result of the two Malaysian airlines disasters were "within normal risk appetite". Novae chief executive officer Matthew Fosh said: "Good new business growth, active capital management and disciplined underwriting has allowed us to build on the positive momentum gained in the first half of the year. This focus, in addition to another quiet period for catastrophe events, leaves the business in a strong position for the final quarter and going into 2015, despite the softening pricing environment." Looking ahead, Novae said that it remained focused on relying on its "expert underwriting, consistent performance and dynamic capital management" to generate success in a softening market. It added that it was continuing to look at "its options in non-underwriting areas of the business such as investments, debt management and taxation", which it felt could "yield benefits in future years". Comment: Novae's big expansion in MAP will be of interest to the market. While there has been a hardening in aviation (particularly war aviation) as a result of disasters this year, Novae has accepted that there is softening in some MAP classes, but has said that it was relying on "expert underwriting, consistent performance and dynamic capital management" to generate profits. That will be the field where investors will be paying closest attention in the months to come. n Virginia lawmakers pass challenge to ACA Republican lawmakers in Virginia have struck another blow against the Affordable Care Act (ACA) by passing a measure that would allow customers to retain health policies that were set to be cancelled under the act. The bill’s supporters say that it could aid up to 250,000 Virginians whose policies could have been cancelled as they don’t meet the minimum standards required by the ACA. A similar bill failed earlier this year following its failure to pass the Virginia Senate, which was controlled by the Democrats at the time. The issue of consumers losing healthcare plans they had come to rely on has become a politically emotive issue because of an earlier pledge made by President Obama. The President had declared at the beginning of the programme that if consumers liked their coverage they could keep it. However, it has been reported that despite this promise, the administration did in fact know many policies would be cancelled. This has been one of the more frequent 12 | 19 november 2014 attacks of Republican opponents to the ACA who have claimed that the President and his administration knowingly lied about some plans being cancelled. It remains to be seen whether other Republican controlled states will seek to follow Virginia’s example and pass bills allowing Americans to retain health plans deemed substandard under the ACA. President Obama’s signature domestic legislation came under further attack at a national level last week, when the US Supreme Court agreed to hear a challenge on the legality of the federal government providing subsidies through the federal exchange healthcare.gov. The announcement led to a decline in the stocks for health insurers and further uncertainty surrounding the programme, potentially following the decision in Virginia, is not likely to be greeted with enthusiasm by the health insurance market. n top stories Markel grows trade credit Oxbridge Re Q3 combined division in Singapore Specialty insurer Markel International has moved to grow its trade ratio of 29% credit presence in Singapore by appointing GE capital’s Linda Naili to its office in the region. Naili most recently worked at GE Capital in Paris as a senior credit risk analyst. The Markel trade credit desk in Singapore specialises in writing business from around the region and offers non-payment excess of loss multi-buyer and ground-up specific buyer policies with an emphasis on delivering specialist solutions such as trade finance products and sovereign default/contract frustration cover. Naili will report directly to Abhishek Chhajer, senior underwriter and head of trade credit in Asia Pacific, and her focus will be to build relationships with financial institutions and brokers around the region. “We would like to extend our warmest welcome to Linda, whose experience will bring great value to the trade credit team in Singapore,” said Ewa Rose, managing director of Markel International’s trade credit division. “Linda’s extensive risk underwriting knowledge gained during her time at GE Capital will support our existing product lines and our business growth plans.” Rose later spoke to Reactions about the hire and said that the appointment of Naili to the Singapore office represented the continuing opportunities that the insurer saw in the Asian hub. “It is a still a very fast growing centre and it also presents a great opportunity as a hub to deal with the rest of Asia especially in markets such as Malaysia which are very interesting to us.” Naili told Reactions. “It’s a great place to be located.” “Our team there has been performing very well both in terms of business growth and in terms of loss ratios, so Linda’s appointment is to really strengthen that team.” Rose said that there remains a huge amount of opportunity left to grow in the Singapore market and that the company would continue to build on its relationships there. Naili’s appointment closely follows the company’s expansion of its trade credit team to New York and a licence application in Dubai’s to offer trade credit cover Rose says that the company sees a lot of the same qualities in Dubai, as it saw in Singapore a few years ago, and that it remains an interesting market. She also identified the US market as a potentially exciting growth market for Markel. “We have just opened up in New York, with opened there this year and Philip Amlot [a senior underwriter at Markel] moved from our London office to New York,” says Rose. “If you want to do business in a location you have to be there. “Also, in order to grow in the US, we need to offer admitted paper and that was part of the reason for locating a trade credit division there. “We do see the US as still having a lot of opportunities. Compared to the size of the US economy, the trade credit market is small, so there are a lot of opportunities there. “There is also a strong and buoyant broking market, and we rely very much on brokers to bring business to us. We are not a direct market, so a strong broking community is what we need to grow our business.” n Gulf Coast reinsurer Oxbridge Re has reported a net income of $1.4m in 2014’s third quarter, up from $0.47m in the prior year quarter. Income was mainly bolstered by increased net premiums earned, as well as $0.2m of investment income, compared to no investment income in 2013’s third quarter. The drop in basic and diluted earnings per share was because of an increase in the number of shares outstanding.Net earned premiums hit $1.6m compared with $0.63m in the third quarter of 2013. “The increase was driven by the continued growth in the number and size of reinsurance contracts placed, including one new reinsurance contract placed during the quarter,” said Oxbridge Re. Gross premiums were $0.46m, from a contract written in July. This contract expires December 31, 2014 and is projected to earn a net underwriting income of $444,000 (assuming no losses), said Oxbridge Re. The property and casualty reinsurer reported a third quarter combined ratio of 29%. “Our third quarter results were in line with our expectations,” said Jay Madhu, Oxbridge Re chief executive officer (CEO). “We continue to remain focused on diversifying our underwriting risk. Our board of directors recently declared a dividend of $0.12 per share, which demonstrates our financial strength as well as our commitment to delivering shareholder value. ”The third quarter had a 0% loss ratio and 29% expense ratio. Policy acquisition costs and underwriting expenses were $0.12m, compared with $0.4m in the third quarter of 2013.The increase in underwriting expenses was due to the recording of an underwriting consulting expense of $38,000, as well as the increase in assumed premiums, and consequently, increase in brokerage fees and federal excise taxes. The company paid dividends of $0.12 per share during the third quarter compared with none in the same period of 2013.Net income for the first nine months of 2014 reached $2.3m. n 19 november 2014 | 13 feature top stories UK insurers at all time low ie below banks UK primary insurance companies really need to work on their customer relations. A survey has found that consumers trust banks