Global financial crisis and

the impact on the Insurance

Industry
12th Global
Conference of
Actuaries
Mumbai, India
18/19 February
2010

David Alexander
Director

Swiss Re

Risk Perception is Changing

CSFI asked 403

insurance executives
from around the
world about their top
fears

Top Fears of
Insurance Co Execs

All Insurers 2007

All Insurers 2009

Too much
regulation

Investment
performance

Natural
catastrophes

Equity markets

Management
quality

Capital availability

Climate change

Macro-economic
trends

Managing the
pricing cycle

Too much
regulation

Source: CSFI and PwC

Slide 2

Todays topics

Slide 3

State of the Global Financial Market

Insurance Trends and Opportunities

Asia

Conclusions

The world has not seen many

crises like the recent one
2008
1998 - 2007
1988 - 1997
1978 - 1987
1968 - 1977
1958 - 1967
1948 - 1957

Normal
distribution fit

1825 - 1947

We are here

2008

Slide 4

US stock market, total returns in %, 1825 - 2008

Source: Axa

Global economy:
unemployment
will
rise
furthe
r in
the
West;
inflati
on
remai
ns
under
contr
ol for
now

Unemployment
Unemployment rose
substantially in the US, much
less in
UK
In Continental Europe
unemployment is expected
to rise when short term
labour programs expire

Unemployment rates
1
2
%
1
0
%
8
%
6
%

Slide 5

4
%
2
%
0
%

Inflation
Inflation will remain
very low or negative
next year in most
markets due to large
economic slack
Market inflation
expectations shifted
away from a
deflationary scenario to
a low inflation scenario
80
92
04

82
94
06

84
96
08

86
98

88
00

United States
United Kingdom
Germany

90
02

Break-even inflation,
10yr Bonds
(percentage points)

2.5

4.5

0.5

4.0

0.0

3.5
3.0

2.0
1.5
1.0

00
05

01
06

02
07

03
08

US
UK

04
09

Despite many
differences in the
underlying
economies, the
BRIC
stock markets
have been
correlated
Emerging Market Indices Return
Including Russia
Emerging
Market Indices Return Excluding
Russia
1300

4
5
0

1200
1100
1000

4
0
0

900
800
700

3
5
0

600
500

3
0
0

400
300
200
100
Dec-02

Dec-01

Dec-99

2
5
0

2
0
0

1
0
0

1
5
0

50

NIFTY Index (India)

MICEX Index - Russia

Shanghai Composite Index

Shenzhen Composite Index

MSCI World Index

Dec-04
Jun-04

Dec-99
Jun-02
Jun-00
Jun-05

Bovespa Index (Brazil)

10-Year CAGR

MSCI

Brazil

Ind

-1.9%

14.9%

13.4

Jun-09

Note: indices have been rebased to 100 at 31/12/1999

Jun-07

Jun-08

Jun-07

Todays topics

Slide 7

State of the Global Financial Market

Insurance Trends and Opportunities

Asia

Conclusions

The insurance industry has been

affected by the crisis but was not the cause
Equity indices, rebased: 01.01.2007 = 100
140

subprime crisis

banking crisis

asset crisis

recession

120

-15%

100

80

60

HSBC boost
loan
provisions

-21%

Fed and ECB

respond to
liquidity
squeeze

Bear Stearns
merged into
JP Morgan

40

20

Bear Stearns
hedge fund loss

Banks announce
significant losses

Lehman default,
AIG saved

0
Jan-07 Mar-07 May-07 Jul-07

MSCI World Index

Slide 8

Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08

S&P 500

S&P US Life insurance

Sep-08 Nov-08 Jan-09 Mar-09 May-09

S&P US Non-Life insurance

Source: Bloomberg, Swiss Re Economic Research & Consulting

Premiums contract in both the life

and non-life sector
Global life and non-life real premium growth, %
Premium income in life
insurance declined in
2008-09, mainly due to
falling demand for unitlinked products

14%

10%

6%

P&C premium growth is

subdued due to the
economic crisis, though
supported by front-loading
of infrastructure
construction projects

2%

-2%

-6%

1991

1993

1995

1997

1999

2001

Non-life
Slide 9

Source: Swiss Re Economic Research & Consulting

2003

Life

2005

2007

2009

Globally, life insurers reported

sharp drops in capital and solvency
Solvency in life insurance drops sharply, ..

