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Reinsurance Market Briefing
Rendez-Vous de Septembre, Monte Carlo
Greg CarterManaging Director,Analytics –EMEA & Asia Pacific
Robert DeRoseSenior Director,Global Reinsurance Ratings
Nick Charteris-BlackManaging Director,Market Development - EMEA
8 September 2019
Carlos Wong-FupuySenior Director
Preparing for Brexit... AM Best• AM Best Rating Services B.V. (AMB-EU) based in Amsterdam was registered with
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© AM Best Company, Inc. (AMB) and/or its licensors and affiliates. All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW ANDNONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED,REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANYMEANS WHATSOEVER, BY ANY PERSON WITHOUT AMB’s PRIOR WRITTEN CONSENT. All information contained herein is obtained by AMB from sources believed by it to beaccurate and reliable. AMB does not audit or otherwise independently verify the accuracy or reliability of information received or otherwise used and therefore all informationcontained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall AMB have any liability to any person or entity for (a) any loss or damage in wholeor in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of AMB or any of its directors,officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or(b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if AMB is advised in advance of thepossibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings, financial reporting analysis, projections, and other observations, ifany, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase,sell or hold any securities, insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specificpurpose or purchaser. Credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. Credit ratings do not address any other risk,including but not limited to, liquidity risk, market value risk or price volatility of rated securities. AMB is not an investment advisor and does not offer consulting or advisory services,nor does the company or its rating analysts offer any form of structuring or financial advice. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS,COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN ORMADE BY AMB IN ANY FORM OR MANNER WHATSOEVER. Each credit rating or other opinion must be weighed solely as one factor in any investment or purchasing decisionmade by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security or other financialobligation and of each issuer and guarantor of, and each provider of credit support for, each security or other financial obligation that it may consider purchasing, holding or selling.
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US Securities Laws explicitly prohibit the issuance or maintenance of a credit rating where a person involvedin the sales or marketing of a product or service of the CRA also participates in determining or monitoring thecredit rating, or developing or approving procedures or methodologies used for determining the credit rating.
No part of this presentation amounts to sales / marketing activity and AM Best’s Rating Divisionemployees are prohibited from participating in commercial discussions.
Any queries of a commercial nature should be directed to AM Best’s Market Development function.
Global Reinsurance Market Outlook
8
Headwinds TailwindsIntense competition Increasing alignment between traditional
and third-party capitalExcess capacity limits the potential forimprovement
Improving pricing discipline for property cat and retro in particular
Potential for increased inflation Accelerating pricing momentum at the primary insurance level
Less cushion in carried loss reserves US economic growth slows, but continues
Continued interest from third-party capital, even beyond prop-cat lines
Use of third-party capital in retrocession programs reducing earnings volatility
December 2018 – AM Best revised the outlook on the Global Reinsurance sector to Stable
Global Reinsurance Market Performance
Source: AM Best data and research
Combined Ratio
10
89.7% 90.4% 95.2%
110.1%102.3% 97.6%
2014 2015 2016 2017 2018 Five Year Average
Global Reinsurance Market Performance
European “Big Four” U.S. & Bermuda Lloyd’s
Combined Ratios by Reinsurance Sector
11Source: AM Best data and research
92.4% 91.8% 96.3%108.9%
99.7%87.4% 88.9% 92.5%
109.2% 103.8%
88.1% 90.0%97.9%
114.0%104.6%
2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018
Loss Ratio
Expense Ratio
11.6%
9.5%8.3%
-0.3% 1.0%
2014 2015 2016 2017 2018
Five Year Average 6.0%
Global Reinsurance Market Performance
Return on Equity
12Source: AM Best data and research
