2013 Insurance Market Briefing - Europe...2013 Insurance Market Briefing - Europe 17 October 2013 16 • Property has returned underwriting profits in four out of five years • Liability

Grange St. Paul’s Hotel, London

17 October 2013

2013 Insurance Market Briefing - Europe

Disclaimer

2013 Insurance Market Briefing - Europe 17 October 2013 2

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Agenda


EMEA Market Overview European Market Outlook: United Kingdom (Non-Life & London Market), Germany, France, Italy, Spain

Reinsurance Panel

Thematic Session: Emerging Markets v Developed Markets – Macro Trends

Thematic Session: Global Insurers’ Expansion into Emerging Markets – Contrasting Differing Strategies

Click on the titles to go direct to the presentations

EMEA market overview


Stefan Holzberger Managing Director, Analytics

A.M. Best Europe – Rating Services Ltd

Click here to return to the Agenda

1% 1% 4%

10%

20% 24%

10% 10% 14%

2% 2% 0% 0% 1%

aa+ aa aa- a+ a a- bbb+ bbb bbb- bb+ bb bb- b+ b

Rating distribution as at 31 July, 2013

EMEA


• Key Market Characteristics – Positive ratings trend overall – Strengthened balance sheets in Western

Europe

– Robust capital in MENA but socio-

economic challenges – Eastern Europe markets influenced by

Western multi-national (re)insurers

MENA W Europe E Europe

EMEA


• Review – Stable ratings environment – Strong competition in all markets – New ratings in MENA and Eastern Europe

75%

5%

6%

14%

Rating Actions

Affirm

Upgrade

Downgrade

Initial

79%

6%

15%

Outlook Summary

Stable

Positive

Negative

• Preview – Economic and investment uncertainty – Balance sheets strong with companies

seeking growth – Good underwriting discipline

• Catastrophe losses will drive performance

Western Europe


• Key Market Characteristics – Companies increasing capital cushion

against further economic shocks – Reduced exposure to Eurozone sovereign

debt and increased liquidity

– Opportunistic refinancing of debt in low

interest rate environment – Modest shift to the left as eurozone

tensions subside

2% 2%

8%

20%

32% 31%

3% 2% 2% 2% 2%

8%

14%

36%

25%

9%

3% 1%

aa+ aa aa- a+ a a- bbb+ bbb bbb-

Rating distribution as at 31 July 2013 Rating distribution as at 31 July 2012

Western Europe


• Review – Majority of ratings stable – No downgrades – Increase in upgrades due to improved

performance and capital – Companies better placed to handle future

Eurozone stresses

78%

10%

12%

Rating Actions

Affirm

Upgrade

Downgrade

Initial

75%

8%

17%

Outlook Summary Stable

Positive

Negative

• Preview – Negative rating outlooks reflect on-going

macro-economic difficulties – Companies in Southern European countries

posting strong results

Middle East & North Africa


• Key Market Characteristics – Stable ratings – Strong balance sheets (risk adjusted)

despite high investment risk – No financial leverage

– Good technical performance – Top players consolidating their

positions

0%

12% 15%

24% 24% 22%

0% 2%

0%

9%

26% 26% 22%

17%

0% 0%

a+ a a- bbb+ bbb bbb- bb+ b

Rating distribution as at 31 July, 2013 Rating distribution as at 31 July, 2012

Middle East & North Africa


• Review – Premium growth slowing in region – High levels of competition – Regional expansion by leading

companies

72%

13%

15%

Rating Actions

AffirmUpgradeDowngradeInitial

80%

5%

15%

Outlook Summary

Stable

Positive

Negative

• Preview – Ongoing socio-economic and political

problems – Weak regulation – Risk management improving but still very

basic

Eastern Europe


• Key Market Characteristics – Poland, Czech Republic and Slovakia

success story – Hungary, Slovenia, Romania and

Croatia hard hit by financial crisis

– Active foreign participation

• Reflected in a- ratings – Shift from bb+ (vulnerable) to

bbb- (secure)

0%

29%

7%

14%

36%

7% 7%

0% 0%

8%

15%

23%

38%

15%

0% 0%

a a- bbb+ bbb bbb- bb+ bb bb-

Rating distribution as at 31 July, 2013 Rating distribution as at 31 July, 2012

Eastern Europe


• Review – Downgrades reflect volatile market

conditions – Motor is the dominant line and remains

unprofitable in many markets – Strong ratings demand as market leaders

seek to differentiate

60%

13%

27%

Rating Actions

Affirm

Upgrade

Downgrade

Initial

86% 7%

7%

Outlook Summary

Stable

Positive

Negative

• Preview – Western insurers seeking entry or growth in

these markets – Consolidation opportunities – Some markets still led by state controlled

insurers

United Kingdom Non-Life and London Market


Mathilde Jakobsen Senior Financial Analyst A.M. Best Europe – Rating Services Ltd


UK Non-Life: Current state of the market


• Underwriting profit margins thin, and under pressure

• Minimal weather-related losses in the UK so far for 2013

• Reserve releases expected to continue to contribute positively to earnings, but diminishing

• Weak economic conditions persist, reducing demand and increasing reserving uncertainty

• Investment income is low - and unrealised losses on bond portfolios seen in first half of 2013

Performance of the Top 100 Companies


Underwriting performance in 2012 comparable to 2011; results represent a big improvement over 2010

Data: GBP millions

Source: A.M. Best Co. based on FSA returns

Underwriting Result is before transfers to/from Equalisation Provision and includes allocated investment return

