swiss re economic forum 2011e2e73506-6d56-4a1c...swiss re economic forum 2011 economic outlook is...

Swiss Re Economic Forum 2011 Thursday 1 December 2011

Kurt Karl, Chief Economist, Economic Research & Consulting Darren Pain, Senior Economist, Economic Research & Consulting

Global economic and insurance market outlook Kurt Karl, Chief Economist, Economic Research & Consulting

1 December 2011

Swiss Re Economic Forum 2011

Economic outlook is currently extremely uncertain and depends greatly on the actions of policymakers, particularly in Europe but also US.

– We assume policymakers will gradually deliver on their duties, but not pro-actively

– Market volatility will continue for quite some time

Low growth, falling inflation and large deficits are keeping monetary policy very accommodative

– Yields on long-term government bonds will remain low for a prolonged period

The insurance industry is well-capitalised, so will weather this storm – Slow growth in developed economies will weaken P&C and L&H premium growth, but

markets recover partially next year and more fully in 2013

– Low yields are reducing profitability, but P&C rates will rise toward end of 2013

– Market volatility from euro debt crisis and US fiscal impasse is reducing capital & profits

Emerging markets are also slowing in growth, but are still expected to perform well in 2012 and 2013

– Both L&H and P&C growing at 7 – 9% in 2012 and 2013, after inflation

Global Outlook

3


Economic recovery has been moderate in most developed economies

Source: Datastream

4


Key economic indicators and forecasts for the major economies

Source: Swiss Re Economic Research & Consulting, forecasts as of 3 November 2011

2010 2011 2012 2013Real GDP growth, annual avg., % US 3.0 1.8 1.3 2.6

Euro area 1.8 1.6 0.5 1.6UK 1.8 0.9 1.0 1.8Japan 4.1 -0.2 2.3 1.6China 10.4 9.1 8.8 8.2

Inflation, all-items CPI, annual avg., % US 1.6 3.1 1.4 1.5Euro area 1.6 2.6 1.8 2.0UK 3.3 4.4 2.6 2.0Japan -0.7 -0.2 0.3 0.7China 3.3 5.3 3.5 3.2

Policy rate, year-end, % US 0.25 0.25 0.25 2.00Euro area 1.00 1.00 1.00 2.00UK 0.50 0.50 0.50 1.50Japan 0.08 0.08 0.10 0.25

Yield, 10-year govt bond, year-end, % US 3.3 2.2 2.6 3.6Euro area 3.0 2.0 2.6 3.5UK 3.4 2.6 3.2 4.2Japan 1.1 1.1 1.2 1.7

5

Swiss Re Economic Forum 2011 6

Credit conditions are tightening while demand for credit is falling

Source: ECB bank lending survey

Note: Positive values indicate a tightening, negative values a loosening of banks’ lending standards. Positive/Negative values indicate increasing/ decreasing demand for credit.

ECB bank lending survey, quarterly data (Net percentage of domestic respondents expecting to tighten standards/expecting increased credit demand)

Are we heading for another credit crunch?

Credit conditions for non-financial corporations Non-financial corporations' demand for credit

-40

-20

0

20

40

60

80

2003 2004 2005 2006 2007 2008 2009 2010 2011


-6

-4

-2

0

2

4

France Germany Greece Ireland Italy Portugal Spain United Kingdom

United States

200820092010201120122013

7.2%

Change in cyclically adjusted general government balance vs. previous year (% of potential GDP)

Sources: IMF Fiscal Monitor September 2011, Swiss Re Economic Research & Consulting

Fisc

al t

ight

enin

g Fi

scal

eas

ing

Fiscal contraction is dampening growth

7


Example of Emerging market risk: China's housing market is much more subdued after monetary tightening

Source: Datastream

8

%


Non-life primary market in developed economies

9


Profitability has deteriorated, but is expected to improve

Profitability of global non-life insurance industry (% of premiums, shareholder capital)

-15

-10

-5

0

5

10

15

20

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Investment result Underwriting result

Operating result ROE after tax

10

Source: Economic Research & Consulting; based on an aggregate of 8 major non-life markets


Significant worsening of u/w results since 2006: from 97% to 104% on average.