more than their insurance provider. The level of trust in insurers was also found to be lower in the UK than in any other European country, and over 50% below the global average, according to a survey from Ernst & Young. EY surveyed 23,595 insurance customers across 30 countries, including 800 from the UK. If insurance marketers feel gutted by that news, Graham Handy, EY’s Global Customer Insurance Leader twisted the knife, saying: “At a time of great upheaval across the entire UK insurance industry, with the motor market reporting unprofitability, the home insurance market not far behind and dramatic changes to pensions, this news could not come at a worse time.” Price is the key reason for switching, however. Over a quarter (26%) of UK customers surveyed claimed that they were likely to switch insurance provider in the next 12 months. Cost is the main reason, with policy benefits and coverage at a distant second and reputation and benefits barely making an impact. EY says the UK insurance consumer is also far more driven by price than many of its international counterparts - 83% of those likely to switch stated cost as the primary reason, which is higher than the global average (67%) and other comparable markets such as the US www.reactionsnet.com 14 | 19 november 2014 (64%), France (60%) or Germany (72%). “In a price-driven market, it is very hard to differentiate service offerings, but insurers need to find the touch points which are important to customers in order to move away from bargain basement prices being the sole driver for customer decisions,” Hardy said in a statement. Under a third of customers have interacted with their insurer in the last 18 months, according to the survey, placing the UK in last position across Europe, the Middle East and Africa in terms of customer communication, and compares with a far higher global average of 56% of customers having interacted with their insurer over the last 18 months. UK customers actually want to receive more communication from their insurer; not just general information or policy updates, but also promotions. Over half (54%) of customers are never contacted about promotions, and 23% would like to receive them annually, the survey found. The majority of UK insurance customers still prefer to manage their policy enquiries via the telephone, but more than 30% claimed to be open to using emerging channels, including webchats and smartphone apps. In addition, 17% of customers would like to trade physical mail and phone contact for email, demonstrating a shift towards digital interaction. n Follow us @reactionsnet feature In The Spotlight Franz-Josef Hahn, Peak Re It is nearly two years since Peak Re first launched in Hong Kong with a mission to modernise the reinsurance industry in Asia Pacific. Nicky Burridge interviews chief executive Franz-Josef Hahn. “Without the right people you cannot get the firm to move in the right direction. We needed to get the right culture and understanding.” Franz-Josef Hahn Peak Re aims to bring a new reinsurance culture to the region through providing fresh, innovative solutions to its clients. Chief executive officer Franz-Josef Hahn’s modernising approach begins at the very core of the company’s structure. He says: “When we were talking about how we see ourselves the word innovation and different came up very often.” After working for large multinational reinsurers in the past, Hahn wanted to create a different culture at Peak Re. He says: “One of the biggest problems is that sometimes large organisations fight over turf, and unfortunately there is a lot of money falling between the turf lines.” In order to avoid this issue, Peak Re does not have departments, sections or divisions. Hahn jokes: “The meaning of these words already limits teamwork as they depart and divide the organisation.” This elimination of individual territory is an important aspect of the culture at Peak Re. All 48 staff work in an open-plan office, including Hahn himself. Underwriting decisions are made mainly through face-to-face conversations, supplemented by email communication, and everyone is responsible for business at the group. “If someone is not at their desk [and something that needs their attention comes in], someone else jumps on and takes care of it. That is what you get if your people treat this as group work, rather than individual responsibilities. “Everybody is responsible for the one firm we have. That is what we see as modernisation,” Hahn says. One of the biggest challenges the group faced setting up was getting the right people in place and communicating Peak Re’s unique corporate DNA to them. As a start-up firm, Hahn found they were attracting a certain profile of employees, people with a strong entrepreneurial flare, who were excited by the prospect of working for a new company. Hahn says: “Without the right people you cannot get the firm to move in the right direction. We needed to get the right culture and understanding.” Peak Re currently employs 48 staff from 14 different nationalities. The majority of staff are from Asia Pacific, but they also have extensive experience working for multinational firms, offering clients the best of both worlds. Hahn says: “We are very diverse because our markets are very diverse. We need to understand these markets, so it is better to have people from the various different cultures, who can relate to clients in those cultures.” Ensuring Peak Re remains nimble and can respond quickly is another key pillar of Hahn’s modernising strategy. He says: “Change is happening all the time, which is why agility is so important.” The group also put a great deal of effort into getting the right 19 november 2014 | 15 feature IT systems in place. Hahn says: “We have the leading IT systems you can use as a reinsurer. Our data structure sits under the underwriting system and the administration system, and these two systems talk to each other.” He adds that it was crucially important to the firm to have easy access to reliable data and not to create an IT legacy. The group, which was licensed in December 2012, started with an initial capital of US$550 million, and has grown to have 152 clients in 29 markets around the world. It is backed by investment group Fosun International, which holds a 85.1% stake, and International Finance Corporation, which has a 14.9% shareholding. At the end of 2013, the latest year for which figures are available, its biggest market was South Korea, which accounted for 48.1% of its portfolio, after the group identified significant opportunities in the country. “Korea is geographically very close to Hong Kong and we have a fantastic underwriter and producer from Korea, who used to be head of reinsurance buying at a large Korean insurance company. His seniority gave us the chance to travel far in Korea from the beginning,” Hahn says. But over time he expects the amount of business they do in Korea to shrink as a proportion of the portfolio as they expand in other markets, particularly Mainland China, where the group has identified a significant insurance gap among the country’s growing middle class. The Greater China market accounted for 21.6% of business last year, and over time, Hahn expects it to become the group’s largest market. In the meantime, Peak Re has doubled the amount of business it does in Japan during the past year, while it is also expanding in Australia and New Zealand. Although its current focus is on Asia Pacific, the group is eyeing up opportunities in other markets including Europe, the US and Bermuda, and it has already started to build up relationships in these regions. “Over the next couple of years, we would like to build up a presence in all the major reinsurance centres, but we will only do that when we consider our portfolio stable and we are 100% on top of our cost ratio,” Hahn says. In 2013, more than 45% of Peak Re’s business portfolio came from property and 41.5% came from motor. Hahn says: “We do a lot of motor, it is a form of quota share, it doesn’t bring in the biggest margins but it brings volume and nice cash flow.” Agriculture accounted for just over 5% of the portfolio, with the balance made up of casualty, engineering and marine business. In June this year, Peak Re obtained a life reinsurance licence in Hong Kong, and it hopes its life business will expand to account for 20% of its portfolio. It has also recently started doing credit and bond business. So far, business 16 | 19 november 2014 growth has all been organic, but Hahn is on the lookout for further