Capital and Surplus includes equalisation provisions

*Aviva Insurance Ltd's pre-tax profit for 2011 excludes the effect of impairment of investments in subsidiaries

2012 2011

Underwriting result 1,260 1,038

Pre-tax profit* 5,574 3,367

Capital and surplus 58,415 54,983

2010 2009

Underwriting result -551 283

Pre-tax profit 3,676 5,361

Capital and surplus 57,209 56,112

Data: GBP millions

Source: A.M. Best Co. based on FSA returns

As presented at IMB 2011

UK Non-Life: Overview of main lines of business


• Property has returned underwriting profits in four out of five years

• Liability and motor have returned underwriting profits in none of the last five years

Source: Best’s Statement File – United Kingdom

Data based on FSA returns for all firms reporting on a one-year underwriting basis

40%

60%

80%

100%

120%

2008 2009 2010 2011 2012

Cal

enda

r-ye

ar c

ombi

ned

ratio

Motor Property Liability

UK Property: Performance affected by weather


• Weather events, particularly flooding, have the potential to impact property loss ratios significantly

• Extensive flooding in 2007 pushed combined ratio to 117%

98.3% 93.6% 101.7% 97.3% 98.7%

2008 2009 2010 2011 2012

Cal

enda

r-ye

ar

com

bine

d ra

tio


UK Motor: Underwriting losses continue

2013 Insurance Market Briefing - Europe 17 October 2013 18 Source: Best’s Statement File – United Kingdom

105.6% 119.5% 118.8%

104.7% 106.6%

2008 2009 2010 2011 2012

Cal

enda

r-ye

ar

com

bine

d ra

tio

• Heavy underwriting losses in 2009 and 2010 driven by rising cost of third party injury and credit hire claims in particular

• Combined ratios at a more manageable level in 2011-2012, but line remains unprofitable

UK Motor: Stable reserves in 2011 and 2012


• Following reserve strengthening in 2009 and 2010, gross ultimate loss ratios stabilised in 2011 and 2012

• Suggests that reserving problems are now over – but uncertainty remains

75%

80%

85%

90%

95%

100%

105%

2007 2008 2009 2010 2011 2012

Gro

ss u

ltim

ate

loss

ratio

Development year

2007

2008

2009

2010

2011

2012


UK Liability: Still no sign of an improvement in underwriting


Liability characterised by high calendar-year and accident-year combined ratios

108.1% 104.7% 106.7% 108.6% 109.3%

2008 2009 2010 2011 2012

Cal

enda

r-ye

ar c

ombi

ned

ratio


London Market: Current state of the market


• Despite strong competition, pricing levels remain adequate overall

• Underwriting results expected to be solid in 2013 – subject to catastrophe experience in remainder of year

• Reserve releases expected to continue to boost calendar year performance

• Investment income is low – and unrealised losses on bond portfolios seen in first half of 2013

London Market: Catastrophe losses reduced in 2012


• Natural catastrophe losses in 2012 roughly in line with companies’ catastrophe budgets

• The year was benign compared to 2011, which was an exceptionally heavy catastrophe year for London market insurers and reinsurers

Company Pre-tax profit 2012, millions

2012 Net catastrophe losses,

millions**

2012 cats as a % of 2011 SHF

2011 cats as a % of 2010 SHF

Aspen Insurance Holdings Ltd USD 295 205 6% 16%

Beazley plc USD 251 90 8% 20%

Catlin Group Ltd USD 339 225 7% 20%

Hiscox Ltd GBP 217 90 7% 21%

Amlin plc GBP 264 152 11% 29%

Novae Group plc GBP 40 37 14% 24%

London Market Company Results*

*Listed companies which write a significant portion of their business in the London market ** Net catastrophe losses exclude losses from the grounding of Costa Concordia where possible Source: 2012 company report and accounts

Lloyd’s: Diminishing casualty releases


• Downward trend in casualty reserve releases evident for Lloyd’s

• But reserve releases are not reliant on casualty

Casualty combined ratios

Source: Lloyd’s annual reports

2012 2011 2010 2009 2008 2007 2006

Accident-year combined ratio 100.4 98.4 101.1 99.1 103.9 101.8 96.3

Prior-year reserve movement -4.8 -1.8 -4.5 -8.3 -8.8 -9.1 -7.3

Calendar-year combined ratio 95.6 96.6 96.6 90.8 95.1 92.7 89.0

Casualty 12%

Other lines 88%

Source: Lloyd’s annual reports

2012 reserve release by line of business

Conclusion


• UK non-life company market remains highly competitive with underwriting losses in key lines

• Better underwriting results achieved in the London Market in 2012, but performance subject to volatility from catastrophe losses

• Investment environment reducing returns in both markets – making underwriting profits even more important

German insurance market


Stefan Holzberger Managing Director, Analytics A.M. Best Europe – Rating Services Ltd

Germany: Market leaders


Company Gross Premiums Written (EURbn) Gross Combined Ratio (%)