Global Reinsurance Market Performance
European “Big Four” U.S. & Bermuda Lloyd’s
Return on Equity by Reinsurance Sector
13Source: AM Best data and research
11.0% 11.5%9.7%
2.7%
5.8%
10.9%
7.5% 6.8%
-0.5% -1.5%
14.7%
8.9% 8.1%
-7.3%
-3.7%
2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018
Five Year Average
6.0%
Global Reinsurance Market Performance
11%
7%8%
5%6%
3%
Five-Year Average Return onEquity
Five-Year Average Return onEquity
(Excluding Loss ReserveDevelopment)
Year-End 2016Year-End 2017Year-End 2018
Global Reinsurance Market
14Source: AM Best data and research
0
5
10
15
20
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
(%)
Median ROCE Median WACC
Global Reinsurance Market Performance
Reinsurers' Median return on common equity (ROCE)Compared to Median weighted average cost of capital (WACC) (%)
Source: Bloomberg 15
Global Reinsurance Market Capital
17Notes and Sources: Estimates by Guy Carpenter and AM Best
Estimate - Total Dedicated Reinsurance Capital (USD billions)
292 320 340 332 345 345 341 346
19
48 60 68 75 87 95 92 311
368400 400 420 432 436 438
2012 2013 2014 2015 2016 2017 2018 2019E
Third-Party – Trapped Portion(High Estimate)
Third-Party – Trapped Portion(Low Estimate)
Third-Party
Traditional
Global Reinsurance Market Capital
18Notes and Sources: Estimates by Guy Carpenter and AM Best
2017 Reinsurance Market Briefing, Monte Carlo10 September 2017
Third-Party Capital (USD billions)
41 45 4962 56 53
1418 21
2034 345
55
55 6
6068
7587
95 92
2014 2015 2016 2017 2018 2019E
Direct InstitutionalInvestors
Reinsurance SponsoredManagers (includingsidecars)
Dedicated ILS Managers
Global Reinsurance - Top 15 ILS Funds (July 2019)
19Notes:Renaissance Re includes Top Layer, DaVinci, Langhorn, Vermeer and Medici.Source: Artemis
2017 Reinsurance Market Briefing, Monte Carlo10 September 2017
Assets Under Management
(AUM)(USD millions) Change in AUM Funds Location ILS Fund Managers Acquisitions
Nephila Capital 11,500 ▼ Bermuda Purchased by Markel 2018
RenaissanceRe Holdings Ltd. 8,200 ▲ Bermuda
Credit Suisse Insurance Linked Strategies Ltd. 8,000 ▼ Zurich, Switzerland
LGT ILS Partners Ltd. 7,100 ▼ Pfaeffikon, Switzerland
Markel CATCo Investment Management 6,800 ▼ Bermuda Purchased by Markel 2015
Fermat Capital Management, LLC 6,300 ▲ Westport, Connecticut, US
Stone Ridge Asset Management 5,930 ▼ New York
Securis Investment Partners LLP 5,900 ▼ London Northill bought out Swiss Re’s interest in 2012
Leadenhall Capital Partners LLP 5,500 ▲ London Purchased by Amlin 2014
AlphaCat Managers 4,200 ▲ Bermuda Purchased by AIG in 2018
Aeolus Capital Management Ltd 4,000 ● Hamilton, Bermuda Purchased by Elliott in 2016
Elementum Advisors, LLC 4,000 ● Chicago, IL White Mountain purchased 30% stake in 2019
Twelve Capital AG 4,000 ● Zurich, Switzerland
Schroder Investment Management 2,930 ▼ London
Amundi Pioneer 2,300 ▲ Boston, MA
Top 15 Fund Managers 86,660
What Would Turn the Market?
20Notes:Percentage of respondentsSource: Artemis
12.57%
16.17%
24.16%
13.17%
16.77%
5.99%
7.78%
3.39%
USD 150 billion+
USD 200 billion+
USD 250 billion+
Above USD 100 billion
Above USD 150 billion
USD 150 billion or greater
Nothing, the cycle is flat forever
Other
Capacity pressure could be a catalyst for a sustained uplift in prices
Event or Series of Events
Unmodelled Event
Liability Catastrophe Event
Global Reinsurance Market Capital
21
174 205 216 223 229
209 203
74% 71% 70% 73% 72% 72% 81%
2013 2014 2015 2016 2017 2018 2019E
Capital Depletion Needed to Reach 10% @ 99.6 Capital Utilisation
Capital Utilisation (USD billions)
Notes and Sources: Estimates by Guy Carpenter and AM Best
Global Reinsurance Market Capital
22
2017 Reinsurance Market Briefing, Monte Carlo10 September 2017
Top 10 World's Largest Reinsurance GroupsReinsurance
Premiums Written TotalLife & Non-Life (USD m) Non-Life Only (USD m) Shareholders’ Ratios (%)
Gross Net Gross Net Funds Loss Expense CombinedSwiss Re Ltd. 36,406 34,042 20,864 20,220 28,727 74.2 32.4 106.6
Munich Reinsurance Co. 35,814 34,515 23,395 22,570 30,336 65.2 34.2 99.4
Hannover Rück SE 21,952 19,791 13,709 12,368 10,923 66.9 29.5 96.4
SCOR S.E. 17,466 15,773 7,069 6,115 6,672 66.5 32.8 99.3
Berkshire Hathaway Inc. 15,376 15,376 9,930 9,930 352,500 88.6 21.9 110.4
Lloyd's 14,064 9,926 14,064 9,926 34,846 72.2 33.8 106.0
China Reinsurance (Group) Corp. 11,564 10,681 3,942 3,809 12,689 58.0 40.9 98.8
Reinsurance Group of America Inc. 11,341 10,544 – – 8,451 – – –
Great West Lifeco 7,737 7,647 – – 20,096 – – –
Korean Reinsurance Co. 6,803 4,786 5,972 4,058 2,014 83.7 17.8 101.5
Notes:Ranked by unaffiliated gross premium written in 2018.Source: AM Best data and research
Global Reinsurance Market Capital
23
Munich Reinsurance Co.