opportunities. He says: “The more capital we can get on the balance sheet, the more eager we are to have inorganic growth, in the form of portfolio transfer or M&A.” In 2013, around 25% of the group’s business was done on a non-proportional basis. The group only offers facultative cover on a selective basis on specific lines, such as credit. Hahn explains: “In my view a really efficient facultative portfolio can only be run by large organisation. You need more people to do the underwriting and you must pay much closer attention on a daily basis to clients. We ran the costs many times but we are not quite ready yet.” “The more capital we can get on the balance sheet, the more eager we are to have inorganic growth, in the form of portfolio transfer or M&A.” Efficiency is something Hahn talks about a lot. “Costs need to be controlled very tightly. That is where the margin is. Reinsurance in the main on the treaty side doesn’t bring you too many margins, specifically when operating in Asia Pacific. The only thing you can control is your costs,” he says. Hahn is determined to keep operating costs as low as possible. As such, the group does not have any offices outside of Hong Kong. He says the group’s technical ratio has improved “significantly” since it was launched. It has also been conservative with its reserves. Hahn was pleased with Peak Re’s first-year pre-tax profit of US$104.4 million, which was made despite it being a bad year for natural catastrophes in the region, including Super Typhoon Haiyan in the Philippines. Losses from these catastrophes contributed to the group recording a US$17.1 million underwriting loss, although this was more than offset by investment income of US$106.7 million. Unsurprisingly, Peak Re is strongly focused on its underwriting business. Hahn says: “It is a must that we produce stellar results on the underwriting side, you cannot just rely on the investment side to perform very well.” The group takes a three-pronged approach to its underwriting. Its actuaries do the pricing and the natural catastrophe modelling in conjunction with the product underwriters. Both teams also work with market underwriters, who have a deep understanding of the individual markets and the clients. Peak Re’s modernising strategy means it strives to provide bespoke solutions to its clients. “We want to be guided by what the market needs. We try to find solutions that fit ourselves and our balance sheet and which fit the balance sheet of our clients,” Hahn says. The group is taking a step-by-step approach, and currently shies away from larger programmes that would tie up a lot of its capital. The majority of its business comes through the syndicated market, while it also does customised deals and it is looking to create new business. “We try to find in emerging markets, those companies that are thinking alike and that want to come up with new products. “Because we are a small organisation we have that energy and we can do things very fast. We turnaround discussions about new deals extremely quickly,” Hahn says. Speed is important to Peak Re and goes hand in hand with Hahn’s aim to keep the company nimble. The group prides itself on turning around claims quickly. Hahn says: “On the underwriting side it depends on the complexity of the deal because we are pricing everything ourselves. But we have always aimed for speedy responses to ensure our analytical discussions do not come at the cost of timely responses to our cedents and brokers.” Risk management is at the core of everything Peak Re does, and in July this year it finalised a review of its enterprise risk management Hahn says: “Our head of research works on every market we are underwriting in, so we produce a Peak Re methodology, we take others into consideration, but we do not just mix vendor models and take the average.” Each time the group enters into a new underwriting contract, it identifies how much capital is being utilised. It has set up trading limits and limits for the different lines of business it is involved in. It also has natural catastrophe ‘baskets’ for every natural catastrophe scenario, which have total limits in relation to shareholder equity. “Whenever we have large pieces coming in the standard question is where do we stand on our capital, how much capital is being utilised. I still want to see almost every case, our chief underwriting officer does as well,” Hahn says. The asset management side of the business is monitored equally closely. Hahn says: “I know on a daily basis how much capital we have used, how much cash we have, how much is in bonds, how much is in equities, each and every position. We have a very high analytical capability. Our investment team does everything in house.” But while the group is careful, Hahn also stresses that it is important Peak Re is bold. “We are eager, we love to analyse the markets, we have the commitment and we have the courage to deliver, it is very important that we have the courage,” he says. n feature Asset Managers back less liquidity for higher returns Reactions, in association with PineBridge Investments and BlackRock hosted a presentation and panel discussion in the Old Library at Lloyd’s, where investment managers at insurers heard experts from the macro-economic, asset management, equity analyst and hedge-fund strategy sectors, discussing the challenges and opportunities facing investment managers today. Markus Schomer Keynote Presentation: Markus Schomer, Chief Economist, PineBridge Investments Panel Moderator: Peter Birks, Managing Editor, Reactions Panel: Stephan Van Vliet, Managing Director, Head of Insurance Asset Management, PineBridge Investments Patrick Liedtke, Head of Financial Institutions Group, EMEA, BlackRock Eamonn Flanagan, Equity Analyst, Shore Capital Johannes Minho Roth, Partner, Sanostro Markus Schomer, Chief Economist at PineBridge Investments, began proceedings with a keynote speech on macro-economic developments. He started with two major themes: the emerging global rate hike cycle and emerging market reform. Schomer noted that “we have all gotten used to allocating and investing in fixed income markets in a falling rate environment, which makes it relatively easy, even if you don’t pick the right horse in that race, you probably still make some money”. But Schomer thought that in a world where interest rates were rising, “it will be much harder to make money in fixed income”. Schomer said that the lead in the rate hike cycle would have to come from the US. This was because when smaller companies that were coming strongly out of recession and were resuming rapid growth tried to raise interest rates, they were immediately subject to huge levels of so-called “carry trade” investment. This in turn led to a rapid appreciation in the that country’s exchange rate, hampering the country’s export industry. New Zealand was a clear sufferer of this a few years ago. The US was able to take the lead, said Schomer, because it does not have such a large proportion of its gross domestic product involved in external trade. He also noted that the key driver would be when the US moved from sub-2% growth to around 3% growth. The importance of such a shift was that the US needed to grow at about 2% a year to remain stable. At less than 2%, the need for stimulus remained. At 3%, interest rates could return closer to a normal level. Schomer’s outlook for the next few quarters in the US was essentially a fairly steady 3% growth trend. Although a number of economists have forecast this, “it seems like the markets have not really bought into this with the same kind of conviction”. He said that PineBridge was tracking whether the US economy was on track and whether there was any reason not to buy into what the Federal Reserve was expecting. If things were going according to plan, said Schomer, “then there’s no reason to not buy into what the Fed is telling us, which is that they will start raising rates next summer. As Schomer observed, rising interest rates “can be a little scary”, particularly if you are a fixed-income investor. However, an interesting difference in this cycle from many of those in the past is that the gradual hikes in the base rate would not be a response to rising inflation, and would not be a case of the Federal Reserve being “behind the curve”. When that happened in the past a steeper yield curve would frequently be the result. But PineBridge was not forecasting that this time round. “We have inflation around a 2% trend. We’ll maybe drift a little bit above 2%, but I