2010 2011 2012 2010 2011 2012

1 Allianz Versicherungs-AG 8.94 8.91 9.07 104.2 105.4 97.7 2 AXA Versicherung AG 3.18 3.54 3.71 105.6 103.4 97.1

3 R+V Allgemeine Versicherung AG 2.72 3.02 3.16 105.5 102.3 104.6

4 HDI-Gerling Industrie Versicherung AG 2.53 2.72 3.06 100.3 109.8 101.4

5 Allianz Global Corporate & Specialty AG 2.41 2.73 3.02 90.5 97.2 92.0

6 ERGO Versicherung AG 2.64 2.71 2.72 95.3 94.4 96.5

7 LVM Landwirtschaftlicher Versicherungs 1.46 1.55 1.77 103.1 96.4 94.9

8 Generali Versicherung AG 1.62 1.60 1.71 97.7 96.7 95.9 9 R+V Versicherung AG 1.37 1.49 1.53 102.4 106.6 99.8

10 Wuerttembergische Versicherung AG 1.32 1.38 1.48 98.8 92.5 94.3 Source: BestLink – Global Statement File

Germany: Performance


• Motor rates improving in recent years but still loss making

• Private property produced modest technical profits

• Commercial lines under-priced – in some cases up to 20%

• General liability performing well – although increase in loss severity in 2013

Non-life combined ratios by line of business

Source: Gesamtverband der Deutschen Versicherungswirtschaft

40% 50% 60% 70% 80% 90% 100% 110%

Total

Legal Expense

Accident

Motor

General liability

Credit & Surety

Marine

Commercial property

Private Property

2009

2010

2011

2012

Germany: Interest rates


Secondary Market Yields of German 10 Year Government Bonds

• Investment income trending down

• Low interest rates a problem for life companies

− Average guarantees on in-force book roughly 3.3% versus Bund yields of 1.5% in June 2013

− Applies to roughly 80% of reserves backing with-profits (guaranteed) business

− Regulator requiring an additional reserve (Zinszusatzreserve)

Source: European Central Bank and European Commission

0

1

2

3

4

5

Germany: Current issues


Floods Health Market Solvency II

• 1:100 year event

• Similar magnitude to 2002 floods

• EUR 8.1 billion in economic damage, EUR 1.8 billion in insured losses

• Flood insurance not compulsory in Germany

• Expected to be an “earnings event”

• Social Democrat Party (SDP) proposed elimination of private health care

• Angela Merkel’s party, the Christian Democratic Union (CDU), remains in control

• Overhaul unlikely but would be a shock to the German health market

• Delay until 2016 – at the earliest!

• Potential partial roll-out of certain elements prior to full implementation

− ORSA

Germany: Final remarks


• Strong balance sheets – Characterised by conservative reserving

• Modest technical profits generated in recent years • ERM embraced by large multi-national companies

– Some small and mid-sized carriers less developed • Macro-environment a benefit to local carriers (a relative measure)

– Comparatively strong economy with modest growth • Pressure on earnings

– Stiff competition in all non-life lines – Low interest rates force reliance on underwriting earnings

• Trouble for life companies’ with-profits books of business

French insurance market


Mahesh Mistry Director, Analytics A.M. Best Europe – Rating Services Ltd

France: Competitive landscape


21.5

14.4

16.2

9.4

7.9

3.6

3.2

10.2

2.6

8.4

6.8

2.5

4.3

5.7

9.6

8.0

0.7

7.8

0.4

0 5 10 15 20 25

CNP Assurances

AXA

Groupe Crédit Agricole Assurances

Generali France

Allianz France

Covéa Insurance

Groupama Insurances

BNP Paribas Cardif

SFEREN

Société Générale Insurance

Insurance Premium (EURbn)

Life

Non-Life

Bancassurers 27%

Mutuals 24% Foreign Insurers 19%

Domestic Insurers 30%

Note: Groupe Crédit Agricole Assurances, Covéa Insurance, Allianz France, SFEREN, Société Générale Insurance results are based on French GAAP; AXA, CNP Assurances, BNP Paribas Cardif, Groupama Insurance and Generali France report under International Financial Reporting Standards. Source: Fédération Française des Sociétés d’Assurances and A.M. Best research

France Non-Life and Life - Premium Revenue (EUR) for 10 Largest Insurers (2012)

France: Market growth


0

50

100

150

200

250

2008 2009 2010 2011 2012 2013e

Prem

ium

Rev

enue

(EU

Rbn

)

France Premium Revenue 2012

Life & Health Non-Life Total

• Premium revenue exceeded EUR 200 billion in 2010

• Insurance market has contracted by approx. 13% between 2010 and 2012, with a reduction in life premiums

• H1 2013 has seen life premiums rebound by 8.8%, while non-life maintains modest growth

Source: Fédération Française Sociétés d'Assurances A M Best Research

France: Non-Life


100%

105% 104%

100% 101%

90%

95%

100%

105%

110%

2008 2009 2010 2011 2012

Com

bine

d R

atio

Non-Life Combined Ratios

Motor Household Market

• Technical margins for non-life remain under pressure

• Core segments (motor and household) underperforming

• Market discipline has improved motor combined ratio, although competition likely to intensify – increased penetration from bancassurers

• Performance on other business lines remains sound Source: Fédération Française Sociétés d'Assurances A M Best Research

39%

18%

13%

7%

5%

18%

2012 Non-Life Market Profile

Motor

ResidentialpropertyCommercialpropertyGeneral liability

Construction

Other

France: Life


0%

5%

10%

15%

-

20

40

60

80

100

120

140

160

2008 2009 2010 2011 2012

Surr

ende

r Rat

e

EUR

bn

Life Market Trends

Premiums Benefits Paid Surrender Rate

• Life market has contracted sharply from 2010-2012

• Benefits are outpacing premium growth in 2013

• Economic climate / lower disposable income and lower average guarantees continue to affect demand for life products

• Uncertainty over prospective tax treatment on life products – switching to banking products