800

1'600

70%

700

1'400

60%

1'200

50%

1'000

40%

800
30%
600

USD bn (2008 exchange rate)

80%

~ USD400 bn

1'800

USD bn

new business temporarily down

40%

30%

31%

600

20%
13%

11%

500

10%
8%

400

8%

7%
-8%

-1%

0%

20%
400
10%

200
0

2002

2003

2004

2005

2006

Capital available (LHS)

2007

2008

Solvency (RHS)

Source: Swiss Re, Economic Research & Consulting

Slide 10

2009

2010

0%

300

-10%
2000

2001

2002

2003

2004

Growth rate (RHS)

2005

2006

2007

2008

Premiums

Sample: US, UK, Canada, Germany, France, Italy, Australia, Sweden, Norway

Insurance capital and profitability

in non-life insurance suffered less
surance capital and solvency
Rebound happened more quickly than expected
It will need time to restore the capital base

Insurers profit from better investment results

ROEs 2009 and 2010 improve compared to 2008 due
to better investment results

Capital and solvency

Non-life market performance

180

20

150

15

120

10

90

60

30

-10

-15

99

00

01

02

03

04
10

05

06

07

08

Primary insurers' capital

Reinsurers' capital

Primaries' solvency [RHS]

Reins' solvency [RHS]

09

5
0
-5

99

00

01

02

03

04

05

06

07

08

09

10

Underwriting result

Investment result

Operating result

ROE after tax

Source: Swiss Re economic Research & Consulting ; Primary insurers: based on 8 large markets (US, CA, JP, AUS, UK, DE, FR, IT); Reinsurers: sample of
25 leading P&C reinsurers
Slide 11

Capital raising
became
extremely
e
x
p
e
n
s
i
v
e
a
t

a
t
i
m
e
w
h
e
n
c
o
m
p

a
n
i
e
s
n
e
e
d
e
d
i
t

m
o
s
t
Selected Debt Issuance by North
American Insurers 2007 - 2009
Date Issuer

Amount
($m)

Coupon Rate (%)

Maturity Da

8 Dec 2009

Lincoln National

300.0

6.250

15 Feb 202

9 Oct 2009

Protective Life

300.0

8.450

15 Oct 203

10 Sep 2009

Prudential

600.0

3.625

17 Sept 201

10 Sep 2009

Prudential

900.0

4.750

17 Sept 201

10 Sep 2009

Metlife

1,000.0

2.875

17 Sep 201

17 Jun 2009

Lincoln National

500.0

8.750

1 Jul 201

Prudential

500.0

5.450

4 Jun 201

Lincoln National

500.0

8.750

1 May 201

4 Jun 2009

Prudential

500.0

5.450

4 Jun 201

3 Jun 2009

Metlife

400.0

2.550

3 Jun 201

2 Jun 2009

Prudential

750.0

7.375

2 Jun 201

1,250.0

6.750

28 May 200

600.0

7.768

8 Apr 201

1,030.0

6.817

15 Aug 201

4 Jun 2009
17 Jun 2009

28 May 2009
1 Apr 2009

Metlife
Manulife Financial

12 Aug 2008

Metlife

19 Jun 2008

Manulife Financial

539.9

5.161

26 Jun 201

4 Dec 2007

Protective Life

150.0

6.400

15 Jan 201

4 Oct 2007

Lincoln National

370.0

6.300

9 Oct 203

Slide 12

So
ur
ce
:
S
NL
Fi
na
nc
ial

1) Financial data in CAD

2) Over quarterly LIBOR

Recent Insurance M&A/ IPO Activity

Recent Asian deals have
been at over 1 times
book value and could be
at a very substantial
premium to that

The range is wide

what makes the
difference between high
and low multiples?

Value of an extra 0.1 on

he P/B, P/E, P/EV ratio
s material

M&A
Target Name

Acquirer Name

Value

Status

P/E

P/B

P/EV

Announced

AXA China Region

AXA SA

AUD 7.7bn

Under
negotiation

20.0x

2.70x

NA

Nov 2009

Asia

ING Life Taiwan

Fubon FHC

USD 600m

Complete

NA

0.71x

0.49x

Oct 2008

Taiwa n

RSA Insurance PLC

Riyadh Bank

NA

Complete

7.18x

1.11x

NA

Jul 2009

Great
Britain

BT Aegon

AEGON NV

USD 15m

Complete

0.34x

0.08x

NA

Jun 2009

Romani

Sistemi
Sanitari Spa

Fondiaria Sai Spa

NA

Complete

11.02x

2.39x

NA

Apr 2009

Italy

ING Life Insurance

Korea Co.

ING Groep N.V.

USD 259.5m

Complete

24.9x

1.20x

NA

Dec 2008

S.Kore

Aviva Australia

National
Australia Bank

AUD 734m

Complete

16.0x

NA

1.10x

Jun 2009

Australi

Navakij Insurance
Public Co. Ltd.

