Contents

Executive Summary 1

Global Reinsurer Capital: Traditional Sector Drives First Half Rebound 2

Traditional capital 2

Alternative capital 4

Demand Remains Stable with Moderate Signs Towards Higher Demand in Casualty 6

U.S. Reinsurance Premium Ceded Remains Stable 6

U.S. Primary Rate Changes Continue to Strengthen 7

Natural Peril Losses Remain Quiet as Historical Q3/Q4 Peak for Losses Loom 8

What Does the Data Say? 9

Global Disaster-Related Insurance Payouts vs Total Premium 9

U.S. Severe Convective Storm 10

2019 California Wildfire Risk 11

Forecasters: 2019 Atlantic Hurricane Season Likely “Normal” 12

Rating Agency and Regulatory Updates 13

Contact Information 14

Aon 1

Executive Summary As hurricane Dorian shifted away from landfall in Florida, the insurance and reinsurance markets escaped losses in what remains the peak region in the globe for insured property catastrophe risk. It was just 27 years ago that Hurricane Andrew caused devastating damage in the state.

While population and exposure growth continue in the region, global reinsurance capital has returned to a peak position at USD610 billion driven by increases in traditional reinsurance capital as alternative capital remains flat for the period. In total capital has grown 4 percent since year end 2018.

Despite some adverse development in catastrophe losses, a positive investment environment has resulted in traditional capital increasing to USD517 billion, or more than USD29 billion and 6 percent to end Q2 2019.

While alternative capital continues to remain flat compared to Q1 2019 and significant capital remains trapped because of prior losses, new capital continues to flow into the industry for a continued widening range of exposures. Catastrophe bonds, though down in issuance, remain near peak total outstanding capacity.

Catastrophic losses year to date for 2019 are again below a 10-year average for the same period. The losses to date are certainly no predictor of full-year totals ─ in 2017 and 2018, despite lower-than-average losses in the first half, full year losses were well above average. Overall, the industry has seen insured catastrophe losses of USD27 billion in the aggregate with five losses exceeding USD1 billion in insured property catastrophe loss.

As we look to January renewals, we expect demand to remain stable with slight increases anticipated in casualty lines as primary rates continue to increase, new potential loss exposures continue to be a topic of discussion, and reserve positions reach a tipping point for some insurers.

Atlantic hurricane forecasts for the season from all three major groups (National Oceanic and Atmospheric Administration, Colorado State University, and Tropical Storm Risk) continue to be at or slightly above normal levels.

2 Reinsurance Market Outlook

Global Reinsurer Capital: Traditional Sector Drives First Half Rebound Aon estimates that global reinsurer capital rose by 4 percent to USD610 billion over the six months to June 30, 2019. This calculation is a broad measure of the capital available for insurers to trade risk with.

Traditional equity capital rose by 6 percent, or USD29 billion, to USD517 billion, driven principally by strong earnings. Assets under management in the alternative capital sector fell by 4 percent, or USD4 billion, to USD93 billion, driven by the payment of losses and investor redemptions.

Exhibit 1: Change in Global Reinsurer Capital

Sources: Company financial statements, Aon Business Intelligence, Aon Securities Inc.

Traditional capital Reinsurer operating performance was strong in the first half of 2019. Insured natural catastrophe losses were below long-term averages, the most significant ‘event’ being adverse development of reserves held for losses occurring late in 2018 (notably Typhoon Jebi). In addition, it was an unusually favorable period for investing:

Stock markets rebounded strongly from the lows seen in December

Ordinary yields benefited from the recent rise in interest rates in the U.S. and UK markets

Bond yields went into reverse in all major markets, resulting in unrealized gains on fixed-income securities

17 22 19 22 24 28 44 50 64 72 81 89 97 93

368 388321

378447 428

461490

511 493514 516 488 5176%

-17% 18%

18%-3%

11%7%

6% -2% 5% 2% -3% 4%

385410

340

400

470 455505

540575 565

595 605 585 610

0

100

200

300

400

500

600

700

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1H2019

Alternative capital Traditional capital Global reinsurer capital

Aon 3

The period was also notable for a significant weakening of the outlook for economic growth, driven by trade disputes and rising geo-political tensions. Fears of recession have prompted moves towards renewed monetary easing and downward pressure on central bank rates, dashing hopes that the recent improvement in ordinary investment yields will be maintained.