Motor business low point was 2010, rates are now rising

In commercial lines, rate softening is slowing

Still positive reserve releases, should reverse next year

Due to weak economic growth, premium growth is also anaemic (low demand) and competition fierce

Due to low interest rates, profitability of insurance will be subdued for next couple of years

Given low investment yields, productivity increases will be sought

European P&C market: Weak, but rates are likely to rise

11


Adjusted US combined ratio, % of net premiums: Casualty rates set to rise

Points of combined ratio 2008 2009 2010 1H 2011

Headline figure,

based on calendar year

of which effective cat losses (-) 6.3% 3.4% 4.7% 12.8%normal cat losses (+) 4.0% 4.0% 4.0% 4.0%

Cat adjusted combined ratio 101.7% 101.8% 100.1% 100.8%A&E reserves additions (-) 0.4% 0.4% 0.9% 0.9%Core reserves releases (+) 2.2% 3.0% 2.5% 4.0%Adjusted AY combined ratio 103.5% 104.4% 101.7% 103.9%

104.0% 101.2% 100.8% 109.6%

Source: A.M. Best, Swiss Re Economic Research & Consulting

Motor rates rising in Europe, even UK and Italy Cat property rates rising in select markets and losses have reduced industry capital Select surveys in US imply commercial insurance rates are on cusp of hardening In Europe, commercial insurers are attempting to raise rates

12


Sources: A.M. Best, estimates by Economic Research & Consulting. [1] based on 10-year average.

2011 industry assumptions: Asset leverage: 313% Tax rate [1] 25% NPE/ avg. surplus 97% 2011 ROE was 4.8%; total yield was 4.1%, and CR 106% [US as an example]

Combined Ratio

ROE

5.3%

4.3%

3.3%

A 1 percentage point lower investment yield requires about a 3 ppt decline in CR to maintain ROE (5% in example)

Investment yield

Non-life insurers can compensate for lower yields with a lower combined ratio (example US)

0%

2%

4%

6%

8%

10%

12%

14%

95% 97% 99% 101% 103% 105% 107%

13


If low nominal interest rates reflect lower inflation, the negative effect from lower investment yields gets fully compensated by lower claims.

If the drop in interest rates is real (not only due to change in inflation), insurers need to charge higher premium rates to compensate for lower investment yields.

– In theory, this should be possible as there are usually no substitutes for non-life insurance products.

– In practice, insurers are reluctant to take investment returns fully into account for pricing, as they are afraid of losing clients.

A prolonged period of low interest rates is usually not favourable for non-life insurers' profitability.

Nevertheless, the insolvency risk resulting from low interest rates is low.

Non-life: Insurers and policyholders share the low yield burden

14


Life & Health primary market in developed economies

15


The shareholder equity of 32 mainly life and global companies (IFRS/GAAP data), 2007Q4 = 100

Source: Company reports, Bloomberg, Swiss Re Economic Research & Consulting

80

90

100

110

120

07Q

4

08

Q1

08

Q2

08

Q3

08

Q4

09

Q1

09

Q2

09

Q3

09

Q4

10Q

1

10Q

2

10Q

3

10Q

4

11Q

1

11Q

2

Market cap weighted average

16

AFLAC; Allianz; Assurant Inc; Aviva; AXA; China Life; CNP; Delphi Financial; Generali; Genworth Financial; Great-West Lifeco; Hartford; Legal & General; Lincoln National; Manulife; Metlife Group; Phoenix Companies; Ping An; Principal Financial Group; Protective Life; Prudential (UK); Prudential (US); St. James Place ; StanCorp Financial Group; Standard Life; Storebrand ASA; Sun Life; Swiss Life; Torchmark; Zurich


Return on equity of 32 mainly life and global companies (IFRS/GAAP data), %

AFLAC; Allianz; Assurant Inc; Aviva; AXA; China Life; CNP; Delphi Financial; Generali; Genworth Financial; Great-West Lifeco; Hartford; Legal & General; Lincoln National; Manulife; Metlife Group; Phoenix Companies; Ping An; Principal Financial Group; Protective Life; Prudential (UK); Prudential (US); St. James Place ; StanCorp Financial Group; Standard Life; Storebrand ASA; Sun Life; Swiss Life; Torchmark; Zurich

