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2018 Reinsurance Market Briefing
Rendez-Vous de Septembre, Monte Carlo
Greg CarterManaging Director,Analytics - EMEA
Anthony DiodatoManaging Director,P/C and Reinsurance
Robert DeRoseSenior Director,Global Reinsurance Ratings
Nick Charteris-BlackManaging Director,Market Development - EMEA
9 September 2018
A.M. Best Delegates
September 9, 20182018 Reinsurance Market Briefing, Monte Carlo 2
Preparing for Brexit……
2018 Reinsurance Market Briefing, Monte Carlo September 9, 20183
• A.M. Best currently registered with European Securities and Markets Authority (ESMA)
• Allows market access across the current EU 28 to provide rating services
• New registered EU subsidiary being established in Amsterdam to maintain EU 27 access
• Operational by 29 March 2019
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4 September 9, 20182018 Reinsurance Market Briefing, Monte Carlo
US Securities Laws explicitly prohibit the issuance or maintenance of a credit rating wherea person involved in the sales or marketing of a product or service of the CRA alsoparticipates in determining or monitoring the credit rating, or developing or approvingprocedures or methodologies used for determining the credit rating.
No part of this presentation amounts to sales / marketing activity and A.M. Best’sRating Division employees are prohibited from participating in commercialdiscussions.
Any queries of a commercial nature should be directed to A.M. Best’s Market Developmentfunction.
September 9, 201852018 Reinsurance Market Briefing, Monte Carlo
Discussion Outline
Global Reinsurance Results and Trends
Global Reinsurance Market Capacity
Global Reinsurance Market Evolution
Global Reinsurance Sector Outlook
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Segment Outlook – Global Reinsurance
7 September 9, 20182018 Reinsurance Market Briefing, Monte Carlo
Headwinds TailwindsIntense competition Cession rates increasingIncreasing interest from third-party capital
Cat losses temporarily stabilise rates
Earnings stabilise but remain under pressure
Favourable reserve development,but waning
Excess capacity hinders further improvement
Strong risk-adjusted capital
Potential for increased inflation Increase in interest ratesM&A
Although capitalisation remains strong and rate deterioration temporarily halted, pressure on margins continues. Over the intermediate term, returns for some reinsurers will fall short on a risk-adjusted basis. Maintain negative market outlook.
Global ReinsuranceResults and Trends
September 9, 20182018 Reinsurance Market Briefing, Monte Carlo 8
U.S. Growth Accelerates in 1H
3
4
5
6
7
8
9
10
11
-6
-4
-2
0
2
4
6
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
GDP (%) CPI (%) Unemployment Rate (%)
GD
P &
Infla
tion
(CPI
) (%
)
Une
mpl
oym
ent R
ate
(%)
U.S. GPD Growth, Inflation and Unemployment
September 9, 20182018 Reinsurance Market Briefing, Monte Carlo 9
Central Bank Base Lending Rates
-1
0
1
2
3
4
5
6
7
8
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
(%)
China
ECB
Japan
UK
US
2018 Reinsurance Market Briefing, Monte Carlo 10 September 9, 2018
Global GDP Growth – Major Economies
-6
-4
-2
0
2
4
6
8
10
12
14
16
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
(%)
China France Germany Japan United Kingdom United States *Forecast
11 September 9, 20182018 Reinsurance Market Briefing, Monte Carlo
2017 represented the most significant year for catastrophe losses since 2011
Hurricane Harvey, Irma, Maria combined with Earthquake in Mexico and Wildfire in California produced industry losses in the range of USD 80 to 100 billion.
Despite timing of these events, negative reserve surprises have been limited thus far
12
Global Reinsurance Market Trends
September 9, 20182018 Reinsurance Market Briefing, Monte Carlo
Global Reinsurance Market TrendsOverall 2017 catastrophes amounted to an earnings events as rated balance sheets emerged flat for the year.
Alternative capital did participate in the events in a meaningful way resulting in collateral locks prior and through the 1/1 and mid year renewal periods
Alternative capital investors were NOT hindered by the losses and brought additional capacity to the market for the renewals.