• Surrender rates increased to 8.5% in 2011 and 2012

Source: Fédération Française Sociétés d'Assurances A M Best Research

France: Final remarks


Challenging operating environment • Insurers are adequately capitalised for their rating levels; seeking to

utilise capital more efficiently

• Competition likely to increase on profitable lines and core segments

• Pressure on technical margins likely to continue for both life and non-life segments

• Low return on equity (constrained underwriting performance and low investment returns)

Italian Insurance Market


Carlos Wong-Fupuy Senior Director, Analytics


Italy: Key indicators

2013 Insurance Market Briefing - Europe 17 October 2013 38 Source: ANIA

-20

0

20

40

60

80

100

120

140

2007 2008 2009 2010 2011 2012

EUR

bn

Total net written premiums

Investment returns

Claims costs

Management andacquisition expenses

Technical results

Italy: Non-Life premiums


Motor 57.1%

Accident and health 14.4%

Fire 6.5%

General liability 8.3%

Other property

damage 7.4% Other 6.3%

37.7 37.5 36.7

35.6 36.4

35.4

2007 2008 2009 2010 2011 2012

EUR

bn

Italy: Performance


Motor third-party liability Motor own damage

0%

20%

40%

60%

80%

100%

16.0

16.5

17.0

17.5

18.0

18.5

2007 2008 2009 2010 2011 2012

EUR

bn

Total premiums Combined ratio Expense ratio Loss ratio:

0%

20%

40%

60%

80%

100%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2007 2008 2009 2010 2011 2012

EUR

bn

Italy: Life insurance market Premium participation by type of product


0%

20%

40%

60%

80%

100%

0

10

20

30

40

50

60

70

80

90

100

2007 2008 2009 2010 2011 2012

EUR

bn

Total

Traditionalproduct

Unit-Linked

Italy: Conclusions


• Shrinking market showing improvement in profitability

• Investment results improving

• Life business volumes remain volatile due to competition with other savings options

• Companies’ exposure to domestic credit risk mitigated by shift from traditional to unit-linked products

Spanish Insurance Market


Carlos Wong-Fupuy Senior Director, Analytics


Spain: Key indicators


2007 2008 2009 2010 2011 2012 Change in Real GDP (%) 3.5 0.9 -3.7 -0.3 0.4 -1.4 Unemployment Rate (%) 8.3 11.3 18.0 20.1 21.7 25.0

Total Insurance Penetration* (%) 5.3 5.5 5.8 5.6 5.7 5.5 Insurance Premiums Earned (EURbn) Life 23.8 27.4 29.2 27.4 29.9 26.7 Non-Life 32.0 32.8 32.1 31.0 31.2 31.0 Total 55.8 60.2 61.3 58.4 61.1 57.7 Y/Y Change in Premium Volume (Total) (%) 3.4 8.0 1.8 -4.8 4.6 -5.5

Notes: * Total Insurance Penetration is defined as Total Insurance Premiums Earned as a percentage of Gross Domestic Product Sources: International Monetary Fund, World Economic Outlook Database, April 2013; Dirección General de Seguros y Fondos de Pensiones

Spain: Main features


• Contracting market due to reduced economic activity

• Key business lines such as motor remain profitable

• Emergence of online distribution channels

• Low volatility of claims / role of “El Consorcio”

• Hub for access to Latin American markets

Spain: Non-life direct premiums (2012) – lines of business


10.6bn

6.6bn 6.8bn

1.9bn 1.4bn

3.7bn

Motor Multirisk Health Funeral Expenses Liability Other Lines ofBusiness

Notes:EURbn Source: Investigación Cooperativa entre Entidades Aseguradoras y Fondos de Pensiones

Spain: Growth of lines of business (January-June 2013)


Source: Investigación Cooperativa entre Entidades Aseguradoras y Fondos de Pensiones

(%) Funeral Expenses 9.3 Health 1.5

(%) Credit -1.6 Multirisk -2.1 Assistance -2.2 Fire -2.9 Accident -3.8

Other Damage to Property -4.4

Surety -5.0 Pecuniary Losses -5.4 Motor -6.6 Liability -8.1 Transportation -8.5 Professional Liability -10.9

Spain: Life business


• Premium volumes responsive to competing savings offerings from banks

• Some opportunities due to restrictions on interest rates

• Medium to long-term: perceived insufficiency of public pension provision

18.0%

11.9%

4.9%

-8.2%

-3.0%

11.8%

-6.2%

-51.6%

1.5%

0

10

20

30

40

50

60

70

SpanishSovereign

Bonds

SpanishCorporate

Bonds

ForeignSovereign

Bonds

ForeignCorporate

Bonds

Stocks &UCITS

Loans &Mortgages

Deposits &Cash

OtherFinancial

Property

Year-End 2011

Year-End 2012

(EU

Rbn

) Spain: Life insurance sector investments (2011-2012)


Source: Direccion General de Seguros y Fondos de Pensiones, Spanish Association of Insurance and Reinsurance Institutions (UNESPA)

Spain: Non-Life and Life (2012) Top 10 insurance groups by premium


Notes:EURbn Market share shown in brackets Source: Investigación Cooperativa entre Entidades Aseguradoras y Fondos de Pensiones

8.0 (13.9%)

5.2 (9.0%)

3.6 (6.4%)

3.5 (6.1%)

3.0 (5.3%)

2.7 (4.7%)

2.5 (4.4%)

2.1 (3.7%)

2.0 (3.5%)

2.0 (3.4%)

