fitch ratings: 2018 global reinsurance outlook

Fitch Ratings: 2018 Global Reinsurance OutlookGraham Coutts, Director, Insurance, Fitch Ratings

Harish Gohil, Managing Director, Insurance, Fitch Ratings

26 September 2017

26 September 2017

Agenda

Operating Environment

Focus on European Market

Focus on Bermuda Market

Alternative Capital

Sector and Rating Outlooks

• Operating Profits Under Pressure

• Rate Declines Continue

• Alternative Capital Capacity Growing

• Market Conditions Remain Conducive to M&A Activity

Key Themes

Hurricane Harvey, Irma & Maria

• Types of Losses

• Main Exposures

• Factors Affecting Potential Losses

• Early Indications

• Impact on Pricing

26 September 2017 4

Natural Catastrophe Losses

0

20

40

60

80

100

120

140

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(USDbn) Natural disasters Man-made disasters Average loss

Source: Swiss Re Sigma

Annual Catastrophe Losses

0

10

20

30

40

1H16 1H17

(USDbn) Natural disasters Man-made disasters Average loss

Source: Swiss Re Sigma

Half Year Catastrophe Losses

Rate Reductions Continue

-10 -5 0 5 10

U.S.casualtynon-lossaffected

Europeanproperty

catastrophe

U.S.propertynon-lossaffected

U.S.property

lossaffected

Source: Company and broker reports

(%)

Premium rate development

Renewal SeasonJanuary 2017

-10 -5 0 5 10

Japancasualtyno loss

emergence

Japanpropertynon-lossaffected

Non-lossaffected

U.S.property

lossaffected


(%)


Renewal SeasonApril 2017


-15 -10 -5 0 5 10

Casualtyexcess of

loss no lossemergence

Floridapropertynon-lossaffected

U.S.propertynon-lossaffected

U.S.property

lossaffected


(%)


Renewal SeasonJune/July 2017


Investment Returns Remain Low

-1

0

1

2

3

4

5

6

Ja

n 0

7

Ju

n 0

7

No

v 0

7

Apr

08

Sep

08

Feb

09

Ju

l 0

9

De

c 0

9

Ma

y 1

0

Oct

10

Ma

r 1

1

Aug

11

Ja

n 1

2

Ju

n 1

2

No

v 1

2

Apr

13

Sep

13

Feb

14

Ju

l 1

4

De

c 1

4

Ma

y 1

5

Oct

15

Ma

r 1

6

Aug

16

Ja

n 1

7

Ju

n 1

7

(%) UK USA Germany

Source: 10 year government bond yields

Low Yields Maintain Earnings Pressure/Attract External Capital

Focus on European Market

26 September 2017

European Reinsurers: 1H17 Reinsurance

Premium Written

0

2

4

6

8

10

12

Munich Re Swiss Re Hannnover Re SCOR

1H16 1H17

Source: Company reports, Fitch

Gross Written PremiumP&C Reinsurance

(EURbn)

0

2

4

6

8

10

12


1H16 1H17


Gross Written PremiumP&C Reinsurance

(EURbn)

0

1

2

3

4

5

6

7

8


1H16 1H17


Gross Written PremiumLife Reinsurance

(EURbn)

0

2

4

6

8

10

12

Munich Re Swiss Re HannnoverRe

SCOR

1H16 1H17



(EURbn)

0

2

4

6

8

10

12


1H16 1H17



(EURbn)

Rate Declines Continue to Moderate

-6

-5

-4

-3

-2

-1

0

1

2

3

Hannover Re Munich Re SCOR Swiss Re

2013 2014 2015 2016 2017

Source: Company disclosure

Overall Portfolio Price MovementsSoftening trend continues but viewed as manageable

(%)

Normalised Combined Ratios

90.4 91.1 90.6 90.294.0

95.7

94.395.2

96.698.5

99.5 99.5

70

80

90

100

110

2012 2013 2014 2015 2016 1H17

Average reported Average normalised

Note: Average for Hannover Re, Munich Re, SCOR and Swiss Re

Source: Company reports, FitchʻNormalisedʼ for variances from reinsurers’ budgeted totals, for both major losses and prior-year reserve development

Major European ReinsurersReported vs. normalised combined ratio

(%)

Individual Reinsurers

92 9390

96 96

83 8486

9497

95 95 94 9497

9491 91

93 94

94

99 99100

101

94 94

100 100 10099 99

100

104103

94 94

96

9495

80

90

100

110

2013 2014 2015 2016 1H17 2013 2014 2015 2016 1H17 2013 2014 2015 2016 1H17 2013 2014 2015 2016 1H17

Munich Re Swiss Re Hannover Re SCOR

(%) Reported Normalised


Major European ReinsurersReported vs. Fitch normalised P&C combined ratio

Reinsurers Remain Well Capitalised

302

223 221 211

267

223 230 225

0

50

100

150

200

250

300

350

Munich Re Swiss Reª Hannover Re SCOR

2015 2016

a 223% represents coverage under Swiss Solvency Test, the regime that Swiss Re operates under