don’t think at any stage, if these forecasts turn out to be true, will there be a reason for the Fed to panic and start accelerating the pace of rate increases against what markets are pricing in”. So, instead of a steeper yield curve, PineBridge expects the yield curve in the US to flatten, with the increases in 10-year and 30-year yields far lower than the rises in the two-to-five year 19 november 2014 | 17 feature The panel: current views From left, Johannes Roth, Eamonn Flanagan, Stephan van Vliet, Patrick Liedtke, Peter Birks rates. The cause of this is that the interest rate hikes are being driven by stronger growth rather than price increases. “So this is probably the most important forecast that we have right now”, he said. Moving on from the US, Schomer observed that things in Europe were very different. Here they were fighting recession risk and deflation risk. “And they are fighting it without real tools”. Schomer noted that the eurozone had started a kind of “QE lite”, but personally he did not think that there would be a larger effort in terms of EU quantitative easing. But, as Schomer observed, it was no longer a matter of banks not having enough money. He also felt that were in a way misdiagnosing the problem. Low inflation, provided it was distributed throughout the eurozone in the correct way, was precisely what was needed, Schomer said. “The debt crisis of 2010/2011 really arose because all the other eurozone members had lost competitiveness vis a vis Germany, so how do you restore that competitiveness in a fixed exchange rate environment? You can’t devalue, obviously, you have to run inflation below your anchor’s inflation rate. And that’s what everybody’s doing”. But, Schomer conceded, it was the slowdown in Germany’s inflation rate that was the real problem. “It would be nice if Germany could run slightly higher inflation”, he said. Schomer commented that the real problem in Europe was that bank lending was still contracting. While in the US, the UK and even in Japan there had been a re- 18 | 19 november 2014 vival in bank lending, the eurozone still saw it contracting. Schomer said that one reason for this was that in Europe, because of lack of transparency between countries, “there’s really no incentive for the banks to start lending again”, at least not until someone high up told the banks that the entire system was fine. Schomer also covered Abenomics in Japan, noting “a typically Japanese” tax hike just as the recovery was gaining traction, the UK (asset prices a source of inflation not reflected in the public consumer price index), China (“Managing the inevitable slowdown”), India (“slower growth trend, stubborn inflation and structural rigidities that new administration should address”), and Brazil, where political uncertainty made the future outlook uncertain. Schomer’s all-encompassing theme was the most important here: he noted that, if reforms were only in one or two small companies, that would not make a large difference, but PineBridge anticipated economic reforms in a whole host of countries and, together, this would make a difference in emerging markets. To summarise, Schomer said that PineBridge anticipated global economic growth stuck in the 3% range. By 2017 he anticipated a return to the pre-crisis global average of 4%. “So I think that, despite the fact that we are looking for higher interest rates in the developed world, and particularly in the US, we don’t think it will be detrimental to growth”. This was because in the developed world the rate rises would be driven by growth. So if growth slows down, the monetary tightening will pause. The panel was then asked to consider Schomer’s comments and to add their own views on the current challenges for asset managers, from their own particular perspective. Patrick Liedtke observed that insurance chief investment officers were “following very, very closely whatever is being communicated by the central banks”. He said that, from BlackRock’s perspective, the key issue was “be efficient in your asset allocation in the current environment, but be resilient enough to withstand some potential future shocks”. Liedtke noted that insurers were also long-term investors, and that some portfolios had liabilities spreading 10 to 20 years down the road. If you look at the long trends then “we know that there is an end to the 30 year downward trending interest rate scenario. And other thing we know from economic history is that whenever we are at the trend of a very, very long cycle, there is period of added uncertainty, higher volatility, shocks to the market, until we find a new equilibrium.” Patrick Liedtke At the moment, said Liedtke, insurers were closing their duration gap. “They are running money very tightly linked to their liabilities”. He felt that this probably made sense, because there could be a massive shift in monetary policy but, even if there were, “we don’t know whether its six months, nine months or 12 months away”. Liedtke also observed that there could be a “tipping point” somewhere in the future, “where we go from the very benign scenario of slowly increasing rates to a run-away scenario that accelerates itself very fast”. This, said Liedtke, dictated the correct strategy at the moment. “You run a strategy that would survive a shock like this, should it come. Is it highly likely? No. But could it happen? Absolutely. And in a situation like that, you don’t want to bet the company”. Johannes Minho Roth said that asset managers had two major jobs – the first was to “harvest risk premiums”, which meant that, ideally, these exceeded liabilities and a profit was made on that side as well. The second job was where Roth and his company came in – avoiding the impact of downturns when they appear. “Why should you do this? Because the negative compounding can kill you”. Stephan van Vliet agreed that the current situation was “extremely challenging” if you were a European or Japan-based insurer. “You really need that yield, but, from the way it looks now, it’s not going to be there for a couple of years”. On the US side, meanwhile, “you’re going to have those rising rates, and fully valued equity markets. So where do you go from there?* Van Vliet said that one possible change in feature investment managers’ outlook could be in emerging market corporate debt. “For some reason we have always looked at emerging markets as one allocation, or international. I think that it’s time we segmented, and said, ‘this is local currency, this is hard currency, this is sovereign’”. Stephan van Vliet Van Vliet also took an interesting stance on currency allocation. “I’ve always been told not to take currency risk on insurance companies, but we have a very special environment right now in terms of currency risk, whereby the Europeans and the Japanese are going to try to keep their currencies low. So why not open up a little bit on that?” However, Van Vliet insisted that he agreed with Roth, that it was vital to have strong controls in place on total risk appetite and protection against sudden shifts. “But within those parameters I think this is the time to dynamically allocate, and capture all those opportunities”. Equity analyst Eamonn Flanagan said that, from the non-life perspective, boring was good. What the investment community wanted most on the asset management side was capital preservation, with underwriting returns on the other side of the balance sheet, plus capital discipline, “and return the money if you can’t use it”. Flanagan observed that the overriding message he heard from the investment community to insurers was “we value you as underwriters, not as investment managers”. He recalled certain situations where London market insurers had moved into the investment side, and had outperformed for a few years, but then it all went bang, and they fell out of bed. “I think the message on the investor relations side, from the investment point of view, is capital preservation, and being the right side of duration risk”. Flanagan said that, while the chief financial officer would undoubtedly like to report better earnings, the downside risk also had to be considered. Liedtke responded that there were two sides to the balance sheet, assets and liabilities. “On the liability side, the insurance industry has made tremendous progress over the past few years to make sure that they strip out costs, to make sure that the business being written is profitable.” But, he said, after such an intensive programme, there was not much slack left. “So now it’s probably