A crisis, what

1
A crisis, whats the use,whats the purpose?

• Impact of the Crisis on Insurance and Reinsurance
• Michel M. LièsMember of the Executive Committee,
  Swiss Re
• Monte Carlo, 8 September 09

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Agenda

• Looking back impact of the crisis on insurance
  and reinsurance
• The here and now
• Looking ahead winners and opportunities

RVS Monte Carlo 2009 Michel M. Liès
Slide 2
3
The world has not seen many crises like this
Normal distribution fit
We are here
RVS Monte Carlo 2009 Michel M. Liès
Slide 3
Source Axa
4
Market value loss was universal across sectors
Financial Services Industry after-crisis market
value loss
Across geographies
Across FS sub-industries
Australasia
Banks
Canada
Capital markets players
Central and Eastern Europe
Consumer finance/monolines
China
India
Diversifieds/ Bancassurers
Japan
PC/Mixed insurance
Latin America
Middle East and Africa
Reinsurance
Other Asia
Service providers
US
Wealth mgmt. Life insurance
Western Europe
RVS Monte Carlo 2009 Michel M. Liès
Market value loss of top-400 FS companies between
31 July 2007 and 31 December 2008
Slide 4
Source Datastream, Oliver Wyman
5
Banking versus insurance - systemic crisis versus
solvency issue
Issues Insurers Banks
Main problem Losses on investment portfolio and on shareholder capital Interbank market collapsed
Operational problems Business as normal cover provided and claims paid Banking system close to collapse
Trust in the system No indication for policyholders losing trust no run on insurers Run on the bank prevented by Central banks guarantees
Government support Confined to very few cases Broad intervention of central banks and governments
RVS Monte Carlo 2009 Michel M. Liès
Slide 5
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Pressure on both sides of the insurers balance
sheet
Non-life insurers were much less affected than
life insurers
Illiquidity of assets, increased correlation of
different asset classes
Insurers
Assets
Drop in asset values
Short term funding drying up, imperfect
functionof hedges
Liabilities
DO and EO losses
Difficulties to manage riskand raise capital
RVS Monte Carlo 2009 Michel M. Liès
Shareholder equity
Slide 6
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Strong drop in shareholder equity
Shareholders Equity,Index June 2007100, USD
Key aspects

• Non-life insurers lost 15-20 and Life insurers
  30-40 of their shareholder capital
• Capital costs to remain high access to capital
  markets likely to remain restricted
• Reinsurance is available but capacities are
  limited, as well
• The government as capital provider of last resort
  a wild card

Sources Company reports, Bloomberg, Swiss Re
Economic Research Consulting
30 major insurers
RVS Monte Carlo 2009 Michel M. Liès
Slide 7
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Agenda

• Looking back impact of the crisis on insurance
  and reinsurance
• The here and now
• Looking ahead winners and opportunities

RVS Monte Carlo 2009 Michel M. Liès
Slide 8
9
The here and now

• Working on de-risking asset portfolio, cost
  saving and recapitalization
• Hardening of market is in most primary insurance
  areas still outstanding, meanwhile competition
  remains fierce
• Low yield environment creates profitability gap

Low interest rates in the medium-term
Sources A.M. Best, estimates by Economic
Research Consulting. 1 based on 1H08
effective statutory tax rates. 2 9M08 total
investment yield was 3.0 and CR was 105
Slide 9
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Capital markets situation improved but risks
remain

• Improved equity valuations in recent months

• Defaults still on the rise

Global speculative-grade default rates (BBB or
below)
European equities, (June 2007100)
9
-2
-46
11
Source Moodys
Source Bloomberg
Slide 10
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Advantage reinsurance!

• Reinsurance surprises positively
• Reinsurance shows resilience through out the
  crisis
• It is and was available when needed most
• It provides quick and very flexible short term
  solutions in the crisis
• For many capital market instruments the same
  cannotbe said

The industry surprises through superior
resilience in the most severe crisis since the
30s drawing the right lessons from the
mistakes made makes it even stronger
RVS Monte Carlo 2009 Michel M. Liès
Slide 11
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Agenda

• Looking back impact of the crisis on insurance
  and reinsurance
• The here and now
• Looking ahead winners and opportunities

RVS Monte Carlo 2009 Michel M. Liès
Slide 12
13
Looking ahead

• Cost management and solid underwriting remain key
  for non-life insurance and reinsurance
• It is the basis for restoring sustained
  profitability
• It is needed for getting investors back on board
• If not now, when should we make progress?
• Outlook
• Strong capitalisation respectively access to
  capital at favourable conditions is key for using
  investment opportunities and the consolidation
  opportunity to expand
• The ultimate winners will be those that take
  action on emerging demand trends
• The current situation demands for vision and
  clear leadership
• Firms will need to quickly refocus from
  pre-crisis to post-crisis priorities

RVS Monte Carlo 2009 Michel M. Liès
Slide 13
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Quick re-focus from pre-crisis to post-crisis
priorities needed
Pre-crisis priorities
Post-crisis priorities

• Short-term tactical priority
• Refine core value proposition and respond to
  competitor initiatives

• Short-term tactical priority
• Exploit discontinuities and future-proof business
  model

• Long-term strategic priority
• Continually evolve business model to a changing
  eco-system

• Long-term strategic priority
• Continually improve competitive positioning in a
  stable and fast-growing dynamic equilibrium

• Required skill set
• Exceptional execution
• Cost and risk management, merger and customer
  integration
• Agility and cycle-adaptiveness
• Simultaneous strategies to hedge an uncertain
  environment

• Required skill set
• Exceptional execution
• Gearing to controlled growth

RVS Monte Carlo 2009 Michel M. Liès
Slide 14
Source Swiss Re, Oliver Wyman
15
Immediate priorities exploiting discontinuities
and future-proofing
Exploiting discontinuities
Future-proofing

• Upgrading risk capabilities
• Investing in more comprehensive risk measurement
  and analysis
• Right-risking
• Aligning risk taking behaviour to stakeholder
  expectations
• Building on strengths
• Making the most of existing businesses via
  re-pricing and cost management
• Diversifying funding and earning sources
• Improving solid-funding base and diversifying
  into less volatile businesses

• Exploit flight-to-quality
• Communicating brand safety to customers
• Capturing the best customers and staff from
  weaker competitors
• Opportunistic MA
• Bargain hunting to take advantage of depressed
  valuations and forbearance on competition
  regulations

RVS Monte Carlo 2009 Michel M. Liès
Slide 15
Source Swiss Re, Oliver Wyman
16
Conclusions
Focus in insurance shifts from crisis management
towards capturing market opportunities
Participate inthe recovery
Drop in asset values
Drive the prioritieson insurance risks
RVS Monte Carlo 2009 Michel M. Liès
Financing opportunities
Slide 16