Risk Management Solutions
KEY DEVELOPMENTS
- Operating profit* increased by 9% with margins* constant.
- Solid new sales bookings achieved despite difficult conditions.
- Prudent cost controls initiated in response to slower growth.
Summary
In its first year as a separate operating division, RMS continued its growth with an increase in underlying† revenue of 7% and operating profit of 9%, despite challenging market conditions worldwide. The reported results benefited significantly from the stronger U.S. dollar, in which currency the majority of revenues are billed.
KEY FIGURES††
Year under review
In spite of difficult economic and trading conditions, RMS achieved solid new sales bookings in the year. More than 80% of new sales were in its core modelling business with the rest in specific growth initiatives including Data Solutions. Growth slowed to some extent in the first three-quarters of 2009 by client cost-cutting initiatives or client withdrawal from certain lines of business leading to product swaps and partial reductions in annual licence fees. Industry merger activity also resulted in 2009 reductions.
Operating achievements for the year included successful delivery of the version 9.0 release for RMS’s core business, launch of RMS’s new Data Quality Analytics, and strong sales of Miu, a software product which helps RMS clients manage portfolios of catastrophe bonds.
Strategic direction
Building on 20 years of success as a catastrophe modelling company, RMS has augmented its strategy for future growth. Access to sophisticated models has become standard industry practice, and RMS clients now seek to differentiate themselves through an ability to integrate models into their enterprise-wide business processes and to understand better how to use and interpret models to make better decisions. Clients seek upstream capability to acquire and manage high-quality exposure data, and downstream capability to open and interpret the models, and then apply these insights to deliver targeted decision support for underwriting, pricing and managing their business. RMS is committed to providing complete solutions for its clients across this value chain.
RMS is also pursuing opportunities to extend its modelling ‘franchise’ beyond a historic focus on perils able to cause sudden, catastrophic, and correlated loss of property, business income, and human life. The company is investing in several growth opportunities in new addressable markets where RMS’s core competencies can enable the creation of new models, databases and analytic applications that could fundamentally and more broadly improve risk management practices in certain additional segments of the property, liability/casualty and life/health insurance sectors.
Core business
RMS has established itself as an industry leading expert with the largest market share in the commercial catastrophe modelling business, which includes modelling of natural hazards risk, terrorism risk and risk from pandemic diseases. While RMS serves clients in a variety of sectors, its primary market is the global property and casualty re/ insurance industry, where it currently serves over 350 customers in 30 countries around the world. Products and services are developed and delivered through the activity of nearly 550 RMS employees in North America, Europe, Japan and China, and approximately 1,200 additional colleagues at India-based RMSI.
RMS models are deeply embedded in risk decision-making processes throughout the re/insurance vertical, including insurance companies, insurance and reinsurance brokers, reinsurers and the capital markets. RMS’s core business consists of the development of risk models, productised and delivered through a software platform and supported through high touch client relationships. Due to the nature of the deliverables, customers require interaction with a broad range of RMS colleagues with specialised skill sets as they seek to understand and deploy the models for a variety of business applications.
RMS released its next-generation models for North America earthquake risks, covering the U.S. (including Alaska), Canada, and Mexico. The new models draw on latest scientific research to help its clients differentiate risk between individual properties more precisely and gain greater insight into the factors affecting uncertainty in model results. The 9.0 release also included a suite of new and upgraded earthquake models for Central and South America that provide an integrated and seamless basis for managing earthquake risk across the entire Americas region. The release has been well received by the market, improving RMS’s competitive position.
Data Solutions
Within the framework of its new strategy, RMS is expanding ‘upstream’ from its models to provide its clients with data and data management solutions. In the quarter to June, after substantial development work in partnership with key clients, RMS released its Data Quality Analytics, designed to help its clients assess, manage and improve the quality of their exposure data. This product represents the first of many products, services and solutions expected to provide RMS clients unique insights into the quality of their data, which should improve the performance of the catastrophe models as well as the quality of their downstream analytics and risk decisions. Sales were robust in the fourth quarter, the first following release of the product, and are expected to grow strongly in the coming year.
Capital Markets
The capital markets were virtually shut down for the first half of the year, which had a significant impact on RMS’s efforts in this small but growing sector of its business. Catastrophe bond issuance was down as compared to 2008, although RMS provided expert assistance on several transactions. A relatively strong sales performance was achieved for the Miu software product, ending the year with more than 15 new customers and a strong pipeline into 2010.
Continuing investment
Despite the prudent cost controls needed in order to achieve its budgeted operating profit, RMS nevertheless maintained its robust investment programme in future growth, adding more than 60 new headcounts in North America and Europe during the year, beginning the ramp up of a multi-year development effort on its Next Generation software platform, and increasing its investment in a variety of newer growth initiatives operating in its Emerging Risk Solutions group, one or more of which is expected to deliver substantial growth over the medium to long-term.
Outlook
The new year has started well with a number of contracts booked, including several catastrophe bonds.
16 New and updated earthquake models for Latin America.
Latin American earthquake models
Focusing on the countries with the highest seismic risk and property exposure, RMS this year launched 16 new and updated earthquake models for Latin America.
A response to the growing demand in an increasingly sophisticated market for detailed risk analysis in the region, the models enable insurers and reinsurers to seamlessly assess risk on a country-by-country and region-wide basis. They also complement RMS’s next-generation models for the U.S. and Canada to provide the insurance industry with a complete picture of earthquake risk across the Americas.
* Adjusted operating profit (before exceptional items and amortisation and impairment of tangible assets).
† Underlying revenue or profit* is revenue or profit* on a like-for-like basis, adjusted for acquisitions and disposals made in the current and prior year and at constant exchange rates.
†† Percentages are calculated on actual numbers to one decimal place.