13 September 9, 20182018 Reinsurance Market Briefing, Monte Carlo
Global Reinsurance Market TrendsOptimism
that followed quickly faded
as January renewal
negations progressed.
Significant push back from Clients not impacted by
losses. But hope lingered into the
June / July Renewal.
Overall, reinsurance pricing stabilized. More
pronounced improvement in
underlying business
As a result pricing is not optimal for certain classes and structures but there are opportunities out there...
14 September 9, 20182018 Reinsurance Market Briefing, Monte Carlo
Total Economic and Insured Losses (USD billions)
2018 Reinsurance Market Briefing, Monte Carlo 15
Source: Swiss Re Institute
2017 2016 Annual Change (%)
10-YearAverage
% of 10-Year Average
Economic Losses
Economic LossesNatural Catastrophe 300 178 69% 178Man-made 6 10 -42% 12
Total 306 188 63% 190
Insured Losses
Natural Catastrophe 131 56 133% 51 29%Man-made 5 8 -45% 7 58%
Total 136 65 110% 58 31%
September 9, 2018
Global Reinsurance Market Trends
55.9% 56.2% 56.2% 60.6%
76.5%
61.1%
31.9% 33.5% 34.2%34.7%
33.6%
33.6%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0%
20%
40%
60%
80%
100%
120%
2013 2014 2015 2016 2017 5yr Avg
Expense Ratio
Loss Ratio
Loss ReserveDevelopment
Source: A.M. Best data and research
Global Reinsurance Sector – Combined Ratio
September 9, 20182018 Reinsurance Market Briefing, Monte Carlo 16
87% 88% 90%98%
114%
2013 2014 2015 2016 2017
Combined Ratio by Reinsurance Sector
17 September 9, 20182018 Reinsurance Market Briefing, Monte Carlo
European “Big Four” U.S. & Bermuda Lloyd’s
87% 87% 91% 92%
109%
2013 2014 2015 2016 2017
89% 92% 92% 96%109%
0%
20%
40%
60%
80%
100%
120%
2013 2014 2015 2016 2017
Loss Ratio Expense Ratio
Global Reinsurance Market Trends
13.0%
11.6%
9.5%8.3%
-0.3%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
2013 2014 2015 2016 2017
Return on Equity Five-Year Average
Source: A.M. Best data and research
Return on Equity (2013 to present) and Five-Year Average
September 9, 20182018 Reinsurance Market Briefing, Monte Carlo 18
Global Reinsurance Market Trends
16.2%14.7%
8.9% 8.1%
-7.3%
2013 2014 2015 2016 2017
13.1%
11.0% 11.5%
9.7%
2.7%
0%
5%
10%
15%
20%
2013 2014 2015 2016 2017
11.4%10.9%
7.5% 6.8%
-0.4%
2013 2014 2015 2016 2017
European “Big Four” U.S. & Bermuda Lloyd’s
Return on Equity by Reinsurance Sector
Five-Year Average
Source: A.M. Best data and research
2017
September 9, 20182018 Reinsurance Market Briefing, Monte Carlo 19
Global Reinsurance Market TrendsGlobal Reinsurance Market
5 Year Average Return on Equity Less Reserve Development
Source: A.M. Best data and research
10.9%
8.3%
6.8%
4.5%
Composite at YE2016 Composite at YE2017
5 Year Average Return on Equity5 Year Average Return on Equity excluding Loss Reserve Development
September 9, 20182018 Reinsurance Market Briefing, Monte Carlo 20
Global ReinsuranceMarket Capacity
September 9, 20182018 Reinsurance Market Briefing, Monte Carlo 21
Global Reinsurance Market Capacity
Top 10 Global Reinsurance Groups –Non-Life
Top 10 Global Reinsurance Groups –Life
Munich Reinsurance Company
Swiss Re Ltd.
Berkshire Hathaway Inc.
Lloyd’s
Hannover Ruck SE
SCOR S.E.
Everest Re Group Ltd.
XL Group plc
Transatlantic Holdings, Inc.
