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AIR Worldwide, a company that develops catastrophe models, has estimated insurance industry losses of $3.5-$8 billion. Swiss Re has estimated insurance industry losses of $6-$12 billion.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
NEWS & ANALYSIS
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Credit Implications of recent worldwide news events
Retrocessionaires: Some reinsurers decided to buy more hedge protection from retrocessionaires in the past year, motivated by abundant availability and attractive prices. Notably, specialist companies that sell such protection, including some reinsurers and hedge funds, have been willing to provide ample protection for natural disasters in New Zealand and other so-called ¡°coldspot¡± regions, or areas that fall outside the hotspots of the US, Europe, and Japan, where natural disasters are more frequent. If industry losses end up at the high end of the range, we think a meaningful portion of reinsurers¡¯ losses will be passed on to the retrocession market
So far, few reinsurers have disclosed their loss estimates for last month¡¯s earthquake. In the table below, we show the handful that have disclosed their estimates. For reference, we have also included reinsurers¡¯ loss estimates for the September 2010 earthquake. Generally, we believe losses from last month¡¯s earthquake will exceed those for the September 2010 earthquake, although this will vary by reinsurer. New Zealand Earthquake and Other Recent Catastrophe Losses for Select Reinsurers ($ millions)
Company Ace Limited Allied World Assurance Company Holdings Ltd. Alterra Capital Holdings Ltd. Amlin Plc Arch Capital Group Ltd. Argo Group International Holdings, Ltd. Aspen Insurance Holdings Limited Axis Capital Holdings Limited Endurance Specialty Holdings Ltd. Everest Re Group, Ltd. Flagstone Reinsurance Holdings Limited Hannover Re Lancashire Holdings Limited Montpelier Re Holding Ltd. Munich Re PartnerRe Ltd. Platinum Underwriters Holdings, Ltd. RenaissanceRe Holdings Ltd. SCOR SE Swiss Re Transatlantic Holdings, Inc. Validus Holdings, Ltd. XL Group plc Ticker ACE AWH ALTE AML ACGL AGII AHL AXS ENH RE FSR HNR LRE MRH MUV PRE PTP RNR SCR RUKN TRH VR XL Dec 2010 Common Equity * 22,974 3,076 2,918 2,699 4,188 1,626 3,241 5,125 2,648 6,284 1,135 6,083 1,287 1,629 30,700 6,687 1,895 3,386 5,792 25,342 4,284 3,505 9,611 156,115
Source: Company reports, Earnings calls * Hannover Re, SCOR SE as of Sept 30, 2010 (1 EUR = 1.3648 USD).Munich Re is a rounded figure. ** Estimates are net of retrocession and, in some cases, net of reinstatement premiums
Sept 2010 NZ Quake ** 55.0 17.0 11.0 160.0 33.0 23.5 52.8 138.0 11.6 106.0 75.5 157.0 <5 30.0 473.0 149.0 96.7 135.3 35.0 230.0 19.0 45.3 47.0 2,101
Jan 2011 Australia Floods + Feb 2011 Cyclone Yasi ** 45-60 10-20 2-12 ? 30-60 15-25 < 1% mkt (< $25-50) ? ? 45.0 60-80 56-139 (floods only) ? ? ? 80-110 15-30 < 50 ? 325.0 50-100 ? 75-95
Feb 2011 NZ Quake ** ? ? ? ? ? ? ? ? ? ? ? 209 ? ? ? ? ? ? ? 800 ? 25-50 ?
2011 Cat Budget 370 ? ? ? ? ? 170 ? ? ? ? ? ? ? ? ? ? ? ? 1,010 ? ? ?
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
NEWS & ANALYSIS
Credit Implications of recent worldwide news events
Gavin Foster Assistant Vice President - Analyst +1.212.553.1418 gavin.foster@moodys.com Rory Callagy Vice President - Senior Analyst +1.212.553.4374 robert.callagy@moodys.com
Proposed SEC Rule Limiting Asset Manager Incentive Compensation Is Credit Positive
On 2 March, the Securities and Exchange Commission (SEC), by a 3-2 margin, approved a rule establishing parameters for incentive-based compensation at investment advisers in accordance with the Dodd-Frank Act. The rule has positive credit implications for asset management firms, as it will lead to a reduction of incentive-based cash compensation expenses. In addition, it prohibits incentive compensation arrangements that encourage disproportionate risk-taking by key decision makers. The rule, if implemented, applies to investment advisers with proprietary assets of at least $1 billion on their consolidated balance sheet. Additional requirements are proposed for investment advisers with $50 billion or more in total proprietary assets.21 Investment advisers with $1 billion in total assets would make a non-public filing of incentive-based compensation with the SEC on an annual basis to reduce ¡°excessive¡±22 incentive-based compensation arrangements that may encourage inappropriate risk-taking. Investment advisers would also be required to develop policies and procedures to improve monitoring of incentive-based compensation. For investment advisers with $50 billion or more in total consolidated balance sheet assets, the rule would require at least 50% of incentive-based compensation for executive officers to be deferred for three years. Most investment advisers do not currently report their consolidated assets to the SEC. However, the SEC¡¯s Investment Management Division (IARD) estimated that investment advisers with at least $100 billion in assets under management would have proprietary assets of $1 billion, while investment advisers with assets under management of at least $500 billion would have proprietary assets of at least $50 billion. Using these assumptions, independent US-domiciled asset managers likely to be subject to the SEC rule are listed in the exhibit below.