17

Source: Company reports, Bloomberg, Swiss Re Economic Research & Consulting

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

07

Q4

08

Q1

08

Q2

08

Q3

08

Q4

09

Q1

09

Q2

09

Q3

09

Q4

10

Q1

10

Q2

10

Q3

10

Q4

11

Q1

3 Canadian companies 7 European Globals 6 UK companies

2 Chinese companies 14 US companies Market cap weighted


Risk products: They have similar characteristics to non-life products, since there are few substitutes to mortality or disability products: Insurers can maintain profitability via higher risk charges. Though a long-tail business, interest rates have only a small effect on the price of pure mortality risk.

Savings products: As investment yields drop, insurers have to face lower profitability and/or reduce guaranteed interest rates. But low guarantees impair the attractiveness of savings products.

In-force business: If the duration of assets and liabilities is not adequately matched, a sustained decline in interest rates lowers profitability and if this continues it increases the risk of insurers defaulting. Some of the low investment yields may be shared with policyholders, depending on product

New business: If guarantees are not adjusted in a timely manner, the risk increases of writing unprofitable business

Life insurance and the low interest rate environment: The key issue is in-force business

18


Interest rate guarantees in life contracts vs. insurers' investment returns and 10y government bond yields

0%

1%

2%

3%

4%

5%

6%

7%

8%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

USA

Insurers' investment result 10y government bond yield

Guaranteed rate

0%

1%

2%

3%

4%

5%

6%

7%

8%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Switzerland

Insurers' investment result 10y government bond yieldGuaranteed rate individual Guaranteed rate Group

0%

1%

2%

3%

4%

5%

6%

7%

8%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

France

Insurers' investment result 10y government bond yieldGuaranteed rate ST Guaranteed rate LT

0

1

2

3

4

5

6

7

8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

10-y-government bond yield investment yield life insurersnew business guarantee average guarantee

Germany

19


Risk heat map life insurance Country

Interest rate sovereign equity macro-economyUS long-term guarantees mainly in UL and

fixed annuities, reinvestment risk for DI and LTC business

marginal exposure to downgraded European sovereign debt

low equity exposure on general account, exposure through VA with guarantees

exposure through sales, group business, disability claims, mortgage investments

UK annuities contain long-term guarantees, other products not very rate sensitive

minimal direct sovereign debt exposure, significant indirect exposure via holdings of

corporate bonds

relatively high equity exposure on general accounts

exposure through housing market for mortgage related products

Germany long-term savings products with long-term guarantees

some direct & indirect exposure to sovereign defaults

low equity exposure on general accounts sales are not very macro sensitive

France low and flexible guarantees (60% of the prevailing 10y bond yield or annual

crediting rates), fairly short duration of liabilities

significant direct debt exposure to vulnerable sovereigns, plus indirect

exposure via bank bonds

low equity exposure on general accounts sales are not very macro sensitive; however unit-linked products would likely be

impacted if the financial market situation deteriorates

Italy relatively low guarantee level significant direct debt exposure to vulnerable sovereigns, plus indirect


low equity exposure on general accounts bankassurance sales might drop if the banking sector has troubles

Spain some guaranteed savings products (new business guarantees linked to Spanish

government bond yields)

significant direct debt exposure to vulnerable sovereigns, plus indirect


low equity exposure on general accounts continuing high unemployment and weak domestic demand, housing market still

under pressure

Japan lingering but diminishing problem on guaranteed savings products (the problems in companies that were most vulnerable to

guarantees have been resolved)

marginal exposure to downgraded European sovereign debt

some equity exposure on general account, exposure through VA mainly limited to

foreign insurers

vulnerable if unemployment increases; demographic trend is believed to be a more

important driver (particular on 3rd sector products)

China limited impact from new business and strong growth will dilute the negative

spread problem on older business

very limited impact; investment mostly confined to domestic debts/equity

small but increasing exposure to equity markets

relatively sensitive to overall economic and income growth; bancassurance also a major channel vulnerable to economic downturn

Risks

20


Conclusions

21


The economic and financial outlook is currently extremely uncertain, particularly in Europe and US – Premium growth has been modest, but will improve next year and further in 2013