time to have a look at what the assets side contributes to the business. This is the new world we are in”. Liedtke said that on the investment side for many insurer investors, there was something magical about 4% return. “That’s the yield they want. But if you look at traditional asset classes, 4% yields are hard to find”. “The last time you got a 4% yield on US Treasuries was in 2007, on euro core it was also in 2007. In the US muni market “For some reason we have always looked at emerging markets as one allocation, or international. I think that it’s time we segmented, and said, ‘this is local currency, this is hard currency, this is sovereign’” – Stephan Van Vliet, Managing Director, Head of Insurance Asset Management, PineBridge Investments the last time you really saw more than 4% across the board was 2008. Even global corporate credit, the last time you hit a 4% coupon was 2009. You’re running out of asset classes. Yes, in 2011, 2012, at the height of the European debt crisis, you could go into euro periphery and get more than 4%, but is that really the place to be? Probably not Liedtke noted that insurers were moving a higher proportion of their business into lower liquidity investments, rather than increasing their gearing or seeking out high-yield products. “Three years ago just 2% of insurers had 16% or more of their investments in alternative investment strategies (private market investments, infrastructure debt, etc). Today it’s 26%. At that rate, almost half of insurers will move to having more than 16% of their balance sheet in these assets. That’s a massive movement”. He noted that a move of just 1% of the total $23trn to $25trn in investable assets held by the life and non-life sectors into such assets would bring in around $240bn a year. Van Vliet said that it always depended on the insurer’s liability book, but that in most cases, “a business can carry much more liquidity risk than they currently do”. Commenting on Asia, Van Vliet observed that there were tremendous savings levels and that this would impact the supply and demand for bonds. Van Vliet definitely saw currency opportunities and strategies that could be deployed. And, with some liabilities being written in local currency, the currency risk went away, while the higher interest rate benefited the asset side of the sheet. Flanagan said that he would have no problem with a loss of liquidity on the life side, but in a long life book, “I think we would have an issue”. He noted the case of an insurer where the returns were highlighted but, when cash was required, “all sorts of exit clauses” appeared. There was a lack of liquidity that was not transparent. Van Vliet took up this point on liquidity. “Obviously every insurance firm needs to have a very good grasp on its liquidity risk”, but he said that even in life firms “we were always 90% liquid”. He saw no reason why investment managers should not try to capture a little more liquidity premium. Moving onto the topic of attractive asset classes for investment managers at insurers were interested in, Liedtke observed that for the next three years the intention was to underweight emerging market debt and fixed income asset classes generally. “That doesn’t mean that insurers stop being fixed income investors; I mean, far from it.” But that meant that investors were stuck with either equities or alternative asset classes. And “equity is a story of too many companies having got burned, and regulators don’t like the insurance companies to run equity exposure”. Here Liedtke pointed to one advantage of infrastructure as an asset class. While the group of investors putting money into Treasuries and corporate credit was wide, in infrastructure debt the potential investor class was narrower. “You’re actually in a fairly exclusive club of investors”. The degree of allocation should not be to the point where it becomes threatening, but Liedtke felt there was “room to do more” in this segment. He also noted, when referring to regulatory restrictions, that it was important to recognize that insurance was not the banking industry. “Is it better to be liquid than illiquid? Yes. But at which point does it make sense for me to have more exposure to illiquidity if I’m been compensated by the market? “And then I would like to run that illiquidity risk against all the other risks that I take. If I invest in a sovereign debt fund bond, my regulator tells me that actually that’s risk free. But I know it is not risk free. So I have to have an appetite and say yes, it might be tremendously liquid, but guess what, if Spain or it Italy had gone under, we would have had a totally different environment here.” Van Vliet observed that one should never be committed to a product where one could be forced to take a hit at a set price when everyone was heading for the exit at once. Continuing into the regulatory arena, Liedtke observed that in Lloyd’s Old Library only a short time previously the insurance industry had told the regulators that they had got it totally wrong on infrastructure debt. What was not a matter of contention was that the move towards Solvency II was obliging everybody to take a new look at risk and at risk diversification”. Van Vliet observed that there were great variations in regulatory capital regimes at the moment, and in Asia Singapore was probably leading the pack. However, a potential danger was that if a country such as, say, Malaysia, went fully Solvency II compliant, then you would have investment requirements that the local market could not supply. n 19 november 2014 | 19 news round-up The introduction of the new programme means that Aon can or repurchase up to $6.1bn of its shares whenever it deems the market conditions appropriate for it to do so. Repurchases of Aon’s Class A ordinary shares may be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when the company might otherwise be precluded from doing so under insider trading laws, said the broker. Aon says that the repurchase programme may be suspended or discontinued at any time. The broker’s share price climbed 0.9% to $90.64 at 9:39am shortly after the opening of the New York Stock Exchange (NYSE). The rise in the broker’s share price extended its yearly growth to around 8% from Dec 31 2013. Aquiline takes stake in Beach & Associates A busy week for Aquiline Capital Partners has ended with the New York-based private equity firm taking a majority stake in independent reinsurance broker Beach & Associates. The broker, which has been in business since 1988, is a commercial property and casualty broker that serves the needs of both insurance and reinsurance companies. Beach & Associates has offices in London, Bermuda, Toronto and New York. Jonathan Beach, the broker’s founder and president, will retain a significant investment in the firm and will continue to have a seat on its board of directors. On top of that, Beach & Associate’s senior partners have invested in the company alongside Aquiline and will own approximately 15% of the broker. “The Aquiline team shares our vision for the company and we look forward to leveraging their insurance expertise and capital investment to strengthen our business,” said Grahame Millwater, Beach & Associate’s chief executive “This investment will allow us to continue our model of serving our clients with a team-oriented and forwardlooking approach.” Aquiline has invested in a business that is slightly more streamlined that it was at the beginning of the year. At the end of July, Beach & Associates sold its Australian and New Zealand reinsurance broking operation, called Beach & Associates Pty Ltd (Beach Sydney), to the broker’s Australian and New Zealand management team led by Simon Cloney. It is the second time this week that Aquiline has been part of a major deal, with the private equity firm selling insurance investment manager Conning to Taiwan-based financial holdings firm Cathay Financial Holding Co for a deal that could be valued up to $240m. 20 | 19 november 2014 Aon authorises $5bn share repurchase Aon has authorised a further $5bn of funds to be used towards share repurchases in addition to $1.1bn that the company already has authorised for buying back company stock. The broker said that it intends to complete the current $1.1bn repurchase programme before repurchasing shares under the new $5bn programme. “Today's announcement continues to demonstrate our belief in the underlying strength of the firm, strong free cash flow generation outlook and our continued focus on maximizing total return for