Aon’s Reinsurance Aggregate (‘the ARA’) posted a net combined ratio of 96.2 percent for the six months to June 30, 2019, as shown in Exhibit 2. The ordinary investment yield ticked up to 2.9 percent, with unrealized gains providing significant additional support to overall returns. As a result, the annualized return on average common shareholders’ equity jumped to 13.7 percent.

Company valuations are currently at the highest level seen since the financial crisis, partly reflecting modest improvement in the underwriting environment and continued speculation around future M&A activity. In addition, strong solvency ratios and solid dividends are appreciated defensive characteristics in a deteriorating macroeconomic environment.

Exhibit 2: Reinsurance Sector Performance*

Sources: Company financial statements, Aon Business Intelligence *Based on Aon’s Reinsurance Aggregate

0%

1%

2%

3%

4%

5%

2008 2010 2012 2014 2016 2018

Ordinary Investment Return

70%

80%

90%

100%

110%

120%

2008 2010 2012 2014 2016 2018

Combined Ratio

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

2008 2010 2012 2014 2016 2018

Valuation - Price to Book

0%

4%

8%

12%

16%

2008 2010 2012 2014 2016 2018

Return on Equity

4 Reinsurance Market Outlook

Alternative capital Headline assets under management in the alternative capital sector are estimated to have contracted by around USD4 billion in the first quarter of 2019, before stabilizing in the second quarter. The total of USD93 billion at June 30, 2019 is shown gross of an estimated USD15 billion of collateral still trapped on contracts impacted by losses from recent natural catastrophe events.

Inflows of new capital have continued, but at a slower rate, reflecting investor concerns around climate change, model credibility, loss reporting and collateral management. New commitments have tended to favor larger ILS fund managers with strong long-term track records of successful capital deployment. In short, alternative capital has become more discerning and is generally seeking higher returns.

Enhancements in model clarity and refinements in contract language are expected to result in the resumption of growth on a more sustainable basis, once recent losses have been fully digested. Many long-term investors have made good returns over time and the strategy of investing in insurance risk for diversification purposes in a low interest rate environment remains valid, as confirmed by the January 2019 announcement that leading fixed-income investment manager PIMCO was entering the ILS business.

Exhibit 3: Alternative Capital Deployment

Source: Aon Securities Inc.

0

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1H2019

Lim

it (U

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Bn)

Cat Bonds Sidecars ILWs Collateralized Re

Aon 5

Focusing on the most transparent area of the alternative market, issuance of Rule 144A property catastrophe bonds in the first half of 2019 were well down on the volumes seen in the two prior years, at USD3.1 billion. However, total limit outstanding remains at a near record high of more than USD30 billion. Taking life, mortgage and private deals into account, the total is around 25 percent higher.

Exhibit 4: Rule 144A Property Catastrophe Bond Issuance

Source: Aon Securities Inc.

500 716 575 300 1,015 1,343 520 1,210 1,494 2,215 2,1703,580

1,350

3,9551,794

810 2,300 5922,095 3,303

4,4922,702 800

6,378 4,029

1,690

1,356

320411

232674

5291,441

250

650925

7801,550

2,048

1,6002,018

1,990

1,888

1,8772,075

1,4251,850

1,353535

7,859

2,8303,396

4,8504,271

5,8557,141

8,027

6,271 5,790

10,6819,694

3,040

0

2,000

4,000

6,000

8,000

10,000

12,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

USD millions Q1 Q2 Q3 Q4

6 Reinsurance Market Outlook

Demand Remains Stable with Moderate Signs Towards Higher Demand in Casualty Overall demand is expected to remain stable for property catastrophe in the aggregate globally with any increases driven by exposure trends or losses in local regions. Specialty casualty areas like cyber continue to see growth as the market continues to evolve and have better analytics to evaluate risk levels.