– The value of assets have been volatile, challenging insurers' capacity

– Interest rates will remain low, reducing profitability until 2013

– It will be a bumpy ride, but insurers are well capitalised, so will perform well

P&C rates, particularly casualty rates, are expected to improve next year

The low interest rate environment reduces profits through low investment yields

– The P&C sector is less affected than life segment

– Life insurers not only have low investment yields, but some products have return guarantees, so are really challenged by low yields

– In addition, life insurance products tend to be very long in duration, so most of the profits often come from investment returns

Conclusions

22

Emerging markets Kurt Karl, Chief Economist, Swiss Re Economic Research & Consulting

1 December 2011


Emerging market economies continue to outperform

Slowing economic growth

Moderating inflationary pressure

Interest rates staying at low levels

Slowing capital inflows and currency appreciations

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2006 2007 2008 2009 2010 2011 2012 2013

Real GDP growth

Emerging markets Industrialised countries

Sources: Oxford Economics; Swiss Re Economic Research & Consulting.

24


-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Emerging Asia Middle East Latin America Central & Eastern Europe

Industrialised markets

Life insurance premium real growth rate, 2007-12

2007

2008

2009

2010

2011

2012

25

Growth in life premiums has stalled in 2011; a recovery expected in 2012

Source: Swiss Re Economic Research & Consulting


Weak performance of the Chinese and Indian markets led the global slowdown

Sources: CIRC, IRDA

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Jan.

09

Mar

.09

May

.09

Jul.0

9

Sep

.09

Nov

.09

Jan.

10

Mar

.10

May

.10

Jul.1

0

Sep

.10

Nov

.10

Jan.

11

Mar

.11

May

.11

Jul.1

1

Sep

.11

Year-on-year growth of life insurance premiums in China

Introduction of new bancassurance regulations in Nov 10

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

Jan.

10

Mar

.10

May

.10

Jul.1

0

Sep

.10

Nov

.10

Jan.

11

Mar

.11

May

.11

Jul.1

1

Sep

.11

Year-on-year growth of new life insurance premiums

(individual business) in India

Single Premium Non-Single Premium

Introduction of new unit-linked insurance product regulations


Developments in 2011 and trends in 2012/13

•Premiums increased by 0.6% in 2011 (2010: 10.5%) in real terms

•Premiums declined in China and grew slower in India in 2011 due to regulatory changes

•Other emerging regions continued to report robust growth, in particular the Middle East (+12.0%) and Latin America (+9.9%)

•Central and Eastern Europe is lagging behind but Poland and Russia reported further premium growth

Developments in 2011

•Growth of premiums will recover in 2012, lead by China and India

•Premiums are projected to increase by 8.4% in real terms in 2012

•Other regions will maintain stable growth, supported by rising affordability, health and pension reforms as well as increasing awareness

•Protection type products will likely gain popularity as rising financial and economic risks will dampen interests in investment products

Trends in 2012/13


-10%

-5%

0%

5%

10%

15%

20%

25%

Emerging Asia Middle East Latin America Central & Eastern Europe

Industrialised

Non-life insurance premium real growth rate, 2007-12

2007

2008

2009

2010

2011

2012

28

Non-life premiums sustained broad-based growth in 2011; growth is however slowing

Source: Swiss Re Economic Research & Consulting


Developments in 2011 and trends in 2012/13

•Steady premium growth by 8.9% in real terms in 2011 (2010: 9.6%)

•Strong growth in Emerging Asia in particular China (+15%), Indonesia (+10.3%) and Vietnam (+6.9%)

•Nat cat has limited impacts on emerging Asian insurers but raised awareness and demand

•Other regions saw broad-based improvement

•Motor, health, personal accidents and agricultural insurance have contributed to growth

Developments in 2011

•Growth is expected to stabilise at 7-9% in 2012/13

• Trade and investment related insurance will be negatively affected by evolving crisis in Europe

•Central and Eastern European markets face significant downside risk – in terms of both economic and insurance business growth

•Emerging Asia and Latin America will perform relatively well, supported by strong demand for personal and speciality lines

Trends in 2012/13


Further convergence of emerging market regulations

Move towards risk-sensitive solvency regimes (eg Solvency II in CEE)