Mapfre

Grupo Caixa

Grupo Mutua Madrileña

Santander Seguros

Allianz

Grupo Axa

Generali

BBVA Seguros

Grupo Caser

Grupo Catalana Occidente

Spain: Conclusions


• Flight to quality without excessive concentration

• Stable leading positions

• Challenging environment for the smallest players

• In general, well capitalised, profitable and more stable than other markets

• No financial leverage issues

• Concerns remain relating to credit risk exposures

Global reinsurance – the capital challenge


Nick Charteris-Black, Managing Director,

Market Development


Stefan Holzberger, Managing Director,

Analytics


Mike Van Slooten, Head of Market

Analysis, International

Aon Benfield


Market overview


• Reinsurance market remains fragmented with large number of competing players

• Top ten global players control over 50% of market capacity

• Capacity provided by capital markets is increasing

• Reinsurance hubs:

– Bermuda – Germany – London – Switzerland – Provide access to business,

regulatory environment, capital and tax efficiency

Market Overview Top 10 Global Reinsurers


Life & Non-Life Non-Life only Domicile FSR ICR Company Name Gross Net Gross Net

1 Munich Reinsurance Co.1 37,251 36,167 22,539 22,038 Germany A+ aa-

2 Swiss Reinsurance Co. Ltd. 31,723 25,344 19,468 15,117 Switzerland A+ aa-

3 Hannover Rueckversicherung AG1 18,208 16,231 10,201 9,060 Germany A+ aa-

4 Lloyd's2 15,785 11,371 15,770 11,358 United Kingdom A a+

5 Berkshire Hathaway Inc.3 15,059 15,059 9,668 9,668 U.S.A. A++ aaa

6 SCOR S.E. 12,576 11,286 6,146 5,558 France A a+

7 Reinsurance Group of America Inc.3 8,233 7,907 0 0 U.S.A. A+ aa-

8 China Reinsurance (Group) Corp. 6,708 6,471 4,184 4,090 China A a

9 Korean Reinsurance Co.4 5,113 3,390 5,113 3,390 South Korea A a

10 PartnerRe Ltd. 4,712 4,567 3,910 3,768 Bermuda A+ aa-

Notes: Ranked by 2012 Reinsurance Premiums Written (USD millions) 1 – Net premium written data not reported, net premium earned substituted. 2 – Lloyd's premiums are reinsurance only. GPW for certain groups within the rankings also may include Lloyd’s Syndicate GPW when applicable. 3 – ICRs are on the operating companies and not the holding companies.

4 – Fiscal year-end March 31, 2013. A.M. Best Ratings correct as of Aug. 23, 2013. Source: A.M. Best research

Market overview Total shareholders’ funds by region


Notes: 2012 data used. Region determined by the domicile of ultimate parent *Americas includes the United States, Canada and Latin America *Americas includes Total Shareholders' Funds of National Indemnity & General Re Corp (subsidiaries of Berkshire Hathaway)

Germany 10%

Switzerland 13%

Americas 28%

London 7%

Asia-Pacific 22%

Bermuda Market 10%

Other Markets 10%

Market overview

2013 Insurance Market Briefing - Europe 17 October 2013 56 Note: Big 4 includes Munich Re, Swiss Re, Hannover RE and SCOR; US & Bermuda composite does not include Berkshire Hathaway. Source: A.M. Best research

68.1 61.4 64.2 65.5 51.6 56.1 68.8 58.6 61.8

77.5 71.3 77.3 61.6 54.0 63.4

29.3 31.8 29.4 28.8 35.9 29.7

30.0 35.9 30.9

29.5 36.9 30.0 29.7 37.1 29.8

0

20

40

60

80

100

120

2008 2009 2010 2011 2012

Global Reinsurance – Combined Ratios (2008-2012) U.S. Bermuda, Lloyd's and European "Big 4."

Expense RatioLoss Ratio

(%)

Changing landscape


• Market is heavily influenced by global leaders

• Few M&A deals

• Approximately USD 10 billion of new capital since superstorm Sandy

– Hedge fund-backed rated reinsurers

– Sidecar capacity

– Collateralised private reinsurers

– Catastrophe bonds

Global reinsurance – the capital challenge


Nick Charteris-Black, Managing Director,

Market Development


Stefan Holzberger, Managing Director,

Analytics


Mike Van Slooten, Head of Market

Analysis, International

Aon Benfield

Global reinsurance outlook


• Outlook remains stable

• Robust capital cushion

• Asset and interest rate risk conservatively managed

• Increasing convergence with capital markets

• Negative pricing momentum

• Disciplined cycle and capital management

• Enterprise risk management tested

• Concerns:

− Softening market − Low investment yield − Reserve redundancies running

out − Fragile global economy

Thematic session: Emerging Markets v Developed Markets – Macro Trends


Vasilis Katsipis, General Manager

A.M. Best MENA, South & Central Asia


Agenda


• Methodology / Scope of analysis

• Market dynamics

• Profitability

• Balance sheet composition

Scope and sources of the analysis


SCOPE: • Analyse the dynamics in key Emerging Markets and compare them to

the European Developed Markets • Identify trends prevalent in Emerging Markets SOURCES OF INFORMATION: • Information is from A.M. Best Statement File Global and • Additional information from Regulatory Filings, Swiss Re’s Sigma

reports and AXCO

Performance of 1,766 companies in 19 countries over the last 9 years was analysed to identify trends and draw comparisons


GCC Countries Covered Entities Analysed Bahrain 35 KSA 29 Kuwait 13 Oman 9 Qatar 9 UAE 35

Developed Markets Countries Covered Entities Analysed France 244 Germany 527 UK 420

BRICs Countries Covered Entities Analysed Brazil 224 Russia 74 India 48 China 145