U.S. Reinsurance Premium Ceded Remains Stable When looking at U.S. premium transferred, it’s noted that major sectors except specialty casualty have had slight upticks in ceded premium as a percent of gross written premium (circa 0.7%), whereas specialty casualty cessions have more greatly outpaced premium increases at 2.5%.

Exhibit 5: U.S. ceded premium to non-affiliates as a percentage of Gross Written Premium ex assumed affiliates

Source: Aon’s Reinsurance Solutions, SNL

0%

2%

4%

6%

8%

10%

12%

14%

16%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Property Casualty Property & Casualty Specialty

Aon 7

U.S. Primary Rate Changes Continue to Strengthen According to the Council of Insurance Agents and Brokers, U.S. primary rates have continued their positive movement throughout Q2 with the weighted average in commercial property, general liability, umbrella, and workers’ compensation moving to 8.9%, 3.6%, 6.5%, and -2.8% compared to 6.1%, 2.1%, 3.5%, and -3.5% in Q1 respectively. Only commercial auto reduced slightly in average to 8.9% from 9.2% albeit still achieving higher rate increases over the last few quarters than had been achieved since 2003. While rate increases continue for original insurance business, exposures for casualty lines are increasing as well, including victims' rights legal changes, litigation financing, and general social inflation, to name a few. This, coupled with the current reserve position of the casualty industry will likely mean that some insurers that elected to retain more casualty risk over the past few years will likely re-evaluate purchasing as part of the changing market dynamics. We saw this trend emerge in 2018 and have seen it strengthen in 2019.

Exhibit 6: U.S. primary pricing trend

Source: Council of Insurance Agents and Brokers

In Europe, existing reinsurance buyers are occasionally buying lower attachment points and insurers who were formally not buyers of casualty reinsurance are coming back to the market, with a strong focus on earnings protection. Prior year loss emergence is slowly but surely starting to rear.

50.0%

70.0%

90.0%

110.0%

130.0%

150.0%

170.0%

190.0%

210.0%

230.0%

250.0%

20002001200220032004200520062007200820092010201120122013201420152016201720182019

Commercial Auto Commercial Property General Liability Umbrella Workers' Comp

8 Reinsurance Market Outlook

Natural Peril Losses Remain Quiet as Historical Q3/Q4 Peak for Losses Loom The combination of a series of notable natural catastrophe events in June, July, and August and the continued evolution of loss estimates from Q1/Q2 2019 events has allowed private and public insurance entity payouts to increase as Q3 moves forward. Insured losses have risen to at least USD27 billion. Given this current trend, claims payouts from natural disasters are on pace to be much lower than what was incurred in 2017 and 2018. As an interesting anecdote, prior to August 25, year-to-date industry losses in 2017 (USD25 billion) and 2018 (USD29 billion) were also projected to be below normal before experiencing several large and costly events that significantly accelerated industry payouts. The third and fourth quarters have historically featured notable landfalling tropical cyclones in the United States and Asia, and more recently, costly wildfire events in California.

Exhibit 7: Global Insured Losses by Peril

Source: Aon’s Reinsurance Solutions; Cat Insight

Through the first eight months of 2019, the severe convective storm (SCS) peril – USD16 billion – remains the costliest globally and accounts for 60 percent of insured losses. Most of those losses were incurred in the United States following an active late spring and summer for tornadoes, large hail, and damaging straight-line winds. SCS losses for U.S. insurers have topped USD10 billion in every year since 2008; with 2019 marking the 12th consecutive year.