Nipponkoa
Insurance Co Ltd.

NA

Complete

13.1x

1.07x

NA

Mar 2009

Thailan

Listing Date

Countr

IPO
Target Name Acquirer Name

Slide 13

Value

Status

P/E

P/B

P/EV

Tong Yang Life

n/a

USD 272m

Completed

NA

2.0x

1.30x

China Pacific
Insurance Co.

n/a

USD 3.1bn

Completed

N/A

2.9x

2.00x

Countr

Oct 8th, 2009

Korea

Dec 23rd, 2009

Hong
Kong

Todays topics

Slide 14

State of the Global Financial Market

Insurance Trends and Opportunities

Asia

Conclusions

A snapshot of
Asian markets
at
d
i
f
f
e
r
e
n
t
s
t
a

g
e
s
o
f
i
n
s
u
r
a
n
c
e

d
e
v
e
l
o
p
m
e
n
t
Asia

al &

L&H

Glob

In
s
u
r
a
n
c
e
p

ene
trat
ion
20
07

N
Taiwa
n 2
0
0
7

14%
South
Korea

12%

H
o
n
g
K
o
n
g

Japa
n
10%

8
%
6
%

Sin
gap
ore

(
U
S
D
1
0
b
n
)
L
i

Aus
trali S Taiw
4%
a
Kor an
Austral
M
ea
ia
al
ay
sia
Japan

Gl
o
b
al
P
&
C
2%

Hong Kong

A
s

fe
p
r
e
m
i
u
m
s,
2
0
0
7
(
U
S
D
1
0
b
n

ia
P&

M Tha
a ilan C
l d
a
y
s
i
a
C0
%

China

Vie
tna
m

Philippines

-2%

Indone
sia

Indi Vietnam
Indonesia
a
Philippines
T Singapore

-10%
10%
30%

-5%
15%
35%

0%
20%
40%

5%
25%

Average
real
premium
growth
(19952007)
S

Sources: Oxford Economics; Swiss Re Economic

Research & Consulting.

Risk Perception: Asian insurers have

similar worries to other insurers

CSFI asked 403

insurance executives
rom around the world
about their top fears

Top Fears of
Insurance Co Execs

All Insurers 2007

All Insurers 2009

Middle East & Asia

Insurers 2009

Too much
regulation

Investment
performance

Equity markets

Natural
catastrophes

Equity markets

Investment
performance

Management
quality

Capital availability

Capital availability

Climate change

Macro-economic
trends

Macro-economic
trends

Managing the
pricing cycle

Too much
regulation

Managing costs

Source: CSFI and PwC

Slide 16

BRIC comparison India has

catch-up
potential in nonlife insurance
GDP 2009
USD bn

Slide 17

Premiums
USD bn
2008

Global
Ranking,
2008

Real
growth
2009

Real
Growth
2010

Premiums
USD bn
2008

Brazil

1483

19.07

14

Non-life
5.1% 4.1%
insurance
Life insurance

Russia

1332

37.53

11

-6.9%

0.5%

0.64

India

1197

7.54

28

2.5%

6.3%

51.11

China

4687

35.87

10 20.0%

7.8%

97.63

17.99

Ra

The sub-market of High Net

Worth also deserves attention
Asia-Pacific High Net Worth Individuals by Markets, 2005-2007

Slide 18

**Others category is comprised of eight markets: Kazakhstan, Malaysia, Myanmar, New Zealand, Pakistan, Philippines,
Sri Lanka and Thailand. Some historical figures have been restated as the result of additional country-level data
becoming available in 2007. Chart numbers are rounded

Todays topics

Slide 19

State of the Global Financial Market

Insurance Trends and Opportunities

Asia

Conclusions

Conclusions:

Asias insurance market outlook

Recessions in some Asian economies and slowing growth in China and India have dampened
insurance business growth
The fall in equity markets has reduced consumer interest in investment-linked products
Bancassurance is particularly affected due to reduced single-premium sales
Some insurers are shifting their focus to protection products

Insurance capital declined in most markets particularly in Japan. Together with a trend of regulators
looking to strengthen solvency supervision, this will put pressure on balance sheets and will favour
the use of reinsurance

Government sponsored infrastructure construction projects in a number of emerging Asian markets

could add to P&C insurance demand.

Capital
management is a
key issue
Slide 20

Past experiences suggest possible strong rebound alongside economic

recovery pressure on capital from business growth
Medium to long term growth outlook remains favourable

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Slide 21