21 22
Segregated client assets would not count in the calculation of total assets. As defined under Section 39 of the Federal Deposit Insurance Act.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
NEWS & ANALYSIS
Credit Implications of recent worldwide news events
List of Independent US Money Managers to Which the SEC Ruling Applies
Under the SEC Assumptions: US Money Managers with total consolidated assets of $50 billion and above 1
BlackRock Capital Group Fidelity investments Franklin Templeton Legg Mason State Street Global Vanguard Group Wellington Management
Under the SEC Assumptions: US Money Managers with total consolidated assets of $1 billion and above 1
Affiliated Managers Group AllianceBernstein Dimensional Fund Advisors Dodge & Cox Eaton Vance Federated Investors Grantham, Mayo, Van Otterloo Invesco Janus Capital Group Nuveen Investments SEI Investments T. Rowe Price TIAA-CREF
[1] Using modeling assumptions by the IARD. Source: Estimated assets based on AUMs obtained from Pension and Invesments 2010 Databook
Many of these firms, along with most financial institutions, have already moved to compensation structures with some deferral elements and this rule will continue that trend. When the rule is published in the Federal Register, the public will be given 45 days to comment. A second vote will be required in order make the rule final. We expect that enhanced regulatory disclosure and scrutiny of incentive-based compensation will lead to the further conservatism in bonus award structures for asset managers. We expect the proposed rule to limit cash compensation, align bonuses with long-term performance targets, and reduce the volatility of earnings. The SEC rule may put larger firms at a disadvantage in attracting and retaining talent. However, we expect this disadvantage to be minimal as the industry continues to move towards greater deferred incentive-based compensation as a percentage of total compensation.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
NEWS & ANALYSIS Sovereigns
Aninda Mitra Vice President - Senior Analyst +65.6398.8302 aninda.mitra@moodys.com
Credit Implications of recent worldwide news events
India¡¯s Budget for 2012 Is Credit Positive
On 28 February, Indian authorities presented a budget for the 2012 fiscal year, beginning 1 April, that projects the central government (Baa3 stable) budget deficit at 4.9% of GDP, slightly lower than the fiscal 2011 revised estimate of 5.3%. The budget forecasts that state-level deficits will decline to 2% of GDP, down from 2.5% in fiscal 2011, and 3.3% in fiscal 2010. As a result, the budget projects that general government deficits will be contained to 7% of GDP in fiscal 2012. This will sustain a faster de-leveraging of government debt than originally forecast, and is credit positive for the Indian government. GDP growth and one-off non-tax proceeds produced one-off gains in fiscal 2011. India¡¯s nominal GDP is projected in the budget to grow by 20.3% in the ongoing fiscal year, much faster than in recent years, owing to large and persistent food price increases (pushing up the GDP deflator), a recovery in private activity, and a strong (though diminishing) level of public spending. Proceeds from the auction of third-generation broadband-wireless licenses were twice as high as envisaged by the budget, bolstering non-tax revenues and helping to accommodate increases of oil and food subsidies. Meanwhile, ongoing tax receipt increases and expenditure restraint also support the reduction of government deficits and slows down the pace of debt accumulation. Against budgeted growth of 20% in fiscal 2011, total tax receipts grew by 26%. This outcome results from a recovery in domestic economic activity and ongoing improvements in tax administration. Looking further ahead, the implementation of the direct tax code in April 2012 and a comprehensive goods and services tax (date yet to be finalized) are important ingredients for sustaining further improvements in tax administration in two to three years. Structural reforms undertaken thus far include a liberalization of domestic petroleum prices and a rationalization of the fertilizer subsidy program. Moreover, one-off price increases in kerosene and liquefied petroleum gas have supported the profitability of oil marketing companies. These measures are limiting larger-than-expected on-lending to public sector oil companies, and it is also reducing the risk of greater-than-budgeted fiscal borrowing that has persistently weighed on the government debt position in the recent past. Additionally, the government has eschewed the issuance of below-the-line subsidy bonds1. Thus, the transparency of the budgetary framework and political commitment to it is also gradually improving. Nevertheless, high oil prices still pose a risk to the projected budget deficit given the absence of a full or much greater pass through of global oil prices to end users. Further fuel price liberalization may contain this risk but it will aggravate short-term inflation. Persistently high inflation is already damaging to the government, whose popularity has suffered from recent corruption scandals. While slower progress toward structural reform may endanger the projected budget deficit in fiscal 2012, it will not jeopardize the downward debt trajectory. We estimate India¡¯s government debt-to-GDP will decline to 65% of GDP in fisc