Through the middle of Q3 2018, there were at least five events which topped USD1 billion, of which four occurred in the U.S. – three severe weather-related and one due to spring flooding. The fifth was Windstorm Eberhard which affected Western and Central Europe in March.

This preliminary data comes via Aon’s Catastrophe Insight group, which is part of Impact Forecasting. To view the most up-to-date catastrophe loss data, please visit: http://catastropheinsight.aon.com

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180

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019YTD

10-YearAvg.

10-YearMedian

US

D B

n (2

019)

Tropical Cyclone Severe Weather Flooding Earthquake Winter WeatherWildfire EU Windstorm Drought Other

Aon 9

What Does the Data Say? Global Disaster-Related Insurance Payouts vs Total Premium Heightened global insurance industry payouts have been a point of focus following high cost years in 2017 and 2018. While the United States has typically driven most of the annual industry payouts given its market dominance in gross premium (non-life and life), there has been an increased rate of insurance take-up in many emerging markets across parts of Asia, Europe, and Latin America.

The question then becomes whether the rate of increase of global gross insurance premium is growing faster than the nominal global insured losses. When analyzing data from 1980 to 2018, it is determined that global premium has grown at an annual rate of 6.6 percent; while nominal insured losses from natural disasters has grown at an annual rate of 9.7 percent. The annual rate of overall growth when analyzing nominal loss as a percentage of global premium has positively trended upwards by 2.9 percent. This indicates that the insured costs associated with natural perils are occurring faster than the volume of new insurance premium that is flowing into the market.

Exhibit 8: Global Nominal Insured Loss as a Percentage of Global Direct Written Premium

Source: Aon’s Reinsurance Solutions; Cat Insight; Swiss Re

The three costliest years on record for the insurance industry – 2005, 2011, 2017 – are notable outliers when conducting this analysis. However, the top five years since 1980 have all occurred since 2005: 2005 (3.08 percent), 2017 (2.97 percent), 2011 (2.93 percent), 2018 (1.85 percent), and 2012 (1.63 percent). This further suggests that natural catastrophe losses are increasing.

As mentioned in previous Reinsurance Market Outlook documents, despite the high cost to insurers in recent years, the re/insurance industry remains flush with available capital to withstand the increasing trend of catastrophe losses.

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

1980

1981

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% Global Written Premium

10 Reinsurance Market Outlook

U.S. Severe Convective Storm Tropical cyclones typically get the majority of focus in the United States given the high financial toll that landfalling events can incur. On average, the costliest insured losses from individual hurricanes can exceed USD10 billion – such as hurricanes Katrina, Sandy, Irma, Andrew, and Ike. While tropical cyclones remain the costliest peril for the insurance industry in the United States, the gap between the peril and number two on the list, the severe convective storm (SCS) peril, is not as significant as one might generally assume. Since 1990, tropical cyclones have triggered USD366 billion in payouts. Severe convective storms have resulted in USD304 billion in payouts.

Exhibit 9: Five-Year Aggregate of U.S. Insured Losses – Tropical Cyclone & SCS

Source: Aon’s Reinsurance Solutions; Cat Insight

When breaking down the aggregate data into five-year increments since 1990, it is quickly seen that outside of a record volume of mainland U.S. hurricane losses from 2005-2009, the SCS peril is very close – and in some instances costlier – than tropical cyclone. In fact, in the last decade (2009-2018), SCS has resulted in USD173 billion in U.S. insured losses and tropical cyclone a lesser USD126 billion. This highlights the annual consistency in which SCS leads to elevated losses; largely driven by hailstorms that annually account for 50 to 80 percent of thunderstorm-related claims. These losses include damage to residential, commercial, automobile, and agricultural assets.