shareholders,” said Greg Case, president and chief executive (CEO). “We have returned a record amount of capital to shareholders through the first nine months of 2014, highlighted by the repurchase of 20.4m shares, equivalent to 7% of actual shares outstanding as of September 30, 2014, for a total of $1.75bn.” Kansas quake brings coverage enquiry influx Kansas insurers have reportedly been inundated with earthquake coverage inquires after a 4.8 magnitude quake last Wednesday. Kansas does not have a history of earthquake losses, so the price and deductibles are low compared to more historically high risk areas like California. Only about 7% of homeowners in the Midwest US have quake insurance. Last Wednesday’s quake was the largest of dozens that have hit Kansas this year despite the state traditionally suffering earthquakes relatively infrequently. More equipment is being brought in to explore what is happening. A rise in earthquakes in several US states has raised suspicions that it could be connected to hydraulic fracturing for oil and gas (“fracking”), especially the wells in which the industry disposes of its wastewater. However, earlier this year Kansas Governor Sam Brownback said there wasn’t enough evidence to make this link. In Kansas, earthquake insurance is available with deductibles of 2% and 5% of the covered amount - $2,000 or $5,000 on a $100,000 house. The epicentre of Wednesday’s quake was near Milan, with a population of only about 80, 10 miles south of Conway Springs. The town suffered structural damage to some of its older brick buildings and residents had belongings thrown from their shelves and cabinets. news round-up “Forker’s team is well known for their industry experience and solid market relationships” – AJG president and chief executive, Pat Gallagher UK Met Office enters cat risk modelling space The UK’s independent weather and climate service, the Met Office, has launched a suite of European windstorm products and services aimed at ILS investors as well as insurance and reinsurance firms. The Insurance and Capital Markets Applied Science team at the Met Office has developed hazard maps designed to support risk pricing at a local level, with a catalogue of historical windstorms for portfolio management and capital reserving. It will also offer impact analysis of incoming storm events for insurance operations. The Euro Windstorm Event Response service gives a daily modelled view of how a storm will evolve, and will match the predicted footprint to the closest historical storm allowing insurers to compare previous losses to predict the financial impact. The team will also deliver a contextual plot against return periods, giving a quick view of the significance of a storm. To help insurers validate model conclusions for compliance purposes, the Met Office is releasing a catalogue of 6000 historical storms for Europe, modelled to an industry leading resolution of 4km, giving expert insight into the probability, location and severity of events that could affect insured portfolios. For insight into extreme events that could happen, but have not happened in observed history, the Applied Science team is currently developing an 'event set' of synthetic storms, modelling tens of thousands of alternative and potentially more extreme outcomes of 'seed' storms that have occurred. Paul Maisey, head of science for Insurance and Capital Markets said in a statement: " As an independent scientific organisation we can bring some real insight into the hazard component of the risk calculation. These are early days for us in this industry but the signs are that the team's Euro Windstorm services will be well received." AJG acquires Illinois insurance agent Arthur J Gallagher (AJG) has acquired Illinois based insurance agency The Forker Company (Forker), in a move to bolster its construction sales, and to continue its aggressive growth strategy in the US. Forker is a retail insurance agency offering contract surety solutions to its Midwest clients since 2000. This company specialises in providing surety coverage for the construction industry. Following the acquisition, Peter Forker, the president of Forker Company, along with the company's other employees associates will be under the supervision of Michael Pesch, the head of AJG’s MidWest region retail property/casualty broking operation. “Forker's team is well known for their industry experience and solid market relationships,” said AJG president and chief executive (CEO) Pat Gallagher. “Their surety expertise and outstanding client service will be a wonderful complement to our Mid-West Region. “We look forward to working with Peter, and we welcome them to our growing Gallagher family of professionals.” AJG has made a number of recent acquisitions to boost its geographic footprint. In the past few months it has acquired California-based SGB-NIA Insurance Brokers, Colorado-based Insurance Associates, Inc., Illinois-based Bennett & Shade Co and New York-based Hagedorn & Company. According to market research company Zack’s the strategy is part of the broker’s long-term plan of growth through acquisition. “Arthur J. Gallagher, which generated annualized revenues of $693.6m for the first nine months of 2014, is well known for pursuing acquisitions that help to expand its business globally,” wrote Zack’s. “While the latest takeover marks the fifth one in the current quarter, the company has made 43 acquisitions year-to-date. “The acquisition spree is expected to continue in the coming quarters.” However, the market research firm noted that AJG’s strong liquidity continued to support its inorganic growth initiatives. 19 november 2014 | 21 news round-up Insurance dividends poised to rise in 2015: Nomura Property/casualty insurers in the US could be poised to raise dividends when boards meet in 2015 says Nomura analyst Cliff Gallant in a new note. Gallant says that one of the industry’s biggest “problems” today is excess capital and that this could lead to higher dividends. “Debt-to-total capital is a low 17.7% for our coverage group, despite the cheap cost of debt, and premiums-to-equity capital ratios are also low, well below 1.0x. Allstate, XL, and AIG look particularly strong,” says Gallant. Another factor that could lead to a bump in dividends is that there are few growth opportunities due to weak pricing and a slow global economy leading to a potential opportunity for capital return. Less volatility in the market because of fewer US catastrophes in recent years, the proliferation of modelling technology, and a diversified product offering could also lead to the possibility of a higher dividend payout in 2015, said Nomura. All these factors could lead to insurers being more comfortable with a higher dividend payout, says Gallant. Of all the companies it monitors, Gallant says that Nomura views Allstate as the most likely to pay out a higher dividend in 2015. “We view Allstate as the most likely to bump up its dividend, due to a particularly strong capital position, growth rates fundable through internal cash generation, and muchreduced volatility in results,” said Gallant in the note. “Other candidates include XL, whose capital is strong post the sale of its 22 | 19 november 2014 run-off book, and AIG, although with the caveat of a Sifi designation. “We also expect a special dividend from PGR (Progressive Corporation).” AM Best downgrades ratings of Farmers Fire AM Best has downgraded the financial strength rating (FSR) to B++ (Good) from A- (Excellent) of The Farmers Fire Insurance Company (Farmers Fire) with the outlook for the FSR revised to stable from negative. The rating’s agency said the downgrade primarily reflects Farmers Fire’s volatile operating results due to a “continuing unfavourable underwriting performance in conjunction with declining surplus” through the first nine month of 2014. Farmers Fire’s unfavorable underwriting performance has been due to a series of frequent and severe weather-related events, which included hurricanes, hail and windstorm events, and winter losses along with increased fire losses. As a result, Farmers Fire has reported significant underwriting losses in four of the past five years which have continued into 2014. As a single state property writer, Farmers Fire’s surplus and operating results are exposed to a wide variety of weather-related events. Despite this, AM Best said an adequate reinsurance program is maintained by the insurer to partially mitigate this risk. In addition, management continues to focus on improving operating