Source: Fitch, Companies’ annual reports

Regulatory Solvency Ratio

(%) Target range

Focus on Bermuda Market

26 September 2017

Bermuda Performance

2

4

6

8

10

12

14

80

85

90

95

100

105

2012 2013 2014 2015 2016 1H17

ROE (RHS) CY combined ratio (LHS) AY combined ratio (LHS) AY combined ratio ex. cats (LHS)

Source: SNL Financial, company reports

(%) (%)

Bermuda (Re)insurers Financial Performance

Bermuda Performance

45

50

55

60

-10

-5

0

5

10

15

2012 2013 2014 2015 2016 1H17

Reins. NPW % of total NPW (RHS) Total NPW growth (LHS) Reinsurance NPW (non-life) growth (LHS)

Source: SNL Financial, company reports

(%) (%)

Bermuda (Re)insurers Growth in Net Premiums Written

Bermuda Market Long-Run Performance

79

82 82 81

83 82 82

85

89 89

95

98

100 100 101

99 98 98

97 97

85

89 89 89

91 90 90

91

93 93

78

82

86

90

94

98

102

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Reinsurance Insurance Total

CR SDTotal 90.2 2.2

Reins. 83.6 3.1Ins. 98.1 1.8

Note: GAAP. Aggregate results for 15 Bermuda-based (re)insurers


AY Combined Ratio ex. Cats

Bermuda Market Long-Run Performance

67

75 74

75

78 78 80

82

85

85

62

67

72

77

82

87

92

97

102

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Operating Ratio

Operating ratio AY operating ratio excluding cats

OR SDOper. ratio 78.6 10.1

AY OR x cats 78.4 5.6

Note: GAAP. Aggregate results for 15 Bermuda-based (re)insurers


Alternative Capital Update

26 September 2017

Alternative Capital Deployment

Source: Aon Benfield Analytics

Catastrophe Bond Issuance

3.75.0

8.4

14.1

11.8 12.3 12.4 12.7

15.2

18.7

22.9 22.5 22.8

24.7

1.12.1

4.6

7.2

2.73.4

4.8 4.3

5.97.1

8.0

6.2 6.1

8.0

0

5

10

15

20

25

30

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1H17

Outstanding Issued

Source: Artemis catastrophe bond & ILS market dashboard

Record IssuanceCatastrophe bonds & ILS risk capital

(USDbn)

Sector and Rating Outlooks

26 September 2017

• Operating Profits Under Pressure

1. ROE falling

2. Normalised combined ratios deteriorating

• Rate Declines Continue

1. Pricing declines appear to be slowing

2. Pricing floor does not appear to have been reached

• Alternative Capital Capacity Growing

1. Record catastrophe bond issuance

2. Increasing use of collateralised reinsurance solutions

• Market Conditions Remain Conducive to M&A Activity

1. M&A likely to resume in the near term as companies consider strategic options to combat market stress

Sector Outlook Negative

Rating Outlooks Stable

Current Rating Outlook/Watch

Lloyd’s of London Negative Outlook

Mapfre SA Positive Outlook

MutRe Positive Watch

QBE Reinsurance Positive Outlook

Source: Fitch, Ratings as at 16 August 2017

2016 Rating Outlook/Watch

Amlin AG Negative Outlook

Arch Capital Group Ltd. Negative Watch

W.R. Berkley Corporation Negative Watch

Source: Fitch, Ratings as at 23 November 2016

0%

20%

40%

60%

80%

100%

2016 (%) Current (%)

Positive Watch Stable Negative/RWN

Source: Fitch

Rating Outlooks

• 1. Deterioration in Sector Profitability, Even If Capital Remains Strong

� Medium-term calendar year combined ratios or operating ratios exceed 100% and 90%, respectively (2018 forecast is 96.9% and 89.9%)

• 2. Catastrophic Loss With Interest Rate Spike

� Catastrophic loss in excess of USD70bn coupled with significant unrealised investment

losses from an abrupt jump in interest rates, of 300bp or more leaving balance sheets temporarily more exposed to adverse events

• Where are Negative Rating Actions Most Likely?

� Individual negative rating actions are possible if a raised calendar-year combined ratio or operating ratio indicated a significant impairment in a company’s financial condition

What Could Change The Rating Outlook

fitch ratings: 2018 global reinsurance outlook

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