Far East Countries Covered Entities Analysed Malaysia 85 Thailand 66 Vietnam 9

Agenda



• Market dynamics

• Profitability


Emerging Markets: less congested but equally competitive


604

452 425

186 250

47

138 60 59 43

89 31 57

407 607

733

442 204

1,413

1,779

181 251 46

206 273 126

Average per Company Premiums (USDm)

Number of Companies

• Fewer companies operating in Emerging Markets • Congested marketplace in Developed Markets results

in intense competition • Greater prevalence of focused / niche strategies

among insurers in Developed Markets

Developed Markets BRICs

Other Emerging

• “Average” insurer in Emerging Markets is smaller than in Developed Markets

• Existence of “national champions” more prevalent in Emerging Markets

• Smaller size can result in more volatile operating performance

Developed

Brazil

Russia

India

China

GCC

Far East

0

100

200

300

400

500

600

700

USD

m

21%

21%

21%

18%

16%

14%

4%

CAGR

Emerging Markets growing by up to five times faster than Developed ones


GWP Growth Comparison • Emerging Markets have been growing faster than Developed ones

• General economic growth, public spending and introduction of compulsory covers the main drivers for growth

• In several Emerging Markets the main growth sector is life

2002 2011 2004 2003 2008 2005 2006 2009 2007 2010 2012

60%

14%

58%

80%

3%

54%

58%

40%

86%

42%

20%

97%

46%

42%

0% 25% 50% 75% 100%

Far East

GCC

China

India

Russia

Brazil

Developed

Indications that many non-life Emerging Markets are under insured


Property26%

Motor42%

Medical7% Other

18% Misc5%MAT2%

Benchmark (Developed)

Property18%

Motor46%

Medical22%

Other14%

Misc0%

MAT0%

Low Non-Life penetration

(India)

Property12%

Motor25%

Medical34%

Other19%

Misc2%

MAT8%

Low Life Penetration

(GCC)

• Varying levels of acceptance of life business, with Russia and GCC Markets having lowest life penetration

• Indications that many of the BRIC non-life Markets are underinsured

• Most Emerging non-life Markets dominated by compulsory covers and medical

Life / Non-Life split of selected markets

Emerging Markets: market dynamics trends


• Growth rates to remain higher than those of Developed Markets but subdued compared to historical rates

• Increasing growth in non-life business in the larger BRIC Markets as under-insurance reduces

• Life and medical remain the largest lines of business


• Market dynamics

• Profitability


Agenda


Profitability in Emerging Markets: realising the potential


-60%

-40%

-20%

0%

20%

40%

60%

80%

100%Capital Gains

InvestmentReturns

Non-LifeTechnical Profit

Life TechnicalProfit

Profitability Components 560

25 8 2

74

5 11

5-Year Cumulative Profits (USDbn)

• Chinese market the only market which provides profits approaching those of Developed Markets

• Indian market profitability lagging behind expectations and expected potential

• National borders and differing regulations mean that access to profitable business is more difficult than the chart implies

• Life profits and investment income the largest contributors to profitability in most markets

• Indian market impacted by unprofitable motor, natural catastrophes and life new business strain

• Russia and the GCC have dependence on non-life profitability

Emerging market profitability resilient to global economic crisis


Developed Brazil Russia India China GCC Far East

80%

100%

120%

2008 2009 2010 2011 2012

Combined Ratio

-10%

0%

10%

20%

30%

40%

50%

60%

2008 2009 2010 2011 2012

Return on Life Premiums

• Most Emerging Markets have better combined ratios than Developed ones

• Improving combined ratios with the exception of Far East (impact of nat-cat) and India (impact of motor pool and nat-cat)

• GCC the only market with increasing combined ratio that is not explained by major losses

• Overall life profitability higher in Emerging Markets • Returns on local investments main driver of profitability • India impacted by regulatory intervention

Developed

Brazil

Russia China

GCC

Far East

40%

60%

80%

Reinsurance is significant in Emerging Markets…


• Net retention levels in most Emerging Markets are lower than those of Developed Markets

• High catastrophe exposures and limited financial flexibility are main drivers for reinsurance demand

• In markets where this is extreme, it can impede the development of local underwriting skills

Premium Retention Ratio

2002 2011 2004 2003 2008 2005 2006 2009 2007 2010 2012

Developed

Brazil

Russia

India

China GCC

Far East

-10%

0%

10%

20%

30%

Developed

Brazil

Russia India

China

GCC Far East

0%

10%

20%

30%

40%

50%Management Expense Ratio

Reinsurance commissions critical to reducing operating expenses


Acquisition Ratio

• Declining trend of management expenses in most Emerging Markets

• Still management expenses are by and large well above those of Developed Markets

• Lack of economies of scale and local practices are the main drivers

• Technical profitability underpinned by low acquisition ratio • Acquisition in most Emerging Markets significantly below

levels of commissions paid • High cession rates (and reinsurance commissions) critical

to technical profitability

2002 2011 2003 2008 2005 2006 2009 2007 2010 2012 2004

2002 2011 2003 2008 2005 2006 2009 2007 2010 2012 2004

Emerging Markets: profitability trends


• High levels of life profitability are unsustainable long term

• Non-life profitability remains good but depends heavily on reinsurance

• Good availability of reinsurance capacity in most markets


• Market dynamics

• Profitability


Agenda


Higher investment risk in Emerging Markets


• High levels of illiquid assets • Lack of significant bond

markets in many developing economies

• Preference toward equity and real-estate

• Generally low levels of soft elements (e.g. goodwill) 69%

59% 55%

82% 69%

43% 45%

17% 28%

10%

14%

21%

16% 14%

4% 3%

8%

1%

17% 5%

2% 5%

12%

1% 1%

13%

2%

2% 2% 4%

1% 4%

1%

6% 3% 10% 2%

5% 6%

33%


Asset Composition (in USD)