States which have seen the highest numbers of large hail reports (2 inches or larger), based on data from NOAA’s Storm Prediction Center, include Texas, Kansas, Oklahoma, Nebraska, South Dakota, Colorado, and Wyoming. These are areas that are most prone to atmospheric conditions highly conducive for thunderstorms capable of spawning major hail events; especially in major metro areas such as Dallas / Fort Worth, Texas; Denver, Colorado; Wichita, Kansas; and Oklahoma City, Oklahoma.

0

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1990-1994 1995-1999 2000-2004 2005-2009 2010-2014 2015-2018

US

D B

n (2

019)

U.S. Severe Convective Storm U.S. Tropical Cyclone

Aon 11

2019 California Wildfire Risk Following the past two years of record wildfire damage and resultant financial losses in California, there remains heightened interest in whether 2019 will feature a third consecutive year of major activity. To this point, wildfire activity in the United States (except for Alaska) has been reduced following a much wetter winter and spring across much of the country. This has thus far resulted in lessened fire activity, including in California, as soil moisture levels remain notably saturated. The near-term forecast for September 2019 from the National Interagency Fire Center does call for an above-average risk of wildfire activity. While it is not possible to predict what the 2019 wildfire season will bring, data suggests that fire seasons are now extended in part due to an evolving climate.

A worthwhile point about wildfires is that regardless of how dangerous or unfavorable that soil, brush, or atmospheric conditions may be, the most critical component surrounds the ignition. Where and when fire ignition occurs is arguably the most important component in dealing with the peril. If weather, soil, and brush conditions are either extremely dry, warm, and involve a highly elevated energy release component (ERC), then this combined with ignition can greatly enhance the wildfire danger. Combine those factors with an expanding population and exposure footprint into known fire locations in the wildland urban interface (WUI) and intermix, that further grows the damage and human casualty risk.

In addition to the wildfire flames themselves, one of the biggest concerns for rapid fire spread involves flying embers. These embers have led to rapid expansion of wildfire footprints in fires seen in California, Texas, and Colorado during the past decade. Dave Shew – a 32-year veteran firefighter with CAL FIRE – recently noted at Aon’s 2019 Analytics Insights Conference: “Wildfires won't go away; they'll never go away. They're always going to be here. But we have to learn how to live more resiliently within that wildfire environment. We can learn to make homes and structures more resilient and try to resist the embers that we know are the primary cause of ignitions of structures. Roughly 80 to 90 percent of every structure burned today ignites because of embers.”

12 Reinsurance Market Outlook

Forecasters: 2019 Atlantic Hurricane Season Likely “Normal” The three main hurricane season prognosticators (National Oceanic and Atmospheric Administration (NOAA), Colorado State University (CSU) and Tropical Storm Risk (TSR)) have all forecast either near normal or slightly above normal hurricane activity for the rest of the 2019 Atlantic Hurricane Season. Each agency cites that while the recent El Niño has officially transitioned to ENSO-neutral conditions in the Central and Eastern Pacific Ocean, there remain some mixed atmospheric and oceanic signals in the main development region of the Tropical Atlantic Ocean. These competing signals include more trade winds (wind shear) and warmer sea surface temperatures.

Regardless, overall conditions should be favorable enough for cyclogenesis to occur in the Caribbean Sea and the Tropical Atlantic Ocean during the peak months of the season: August, September, October. Climatology indicates that roughly 67 percent (two-thirds) of Atlantic Hurricane activity occurs after August 20.

As always, it only takes one landfalling storm to entirely alter the perception of a season from a financial loss perspective – regardless of how meteorologically active or inactive a year may be.