Further liberalisation in key emerging markets

30

Major regulatory changes expected in 2012/13

Chi

na

Planned opening of the motor third party liability insurance market to foreign participation

Indi

a A bill to raise foreign investment ceiling to 49% from current 26% could be passed by the parliament in 2012

Rus

sia There are

proposals to increase the 25% limit of foreign capital in the insurance industry, as this limit has been reached

Euro sovereign debt crisis Implications for the insurance industry

Darren Pain, Senior Economist, Economic Research & Consulting

1 December 2011


Selected European sovereign credit spreads

0

5

10

15

20

25

30

35

2007 2008 2009 2010 2011

10-yr yield spreads over German bunds (pp)

Greece Ireland Italy Portugal Spain

Source: Datastream


Sovereign debt maturing in 2012

0

50

100

150

200

250

300

350

Portugal Ireland Greece Spain Italy

€bn

Source: Bloomberg


Potential direct effects on European insurers

50% haircut on sovereign bonds issued by:

Potential losses for European insurers (€bn)

% of shareholders’ funds

Greece 14 2.4

Greece, Ireland, Portugal (GIP)

25 4.3

Greece, Ireland, Portugal and Spain (GIPS)

58 9.8

Greece, Ireland, Portugal, Spain and Italy (GIIPS)

143 24.3


European Insurers’ gross exposure to sovereign bonds (% of shareholders equity)

Greece Ireland Portugal Spain Italy

Ist quartile average 5.9 7.1 8.5 43.0 81.0

2nd quartile average 1.2 2.3 1.7 8.4 20.4

3rd quartile average 0.0 0.3 0.1 2.2 2.7

4th quartile average 0.0 0.0 0.0 0.0 0.0

Average 1.9 2.5 2.7 14.0 27.1

Weighted average 2.5 2.9 3.3 12.0 40.5

35

Distribution of exposure is important

Source: Moody's


European Insurers’ gross exposure to sovereign bonds (% of shareholders equity)

Greece Ireland Portugal Spain Italy

Ist quartile average 5.9 7.1 8.5 43.0 81.0

2nd quartile average 1.2 2.3 1.7 8.4 20.4

3rd quartile average 0.0 0.3 0.1 2.2 2.7

4th quartile average 0.0 0.0 0.0 0.0 0.0

Average 1.9 2.5 2.7 14.0 27.1

Weighted average 2.5 2.9 3.3 12.0 40.5

36

Distribution of exposure is important

Source: Moody's


Policyholder participation...

... but the "devil is in the detail" and there are considerable differences across jurisdictions.

Losses could be offset against future taxes ...

... yet there may be limits on deferability of tax/carrying forward losses indefinitely.

Many insurers would have already have taken "mark-to-market" (ie unrealised) losses against equity ...

... although not to the same degree as in the extreme stress scenario involving multiple defaults.

37

Mitigating factors


Indirect effects operate through impacts on: – values of other investments/assets – overall economic activity and revenue generation.

Depending on the scenario, these could be very significant (and may be greater than the direct effects).

Multiple defaults and/or persistently high costs of borrowing for vulnerable sovereigns (especially Spain and Italy) would increase uncertainty about the break-up of the euro.

The resulting market volatility would reduce the value of other assets (through higher risk premia) and intensify funding pressures on banks. In turn, this would likely lead to a further pull back in credit supply accentuating recessionary forces.

Again, some mitigating factors: "safe haven" assets could rise in value and some insurers might have hedged some forms of extreme market risk.

38

Indirect effects on European insurers


European insurers’ capital buffers appear adequate to cope with direct losses on their sovereign bond holdings provided any debt restructurings are limited to the smaller peripheral European countries.

But the direct and indirect implications would be much more serious if write-downs on Spanish, and especially Italian bonds, were ultimately required.

In such a scenario, the prospect for heightened volatility, disorderly markets and a severe recession appear high, imposing additional realised and unrealised losses on insurers’ investment portfolios as well as restricting revenue and earnings generation.

39

Conclusions

Thank you


Legal notice

©2011 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivatives of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re.

Although all the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial and/or consequential loss relating to this presentation.

41

swiss re economic forum 2011e2e73506-6d56-4a1c...swiss re economic forum 2011 economic outlook is...

Documents