Bankers Association for Trade and Finance 12th Annual Conference on International Trade Chicago, Ill

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Bankers Association for Trade and Finance12th
Annual Conference on International TradeChicago,
IllinoisOctober 10, 2002
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A Reinsurance Perspective

• Presented by
• Vincent Matsui
• Co-Head Global Structured Credit
• Swiss Re Financial Services Corporation

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Agenda

• State of the multiline reinsurance industry
• A perspective on the global credit markets
• Outlook

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Where weve been...

• 2001 record property catastrophes (34.4B of
  which 24.4B man-made)
• followed by
• 2002 Capital depletion through stock market
  losses
• Crisis of confidence in integrity of the system
• The market has limited appetite for new capital
  commitments to the financial industry
• and
• Prior treaty years adverse development
• offset by
• Significant hardening in reinsurance premiums,
  and
• confronted by
• New risks, e.g. Cyber risks, and old risk with
  new properties, e.g. terrorism

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Where we are going...

• A return to basic underwriting skills
• technical underwriting profit (combined ratio lt
  100)
• much closer interaction with cedants on exposure
  management and claims handling
• shift from quota share to facultative/excess of
  loss covers (from providing working capital to
  providing contingent capital).

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Insurance premiums as short-term deposits
106
Claim
Investment return must be ? 6 to make a profit
Technical Loss
time
100
98
Premium
Claim
Technical Profit
time
100
Premium
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Balance Sheet Challenges
Banks
Insurance Companies
Market Volatility
CAT Losses
Credit Problems
Credit Problems
Variable Annuities Guarantees
Equities
Private Equities
Bank stock trading below book value
P/E multiplies at 2x
No Deal Flow
Too many uninsurable risks
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Credit Distress Fallen Angel Bankruptcies
andRestructurings
2001
2002

• Southern California Edison
• Pacific Gas Electric
• PGE Corp.
• Finova Capital Corp.
• USG Corp.
• Warnaco Group, Inc.
• Comdisco, Inc.
• SAir Group
• Railtrack PLC
• Enron Corp.

• K-Mart
• Xerox Inc.
• WorldCom Inc.
• Solutia, Inc.
• Marconi

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Fall-out from the Weak Credit Cycle

• Severe capacity constraints in U.S. Commercial
  Surety market
• Insurance industrys Willingness to Pay becomes
  an issue
• Embedded credit risk in Professional Liability
  and Workers Comp covers comes to the surface
• Further deterioration in investment portfolios
• Increase in underwriter risk aversion

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Outlook for Credit Insurance Markets

• Closer interaction with cedants on exposure
  management and claims handling.
• Pricing moves to rebalance too much demand with
  limited supply - capital markets pricing
  imperative.
• Continued tightening of terms and conditions with
  less cedant discretion on surplus capacity.

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Credit Insurers providing value in todays market

• Vendor finance and factoring programs for both
  working layer and excess of loss credit cover.
• Trade receivables programs which need increased
  concentration limits to large buyers.
• Appetite for diversifying emerging market
  sovereign risks.