PartnerRe Ltd.
Munich Reinsurance Company
Swiss Re Ltd.
Reinsurance Group of America Inc.
SCOR S.E.
Hannover Ruck SE
Great West Lifeco
Berkshire Hathaway Inc.
Pacific LifeCorp
PartnerRe Ltd.
Assicurazioni Generali SpA
Source: A.M. Best data and research. Ranked by unaffiliated gross premium written in 2017
September 9, 20182018 Reinsurance Market Briefing, Monte Carlo 22
Global Reinsurance Market Capacity
Rank 1-1070.2%
Rank 11-2015.5%
Rank 21-307.2%
Rank 31-404.6%
Rank 41-502.5%
Life and Non-Life Reinsurance GPW Distribution by Ranking
September 9, 20182018 Reinsurance Market Briefing, Monte Carlo 23
Global Reinsurance Market Capital
292 320 340 332 345 345 362
19
48 60 68
75 87 100
2012 2013 2014 2015 2016 2017 2018E
Convergence Capital
Traditional Capital
Estimate for Total Dedicated Reinsurance Capital (USD billions)
Notes and Sources: Estimates by Guy Carpenter and A.M. Best
September 9, 20182018 Reinsurance Market Briefing, Monte Carlo 24
Global Reinsurance Market Capital
Dedicated Insurance-linked Securities (ILS) Managers,
71bn
Reinsurance Sponsored Managers, 23bn
Direct Institutional Investors, 6bn
0
10
20
30
40
50
60
70
80
90
100
Convergence Capital(2018 estimated) (USD billions)
Notes and Sources: Estimates by Guy Carpenter and A.M. Best
September 9, 20182018 Reinsurance Market Briefing, Monte Carlo 25
Global Market Evolution
September 9, 20182018 Reinsurance Market Briefing, Monte Carlo 26
“Global” Franchises
• Arch• Aspen• AXIS• Everest Re• Hannover Re• Lloyd’s• Munich Re• RenaissanceRe• SCOR Re• Swiss Re
ShelteredFranchises
• Allied World• Endurance(Sompo Intl)• General Re• MS Amlin• Odyssey Re• National Indemnity• Partner Re• Tokio Millennium Re• TransRe• Validus• XL Catlin
Franchises That Are Gone
• Ariel Re• Flagstone• Harbor Point / Max (Alterra)• IPC Re• Montpellier • New Castle Re• Paris Re• Platinum Re
What Does The Future Hold?
• Fidelis• Greenlight Re• Hamilton• Harrington Re• Humboldt Re• Kelvin Re• Lumen Re• Maiden Re• Third Point Re• Watford Re
Market Landscape ~10 Years In Time
2018 Reinsurance Market Briefing, Monte Carlo September 9, 201827
The Case for M&A
28 September 9, 20182018 Reinsurance Market Briefing, Monte Carlo
Broader product capability
Broader geographic reach
Greater influence
Greater attractiveness to alternative capital
Opportunity for growth
Alternatively…M&A is the result of a strategic
opportunity
Alternative Capital
29 September 9, 20182018 Reinsurance Market Briefing, Monte Carlo
Market is still largely
influenced by global leaders
M&A will continue
Alternative capital is driving change
Alternative capital is driving a great deal of structural change in the market
However, the market continues to be heavily influenced by the global reinsurance leaders
The Drive for Efficiency
30 September 9, 20182018 Reinsurance Market Briefing, Monte Carlo
The market will
continue to become
more efficient as all
players strive to
become closer to
the client
Global Market Trends
Traditional Dual Platform
Controlthe client
Build primary business
Alternative Capital Platform
Manage or have a relationship with
alternative capital
Build fee income stream
Mergers &Acquisitions
Relevanceand size
Ability to be small and nimble with parental
protection
Strategy Evolution
September 9, 20182018 Reinsurance Market Briefing, Monte Carlo 31
Global Market TrendsPotential Opportunities
Cyber Insurance Flood Mortgage Terrorism InsurTech US Tax
Reform
September 9, 20182018 Reinsurance Market Briefing, Monte Carlo 32
London and Regional Markets
Lloyd’s
Brexit Plans
September 9, 20182018 Reinsurance Market Briefing, Monte Carlo 33
Lloyd’s
2018 Reinsurance Market Briefing, Monte Carlo September 9, 201834
Source: Lloyd's market results (31 Dec., 2017)
Combined Ratios by Class of Business10
2.3
106.