performance through rate increases, frequent inspections, strict agency management, re-underwriting of the personal lines book, strengthening of reinsurance program and enhanced technology, while increasing top-line growth by targeting specific personal and commercial lines risk. "These negative rating factors are partially offset by Farmers Fire’s adequate risk-adjusted capitalisation, moderate underwriting leverage and generally positive unrealised capital gains, as well as its long-standing agency relationship and local market presence,” said the ratings agency in a report. “In addition, despite an unfavorable underwriting performance, Farmers Fire continues to maintain adequate balance sheet liquidity and reported favourable loss reserve development in recent years on both an accident- and calendar-year basis." AM Best added that ratings pressure may result if Farmers Fire has a continuation of underwriting losses and adverse operating results, which also could lead to weaker risk-adjusted capitalisation. Removal of the negative outlook on the ICR is contingent upon Farmers Fire’s ability to reverse its adverse operating performance to a consistent pattern of operating profitability, while maintaining supportive risk-adjusted capitalisation. news round-up fied business model. “We are pleased with the group’s overall steady performance,” he said. The group’s owned insurance companies performed satisfactorily and the overall the group is performing in line with the Board’s expectations. BMS launches specialty reinsurance division PZU expects slight decline in full-year profit Poland's leading insurer PZU has reported gross written premiums of PLN12.4bn, up from on a par with GWP in the same period last year. Higher investment profit of PLN2.16bn (9mo 2013, PLN1.86bn) counterbalanced higher net insurance claims of PLN8.41bn (9mo 2013, PLN8.21bn). However, gross profit declined year on year to PLN3.22bn, from PLN3.46bn. Net profit fell to PLN2.56bn, from PLN2.76bn. The technical result on non-life for the nine months was PLN706.0m, sharply down from the PLN1.15bn reported in the same period last year. PZU said that there had been a "decrease in the profitability of motor insurance, caused by a higher level of provisions for claims in previous years". It also reported a "slower rate of conversion of long-term policies into yearly renewable term agreements in type P group insurance". Part of the reason for the decline was a one-off gain in 2013, where there was a settlement with a reinsurer regarding Green Card Insurance (a partial reversal of the adjustment to estimates with the reinsurer which reduced the 2011 result". The insurer expects a slight decline in full year profit, compared with 2013. For Q3 2014, GWP rose to PLN3.97bn, up from PLN3.91bn. Net insurance claims rose to PLN2.99bn, up 9% from PLN2.75bn Gross profit declined to PLN1.04bn, from PLN1.35bn. Net profit declined to PLN, from PLN1.09bn in Q3 2013. Investment income for the quarter fell 10% year on year, down to PLN805.4m, from PLN891.6m. Charles Taylor reports overall steady performance Charles Taylor Group reported results in line with expectations this morning, but its Adjusting Services division’s profits suffered because insurers globally experienced an unusually low level of large insurance losses globally The Adjusting Service division was also impacted because it performs many of its services overseas, and consequentially its earnings were impacted by a stronger pound. The company’s Management Services arm, managing mutual insurers, delivered a good performance, despite a negative impact from foreign exchange movements. The mutuals managed by the Group also performed well on behalf of their members. The Insurance Support Services arm also had a good performance, which was greatly improved from 2013. The business delivers professional and technical services. This includes outsourced insurance support services, insurance company run-off services, investment management, captive management and specialty risk management David Marock, group chief executive officer, said: “Whilst the unusually low level of large insured claims across the market has affected our Adjusting Services business, our strategy of investing in new adjusting offices and senior staff puts us in a strong position to benefit when insurance claims return to more normal levels. “Our Management Services business has delivered a good performance alongside the much improved performance of our Insurance Support Services business. This demonstrates the resilience of our diversi- Specialist insurance and reinsurance broker BMS Group, part of Minova Holdings, has launched a Specialty Reinsurance division, naming Andrew Hitchings as Managing Director. Hitchings, who joins from Cooper Gay, will report to BMS Group chief executive Nick Cook. BMS said that the new division would focus initially on he addition of new product lines to BMS' existing Property-Casualty offering, in reinsurance and in retrocession. CEO Cook said that BMS saw "enormous potential" in is specialty reinsurance business. "The continued consolidation in the reinsurance market presents BMS with a unique opportunity of offering our clients an independent choice". Newly named TMK Syndicates update forecasts Tokio Marine Kiln Syndicates, formerly RJ Kiln and Co, has released updated forecasts for the 2012 and 2013 years of account for its three non-aligned syndicates. The main syndicate, 510, with a capacity of £1.062bn for 2012, saw a 0.7pp rise in its forecast range. to between 4.9% and 9.9%. Reinsurance-focused Syndicate 557 (capacity £56m) also rose by 0.7pp, to a range of between 2.8% and 7.8%. Dedicated Life Syndicate 308 (capacity £23m) rose 0.3pp to a range of between 2.6% and 7.6%. For the 2013 year of account, syndicate 510 (capacity £1.064bn) had its forecast range increased by 0.4pp to between 5.0% and 10.0%. Syndicate 557 (capacity £46m) saw a decline of 0.7pp, to a range of between 9.2% and 14.2%. Syndicate 308 (capacity £27m) improved 0.7pp, to a range of between minus 3.4% and plus 1.6%. TMK said that, "despite incurring losses from the fighting at Tripoli airport and on the Malaysian Airlines flight disasters. there was a small improvement on Syndicate 510, driven by reserve releases following a benign hurricane season". The minor deterioration for Syndicate 557 in 2013 was due to a reduction in expected premium income. Charles Franks, Group Chief Executive Officer of Tokio Marine Kiln, said: I am pleased to report that we have delivered a good performance despite continuing market challenges." 19 november 2014 | 23 people news round-up moves the damage to already waterlogged ground. Large numbers of greenhouses and storage depots used for the production of flowers and aromatic herbs were reported destroyed in Liguria and Piemontein in the north. The central region of Emilia Romagna. More heavy rain is expected today and tomorrow on both sides of the Swiss-Italian border. Cathay acquires Conning At least four dead in Swiss-Italian floods At least four people have been reported killed by mudslides that engulfed their homes in the border area between Italy and Switzerland over the weekend. There have been heavy rains in the last few weeks, causing floods in many areas of northern Italy A 70-year-old man and a 16-yearold girl died when their house in Cerro di Laveno was destroyed by a mudslide late on Saturday. Two women were reported dead in Switzerland when a building in DavescoSoragno was struck. A 67-year-old man, reported missing in Serra Rocco, a village near Genoa in the northwestern Italian region of Liguria, was still not accounted for yesterday. The deaths at the weekend bring to 11 the number of people who have died as a result of floods in Italy in the past month. Several rivers burst their banks, flooding the streets of Genoa and other towns nearby. Lake Lugano also broke its banks, and Lake Maggiore might do the same. Genoa received 139mm of rain on Saturday, compounding 24 | 19 november 2014 Cathay Financial Holding Co, a Taiwan based financial holdings company, is to acquire insurance investment manager Conning, for up to $240m The vendors are funds managed by Aquiline Capital Partners (a New York–based private equity firm investing in financial services), and other shareholders. Following the closing of the deal, Conning will operate as an independent company within the Cathay group and be governed by its own board of directors, both companies announced in a joint statement. Conning will be