Named Storms Hurricanes Major Hurricanes TSR (August 2019) 2009-2018 Average 14 7 3 2019 13 6 2 CSU (August 2019) 1981-2010 Average 12 6 3 2019 14 7 2 NOAA (August 2019) 1981-2010 Average 12 6 3 2019 10-17 5-9 2-4

Sources: Tropical Storm Risk (TSR), Colorado State University (CSU), NOAA

Aon 13

Rating Agency and Regulatory Updates AM Best – Scoring and Assessing Innovation In spring of 2019, AM Best released a Request for Comment (RFC) proposal on scoring and assessing innovation for all rated companies. In the proposed criteria, AM Best discusses the importance of insurers being innovative and the relationship between the company’s ability to innovate and their long-term performance and financial strength. The criteria proposal highlights that innovation can come in many forms and that new or improved products, processes, services, or business models should have measurable impact. The score will consist of two components: innovation inputs and innovation outputs. Innovation inputs refer to the varying components of the innovation process while the innovation outputs help measure the impact of the innovation effort for the company.

A.M. Best does not think it is likely that this criterion will change insurers’ ratings when implemented, as innovation was already previously considered in the overall rating process. AM Best anticipates another comment period in the fall which will include any revisions from the first public comment period and the updated BCRM will clarify how innovation fits into the business profile component of each insurer’s rating.

AM Best – Catastrophe Concentration Survey A.M. Best is considering adding a new section to next year’s Supplemental Ratings Questionnaire (SRQ) to better understand insurer’s exposure aggregations. Selected companies have been asked to fill out a survey detailing their top 20 counties, number of risks in each, Total Insured Value (TIV), primary peril and TIV by country as a ratio to total TIV and surplus.

Insurance Business Transfers & Division Statutes U.S. insurance companies have been limited with strategies and mechanisms for managing legacy liabilities on their balance sheets. Recent legislation passed in a few states (and with more considering) has substantially expanded a U.S. insurer’s capability to manage these risks. Modeled after the U.K’s Part VII transfers, Divisions Statutes (Division) and Insurance Business Transfers (IBT) enable an insurance company to divide or transfer books of business into a different entity. This legislation grants companies domiciled in states that have approved this measure the ability to permanently remove liabilities from their balance sheet through a court ordered novation. If the proportion of transferred/divided assets is reasonable and the transaction does not conflict with policyholder interests or solvency, an insurance company can consider and IBT or Division.

U.S. Risk Based Capital (RBC) Model Changes: Two changes to the RBC calculation impacted P&C companies year-end 2018 filings:

The NAIC adopted new credit risk charges based on each reinsurer’s financial strength rating. Prior to this change, all reinsurance recoverables received a flat 10% charge. All reinsurance credit risk charges are lower than the prior 10% except for NAIC class 6 uncollateralized recoverables. This change led to minor increases in RBC results, with more impact to insurers that heavily utilize reinsurance.

The NAIC implemented a 3% operational risk charge with the goal is to quantify the risk of financial loss resulting from operation events, such as the inadequacy or failure of internal systems, personnel, procedures or controls, as well as external events. The impact for P&C and health insurers is a 3% reduction in RBC. Therefore, a 300% ratio becomes 291% after accounting for operational risk.

14 Reinsurance Market Outlook

Contact Information Tracy Hatlestad Executive Managing Director Reinsurance Solutions, Aon +1 952 886 8069 tracy.hatlestad@aon.com Greg Heerde Head of Analytics & Inpoint, Americas Reinsurance Solutions, Aon +1 312 381 5364 greg.heerde@aon.com Kelly Superczynski Head of Capital Advisory Reinsurance Solutions, Aon +44 0(20) 7086 2175 kelly.superczynski@aon.com Gero Michel Head of Analytics, UK & EMEA Reinsurance Solutions, Aon +44 0(20)7086 1726 gero.michel@aon.com

Peter Cheesman Head of Analytics, APAC Reinsurance Solutions, Aon +61 2 9650 0462 peter.cheesman@aon.com Mike Van Slooten Head of Business Intelligence, International Reinsurance Solutions, Aon +44 0(20) 7522 8106 mike.vanslooten@aon.com Marie Teissier Business Intelligence, International Reinsurance Solutions, Aon +44 0(20) 7522 3951 marie.teissier@aon.com

Aon 15