6
102.
9
108.
4
106.
4
108.
9
106.
9
92.3 10
3.4
102.
7
106.
2
92.6
111.
9
84.7
121.
7 131.
5
103.
7 121.
8
107.
7
114.
4
100.
6117.
2 127.
6
103.
1
122.
4
86.6
122.
3
102.
2
Reinsurance Property Casualty Marine Energy Motor Aviation
Accident Year 2016 Calendar Year 2016 post Prior Year Releases/Deficit Accident Year 2017 Calendar Year 2017 post Prior Year Releases/Deficit
GBP 6.1bn GBP 0.8bn GBP 0.8bn
100%
GBP 7.8bn GBP 6.4bn GBP 2.1bn GBP 0.5bn2017 Net Earned Premium
Lloyd’s
2018 Reinsurance Market Briefing, Monte Carlo September 9, 201835
• Catastrophe losses –18.5 points on combined ratio in 2017 –not outside expectations given scale of events
• Underlying run rate combined ratio of business –> 100%
• Remedial actions – underway• A.M. Best Rating – Action affirmed (July),
FSR A, ICR a+, Outlook stable
Lloyd’s challenges
2018 Reinsurance Market Briefing, Monte Carlo September 9, 201836
• Core lines of business – strong competition• Expense ratio – high compared to peers• Regional reinsurance hubs – growth reducing flow of
business to London• Market modernisation programme (TOM) –
being implemented• Appointments – senior management• Brexit
Brexit
2018 Reinsurance Market Briefing, Monte Carlo September 9, 201837
Brexit Plans
2018 Reinsurance Market Briefing, Monte Carlo September 9, 201838
Brexit
2018 Reinsurance Market Briefing, Monte Carlo September 9, 201839
Major considerations for choice of domicile– tax regime– approach and expertise of
regulator– proximity to clients– access to talent– Location of existing
subsidiaries
– more insurers exploring Part VII transfers of existing EU businessto newly-created subsidiaries
Brexit
2018 Reinsurance Market Briefing, Monte Carlo September 9, 201840
London likely to remain one of the world’s leading insurance centres in Europe
Segment Outlook – Global Reinsurance
41 September 9, 20182018 Reinsurance Market Briefing, Monte Carlo
Headwinds TailwindsIntense competition Cession rates increasingIncreasing interest from third-party capital
Cat losses temporarily stabilise rates
Earnings stabilise but remain under pressure
Favourable reserve development,but waning
Excess capacity hinders further improvement
Strong risk-adjusted capital
Potential for increased inflation Increase in interest ratesM&A
Although capitalisation remains strong and rate deterioration temporarily halted, pressure on margins continues. Over the intermediate term, returns for some reinsurers will fall short on a risk-adjusted basis. Maintain negative market outlook.
Q & A
September 9, 20182018 Reinsurance Market Briefing, Monte Carlo 42
2018 Insurance Market Briefing – Europe& Methodology Review Seminar
10 September 20172017 Reinsurance Market Briefing, Monte Carlo 43
Tuesday 6 November, 2018:2018 Insurance Market Briefing – Europe08:30 – 13:00 GMT, followed by lunchMethodology Review Seminar14:00 – 16:00 GMT
etc. venues St Paul's, London200 Aldersgate, London, EC1A 4HD
EMEA Market Overview ● Reinsurance ●Environmental, Social, and Governance ●Technology in Insurance Panel
Notable Developments since last year’s Best's Credit Rating Methodology Update ● BCRM –Key Changes, Impacts and Expectations ● Mock Rating Committee
There is no cost to attend the Briefing or Seminar, but registration is required as space is limited.