Liquid Assets illiquid Assets R/I recoverables Other recoverables Debtors Other

Higher levels of capitalisation in Emerging Markets


• Higher proportion of capital in Emerging Markets

• Lower level of insurance reserves partly explained by legacy life business

• Increased insurance creditors point to higher reinsurance utilisation

Liability Composition (in USD)

8% 17%

25% 22% 9%

37%

15%

82% 75% 60% 70%

76%

46%

52%

2% 1% 4% 2% 3%

4% 3% 8% 5% 4% 10%

3%

5% 4% 3% 2% 8% 5%

29%


Equity Reserves Borrowings Creditors Other

Emerging Markets: Balance Sheet trends


• Balance Sheets continue to be characterised by low financial and high operational leverage

• Investment portfolios remain biased toward cash, equity and real estate

• Risk-adjusted capitalisation remains strong but continues to decline as more risk is retained

Concluding: significant differences among Emerging Markets ...


• Most Emerging Markets provide greater growth and profitability potential than Developed Markets

• Significant differences among BRIC Markets

• There are profitable segments / clients even in most challenging markets

• Size, regulation and national borders of some markets may deem them uneconomical for expansion

Market Size and Potential

Germany, France, UK

Brazil Russia

India China

GCC

Far East

0%

15%

30%

0% 13% 25%

Retu

rn o

n Eq

uity

(lev

erag

ed)

Growth Rate

... requiring different strategies


Market Size and Potential Textbook Strategies

• Grow at least at market pace • Allocate capital when required • Reduce capital allocation when

Markets slow down

• Focus on specific segments / products • Consider capital allocated or improve

technical profitability • Review viability

Germany, France, UK

Brazil Russia

India China

GCC

Far East

0%

15%

30%

0% 13% 25%

Retu

rn o

n Eq

uity

(lev

erag

ed)

Growth Rate

The foundation for today’s analysis


A.M. Best’s Statement File – Global system is the online worldwide insurer ratings and financial database with historical and quantitative information:

Best’s Statement File – Global

- Over 15,700 insurers and reinsurers worldwide - 10 years of financial data - Standardised and consistent data formats for all companies worldwide

plus As Filed formats - Real-time ratings and rating reports - Access to source documents - Analysis, download and Excel tools - Ratings Change & News Alert service For more information please visit: http://www.ambest.com/sales/Statementglobal/

Thematic session: Global Insurers’ Expansion into Emerging Markets – Contrasting Differing Strategies


Carlos Wong-Fupuy, Senior Director Analytics Deniese Imoukhuede, Associate Director



Main Drivers (1/2)


• Saturated markets – Limited room for growth – Technical margins under pressure

• Solvency II – expected increase in capital requirements

• Need for geographical diversification

• Eurozone crisis – Low interest rate environment – Increased credit risk / peripheral eurozone sovereign debt – Particular issue for life companies

Main Drivers (2/2)


• Shareholder pressure for more capital efficiency and higher returns – Focus on return on capital, cash generation, shorter payback

periods and increased margins

• Reflected in some cases in radical changes in senior management and strategy

• Life markets in emerging economies less sophisticated / more capital efficient

Groups with focus on High Growth Markets


Company

Share of P/C Revenues

in HGM (%)

Share of Life APE1 in

HGM (%)

Life New Business Margin

in HGM (%)

Life New Business Margin of Total Business (%)

HGM Combined Ratio (%)

Total Combined Ratio (%)

Reporting Period

AXA S.A. 14.0 16.0 44.0 33.0 97.6 95.7 HY 13 Allianz SE2 11.5 12.0 3.0 2.0 96.9 96.3 4Q 12

Generali S.p.A.3 10.7 4.2 31.4 19.2 88.5 95.7 2012

Zurich Ins Group2 11.8 25.8 n/a n/a n/a n/a 2012

Prudential plc n/a 45.2 67.0 58.0 n/a n/a 2012

CNP Assurances4 n/a 11.7 35.5 11.6 n/a n/a 2012

Talanx AG 12.0 n/a n/a n/a 92.1 94.3 2012 MAPFRE S.A. 40.2 39.9 n/a n/a 97.9 95.4 2012 Note: Numbers are not necessarily comparable between companies, owing to different assumptions used. 1 Annual premium equivalent (APE) 2 Based on revenue, not APE 3 Central and Eastern Europe only. 4 Latin America only Source: A.M. Best data and research

Key European and emerging markets non-life & life – key market statistics (2012)

2013 Insurance Market Briefing - Europe 17 October 2013 86 Sources: International Monetary Fund, World Economic Outlook Database, April 2013; Swiss Re, sigma No 3/2013; A.M. Best Research

Country Penetration (%)

% Change in Real GDP

Real GDP Per Capita (USD)

Population (Millions)

Market Ranking

Total Premium (USDbn)

Y/Y % Change in Premium

(USD)

Y/Y % Change in Premium (Local

Currency)

