The annual meeting in Monaco was dominated by what to do with excess capital, dealing with low valuations and problems with private equity. But has the industry become boring now that the worst companies have gone?
Despite the lack of major rating actions, mergers, failures or weather events (unless you count Monday’s torrential downpour) to dictate a central theme of this year’s Monte Carlo Rendez-Vous, there was plenty to discuss.
A big talking point was reinsurers’ levels of capital, and what should be done with any excess. The general perception is that the reinsurance industry has too much capital – a position supported by the fact that heavy catastrophe losses in the first half failed to budge rates. Reinsurance broker Guy Carpenter, for example, estimates that the industry was overcapitalised by as much as $20bn, or 12%, at the beginning of 2010, which caused rates to fall by as much as 6% in the renewals.
Guy Carpenter started the debate early, postulating in its Saturday evening press conference that returning capital to shareholders through buy-backs and dividends is not the best way to create long-term value for shareholders, arguing that the call for buy-backs is being driven by short-term investors. Instead, the broker said, reinsurers should innovate and seek new ways to put the capital to work.
Not everyone agreed with this suggestion, however. Some pointed out that funds that appear to be excess capital could be required urgently if a large event were to hit. Others highlighted the risks inherent in pushing into uncharted waters. “There are numerous examples of companies diversifying and destroying value,” Standard & Poor’s director of financial institutions rating services Mark Coleman said.
Monte Carlo wouldn’t be Monte Carlo without talk of rates, terms and conditions, of which there was plenty this year.
Investors’ appetite is crucial
The consensus will make uncomfortable reading for reinsurers, however. While they are keen to maintain price levels or even raise them, the feeling is that, outside catastrophe-hit lines, prices will continue to erode if there are no major events. “The reinsurers may try to talk the market up here and in Baden-Baden but the only way is down,” Cooper Gay managing director of reinsurance Andrew Hitchings said.
Reinsurers’ long-term growth prospects, and the chance of potentially richer pickings elsewhere, could prompt private equity investors to turn their backs on the industry. Glacier Re closed its doors two weeks before Monte Carlo, ostensibly because its owners are unimpressed by the industry’s potential. Some have asked whether there are more such closures to come. “A lot will be driven by the appetite investors have for the reinsurance business and the business models companies are putting forward,” law firm Barlow Lyde & Gilbert’s reinsurance head, Clive O’Connell, said.
Reinsurers have clearly fallen out of favour with the investment community, judging by the low valuations, prompting Guy Carpenter chief executive of analytics Bill Kennedy to comment that the industry is being “unfairly punished”.
According to one delegate, there were notably fewer banks at this year’s Rendez-Vous. However, it seems banks are still willing to provide capital to the reinsurance industry. French reinsurer SCOR announced shortly before the event that it has secured a $150m contingent capital facility in conjunction with investment bank UBS, and Société Générale CIB launched a contingent capital facility called EDGE (event-driven guaranteed equity) during the event.
The reinsurance industry is also clearly not devoid of opportunities.
One notable attempt at product development during the Rendez-Vous came from Munich Re, which unveiled plans for a new third-party liability scheme for oil rigs. The solution will cover the projects themselves, rather than the individual joint venture partners, and will aim to provide coverage limits of between $10bn and $20bn. Rigs backed by a three-strong joint venture can currently only expect limits of up to $4.5bn.
The project got a lukewarm reception from Hannover Re, which said it supports the concept but considers the coverage limits ambitious. It will not match the $2bn capacity that Munich Re itself is putting up – while declining to give an amount, chief executive Ulrich Wallin said that Hannover Re’s capacity in such a venture “would definitely not go into the billions”. Other insurers and reinsurers are understood to be mulling their response.
While there was no shortage of talking points at this year’s Monte Carlo, there is a sense that some of the events that have defined the conference in previous years, in particular spectacular failures, will be in short supply in future.
One chief laments that the industry has become boring, in part because the worst companies were no longer around. “It has become a professional industry,” he said. GR
Key announcements at this year's Rendez-Vous
- Munich Re proposed a marine energy liability solution that could offer coverage limits for oil drilling projects of up to USD20bn. Hannover Re voiced support for the idea, but described Munich Re's suggested limits as ambitious.
- Guy Carpenter questioned the wisdom of reinsurers returning capital to shareholders through buy-backs and dividends, arguing they were "sacrificing longer-term returns".
- Willis chief executive Joe Plumeri defended his appointment of ex-AIG chief Martin Sullivan to head a new division, Willis Global Solutions, saying that Sullivan would "help Willis be better".
- AM Best aimed to explode myths about rating agencies, attacking the notion that Solvency II would diminish the need for ratings.