led by its current president and chief executive officer (CEO) Woody Bradford, and the existing global management team. The insurance investment manager’s teams across asset management, risk and capital management and insurance research will remain in place, serving clients from Hartford, New York, Cologne and London, said the statement. “This transaction is good for Conning’s clients and employees, as well as the longterm strategy of our company,” said Bradford. “Cathay supports the continuation of our firm’s client-focused culture and service model and will provide additional resources to accelerate our business plans and further enhance the value proposition for our clients.” Conning says that In Asia Pacific, Cathay Conning Asset Management (a joint venture between Conning and Cathay) will remain a core part of its strategy, providing investment and advisory solutions from its offices in Hong Kong. Cathay said that transaction represents its attempt to build a complete financial services platform with expertise in asset management, banking and insurance. The Taiwanese company said that it had also expanded its investment management agreement with Conning to include additional asset commitments and growth capital. “Cathay has been a client, shareholder and strategic partner of Conning since 2011,” said Mr. Hong-tu Tsai, Chairman of Cathay. “We are excited to broaden our relationship with Conning and support the leadership team as they continue to build the business, both organically and through acquisitions, across markets in Asia, Europe and North America.” Cathay’s life insurance country Cathay Life Insurance Company is the largest insurance company in Taiwan. As of June 30, 2014, the company had total assets of over $146bn. Nine-month volumes up 5.5% for Baloise Swiss composite Baloise has reported turnover of CHF7.48bn for the first nine months of 2014, up 5.5% year on year. This was a result of strong growth in its life division. The non-life sector shrank by 1.5% year on year to CHF2.88bn. Baloise said that this was due to an “improvement in product mix”. The insurer said that its growth in life business was a result of “consistently strong demand for safe solutions in group life business”. It said that it would report an “excellent” result for 2014, helped by “excellent insurance operations, the disposal of its shareholdings in Nationale Suisse and Helvetia, and the sale of Basler Austria. Business volumes as at 30 September 2014 (YTD) *Austria, Croatia and Serbia. n people moves ing Director of AIG in the UK. Aubert will be CEO Designate in 2015, reporting to Steve Hearn, Deputy CEO of Willis Group and currently CEO of Willis UK Insurance. After taking on his new role Aubert will report to Willis Group CEO Dominic Casserley. Hearn will continue in his role as Group Deputy CEO. Willis Re appoints Japan MD Willis Re has appointed Tsuyoshi Noguchi as the new managing director (MD) for its Japan to be based in Willis Re’s Tokyo office. Noguchi will work with the existing Willis Re Japan senior management team to drive Willis Re’s service offering for the Japanese market, said the broker. Aon Benfield appoints US accident and health MD Peter Durhager RenRe’s Peter Durhager steps down RenaissanceRe’s executive vice president and chief administrative officer, Peter Durhager, is stepping down, effective from December 31. Jeffrey Kelly, RenaissanceRe’s executive vice-president and chief financial officer (CFO) will become chief operating officer (COO) while maintaining his current role as CFO. “Our entire team is grateful to Peter for all he has accomplished over his more than ten years at RenaissanceRe. He has continually raised the bar on our operations functions and systems, which I believe are now key competitive advantages for our company,” said Kevin O’Donnell, RenaissanceRe CEO. “We are pleased that Peter has agreed to serve in an advisory capacity at RenaissanceRe into the next year, even as he focuses on his family, his intense involvement in the economic development of Bermuda, his corporate directorships and other pursuits. “Jeff has significantly enhanced our financial and strategic planning functions since joining us as CFO in 2009, and his input and insight as a member of our executive team have contributed meaningfully to our ongoing success,” O’Donnell said. As COO, Kelly will add to his current duties the oversight of the company’s global shared services functions, which includes human resources and organizational development, marketing, operations, information technology and administration. Before joining RenaissanceRe as executive vice president and CFO, Kelly was CFO of National City Corporation from 2000 until his retirement in 2008, and was named vice chairman of the company in 2004. New posts at ArgoGlobal ArgoGlobal SE, the European subsidiary of Argo Group International Holdings, has added two new underwriting appointments. Martin de Witte will be a professional lines underwriter based at ArgoGlobal SE’s branch office in Zurich. De Witte joins from Aon Risk Solution Switzerland, Ltd. where he was a senior financial lines broker. Malgorzata Pietrzyk will be a professional lines underwriter based at ArgoGlobal SE’s base office in Sliema, Malta. Pietrzyk joins the company after having served in similar roles for Tempo Underwriting, HCC Global and Royal Bank of Scotland. Aon Benfield has expanded its accident, health and life practice in the US by adding Thomas Sass to its team in Minneapolis, Minnesota. Sass will report to Roger Smith, senior managing director at Aon Benfield accident, health and life practice. The broker says that Sass’s responsibilities will include driving new business growth in the healthcare sector, leading client teams, and creating and maintaining a robust business environment that is supportive to optimising client results. Aubert moves from AIG to Willis Insurance and reinsurance broker and global risk adviser Willis Group Holdings has appointed Nicolas Aubert as Chief Executive Officer (CEO) Designate of Willis UK Insurance. This includes the broker's combined UK retail and global specialty businesses. Aubert is currently the Chief Operating Officer (COO) of American International Group (AIG) in Europe, Middle East and Africa. Previously he was Manag- Nicholas Aubert Thomas Sass Two new appointments at ABI The Association of British Insurers (ABI) has appointed Maurice Tulloch as chairman of the General Insurance Council Management Committee (GIC) and Barry O’Dwyer as Long Term Savings and Life Insurance Committee chair. Maurice Tulloch is Aviva’s chairman of global general insurance and chief executive officer, UK & Ireland General Insurance. He joined the GIC in 2013, and since then he has played a leading role in the ABI’s response to important industry issues. Maurice will also join the ABI Board in the capacity of his new role. “The ABI’s 19 november 2014 | 25 people moves GIC has a vital role to play as an industry leadership forum to engage proactively with the big public policy and regulatory issues we face,” said Huw Evans, ABI director of policy and deputy director general. “Maurice’s insight and perspective will be very important as we address important issues ranging from flood insurance, to compensation reform,” said Evans. Maurice Tulloch, said: “We face major challenges, from making insurance less complex for our customers, to demonstrating our value to governments and working with regulators to ensure we are operating effectively. There is a real opportunity for the ABI to set the future shape of our industry; I am confident that the GIC will continue to play a leading role in these important debates and take the right decisions for our industry and its customers,” he added. O’Dwyer, the new chairman of the Long Term Savings and Life Insurance Committee, is Standard Life workplace managing director. He has served on the Committee for over five years with two different firms. He will also join the ABI Board in the capacity of Maurice Tulloch his new role. Evans said: ““At a crucial time for the long-term savings and pensions industry, the ABI has a vital role to play in engaging proactively and helping shape the outcome of the big public policy challenges and opportunities, such as pension reform.” O’Dwyer, said: “Delivering the exciting pension reforms introduced in the Budget will be a clear focus, along with encouraging a broader savings culture in the UK.” n Lose the rolodex join our linkedin network joi 26 | 19 november 2014 nt oda y!
© Copyright 2018