United Kingdom 12.76 0.17 38,589 63.2 3 311.4 -0.5 0.7

France 9.29 0.03 41,141 63.4 5 242.5 -11.1 -3.7 Italy 7.16 -2.37 33,115 60.8 7 144.2 -10.3 -2.8 Germany 6.82 0.87 41,513 81.9 6 231.9 -5.6 2.3 Spain 5.32 -1.42 29,289 46.2 14 72.0 -12.6 -5.3 Poland 3.90 2.05 12,538 38.9 30 19.0 -0.3 9.5 India 3.64 3.99 1,492 1,223.2 15 66.4 -8.2 4.2 Brazil 3.43 0.87 12,079 198.4 13 82.3 4.6 22.1 China 2.98 7.80 6,076 1,354.0 4 245.5 10.7 8.0 Mexico 2.04 3.95 10,247 114.9 27 24.0 4.9 11.2 Turkey 1.37 2.62 10,609 74.9 38 10.9 8.0 15.8 Russia 1.29 3.40 14,247 141.9 24 26.0 15.0 21.7

Southeast Asia Main expansion drivers


• Economic growth / emerging middle class

• High savings rates

• Introduction of compulsory lines (in particular motor third-party liability and medical insurance)

• Takaful innovation / regulatory developments (e.g. Malaysia)

• Microinsurance initiatives (e.g. Philippines)

• Key players: Prudential, AXA

Central and Eastern Europe Main expansion drivers


• Strong economic links with Germany and Austria

• Poland and Russia by far the largest markets

• Also interest in Czech Republic, Croatia and Romania

• EU membership an advantage

• Key players: Allianz, Talanx, Generali, Aviva and AXA

Latin America: Main expansion drivers


• Brazil and Mexico by far the largest

• Also interest in Colombia, Chile, Venezuela and Peru

• Madrid becoming a European hub to access Latin American business

• Servicing Spanish interests present in the region

• Key players: Mapfre, Zurich and Santander

Turkey: Main expansion drivers


• Insurance market largely privatised

• Strong participation of foreign players

• Dominated by motor insurance

• Highly competitive

• Key players: AXA, Allianz, Aviva, Mapfre

Other territories - Challenges


Russia, China, India:

• Regulatory hurdles – limits on foreign investment (lack of full control)

• Dominance of state sponsored entities

• Allianz, Aviva, Talanx

Middle East:

• Highly competitive

• Abundance of domestic capital

• Role of quasi-government institutions

• Relatively small populations in the GCC

• Low retention levels

• Small and fragmented markets

• Hannover Re, Talanx

Other territories - Challenges


• Sub-Saharan Africa:

– Small markets (excluding South Africa): mainly Nigeria and Kenya – Oil and energy sector main driver – Low retention levels – Outstanding receivables and lack of investment options a big issue

Largest European insurance groups Key high growth markets

2013 Insurance Market Briefing - Europe 17 October 2013 93 Source: BestLink and A.M. Best Research

Rank Company Country of Domicile

Gross Premiums Written (EURbn)

Latin America

Southeast Asia

Asia excluding India and

China

India China Central Eastern Europe

Turkey Middle East

1 AXA S.A. France 84.6 Y Y Y Y Y Y Y Y 2 Allianz SE Germany 72.1 Y Y Y Y Y Y Y 3 Generali S.p.A. Italy 65.9 Y Y Y Y

4 Zurich Ins. Group Switzerland 40.8 Y Y Y Y

5 Prudential plc United Kingdom 36.6 Y Y

6 Aviva plc United Kingdom 27.8 Y Y Y Y 7 CNP France 26.4 Y 8 Talanx AG Germany 25.5 Y Y Y Y Y Y Y 9 MAPFRE S.A. Spain 21.6 Y Y Y

10 Achmea B.V. Netherlands 20.4 Y Y

11 ING Verz. N.V. Netherlands 20.3 Y

12 AEGON N.V. Netherlands 19.5 Y Y Y Y Y Y

Challenges and what lies ahead


• A.M. Best takes a positive view on the re-alignment of the international strategies of most major insurance groups as this shows:

– Focus on profitable growth and capital efficiency – Increased diversification – Higher potential for growth



• However, some challenges remain, such as:

– Companies up for sale are not always the ones in best shape – Lack of scale in particular territories – Low synergies / low degree of group integration – Lack of full control of subsidiaries – Political and regulatory risks – Emerging risks / less sophisticated risk modelling and pricing tools – Restricted local investment opportunities



• The core domestic markets will continue to be the main drivers of steady profits, as they are more predictable and well established

• Companies expected to continue expanding in emerging countries

• Where scale is not achieved, potential for exit or consolidation

• Significant barriers to entry remain in Russia, China and India; removal of these barriers could be the real game changer

About A.M. Best: Leading coverage in insurance ratings


Global insurer interactive Financial Strength Ratings (FSRs)

Source: A.M. Best, Moody’s and Fitch’s websites and S&P’s Ratings Direct. Data as of July 2013 Does not include PD ratings, NR ratings, “National” ratings, rated companies who are branches of a parent (Canada, Japan, New Zealand and U.S.), or companies who are under regulatory supervision or in liquidation.

A.M. Best 3334

S&P 1565

Fitch 981 Moody's

700

Best’s global ratings coverage Ex USA/Canada


Western Europe, 32%

Eastern Europe, 2%

Middle East, 7%

Asia, 13%

Oceania, 8% Africa, 3%

Latin America & Caribbean, 18%

Bermuda, 17%

Interactive rating relationships with insurers/reinsurers in over 77 countries worldwide

Grange St. Paul’s Hotel, London

17 October 2013

2013 Insurance Market Briefing - Europe

Documents

2013 Insurance Market Briefing - Europe...2013 Insurance Market Briefing - Europe 17 October 2013 16 • Property has returned underwriting profits in four out of five years • Liability