Swiss Re Ltd.
Lloyd's
Hannover Rück SE
Berkshire Hathaway Inc.
SCOR S.E.
Everest Re Group Ltd.
PartnerRe Ltd.
XL Bermuda Ltd.
Transatlantic Holdings, Inc.
Top 10 Global Reinsurance Groups Non-Life
Top 10 Global Reinsurance GroupsLife
Swiss Re Ltd.
Munich Reinsurance Co.
Reinsurance Group of America Inc.
SCOR S.E.
Hannover Rück SE
Great West Lifeco
Berkshire Hathaway Inc.
Pacific LifeCorp
Assicurazioni Generali SpA
PartnerRe Ltd.
Notes:Ranked by unaffiliated gross premium written in 2018.Source: AM Best data and research
Global Reinsurance Market Capital
24
Life and Non-Life Reinsurance GPW Distribution by Ranking
Rank 1-1067.9%
Rank 11-2017.2%
Rank 21-307.6%
Rank 31-404.8%
Rank 41-502.5%
Surviving Franchises of Today
• Arch• AXIS• Everest Re• Hannover Re• Lloyd’s• Munich Re• RenaissanceRe• SCOR• Swiss Re
ShelteredFranchises
• Allied World• Aspen• AXA-XL• Endurance(Sompo Intl)• General Re• MS Amlin• Odyssey Re• National Indemnity• Partner Re• TransRe• Validus
Franchises that are Gone
• Ariel Re• Flagstone• Harbor Point / Max (Alterra)• IPC Re• Maiden• Montpellier• New Castle Re• Paris Re• Platinum Re• Tokio Millennium Re
What does the Future Hold?
• Fidelis• Greenlight Re• Hamilton• Harrington Re• Third Point Re• Watford Re
Market Landscape ~10 Years In Time
25
Global Reinsurance Market Developments - Price/Book Value
40
60
80
100
120
140
160
180
200
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Pric
e/B
ook
Valu
e
Average
Current P/BV: 1.18x Average 1994-Present: 1.17x
Low Reached March 2009 (0.75x BV)
Peak reached February 2002 (1.83x BV)
1.0x P/BV
Announced Acquirer Acquiree Price (USD mm)
Tangible Price to BV
9-Jan-15 XL Group Catlin Group Limited 4,100 1.27x3-Aug-15 EXOR PartnerRe 6,900 1.19x5-Oct-16 Sompo Endurance 6,304 1.36x6-Jul-17 AXIS Novae 604 1.50x
26Notes:1996 to Present. Excludes accumulated other comprehensive income.Sources: AM Best data and research, Bloomberg, company reports and accounts
Announced Acquirer Acquiree Price (USD mm)
Tangible Price to BV
22-Jan-18 AIG Validus 5,560 1.53x4-Mar-18 AXA XL Group 15,300 1.96x
28-Aug-18 Apollo Aspen 2,600 1.08x31-Aug-18 Markel Nephila 975 –30-Oct-18 RenRe Tokio Millennium 1,469 1.02x
Reinsurance Rates – Response to Influx of Alternative Capital
28Source: Guy Carpenter
Supply and Demand
Reinsurance rates in the Florida property cat market dropped in response to an influx of alternative capital
Catastrophe Losses do have Reserve Tails (1)
29
Hurricane Irma (2017) loss creep surprised both reinsurers and ILS funds exceeding USD 1 billion
Impact of development based on Florida footprint
Demand surge stressed claim adjustment process
Assignment of Benefits (AOB) resulted in higher loss cost
AOB lawsuits increased from 1,300 in 2000 to 135,000 in 2018
Catastrophe Losses do have Reserve Tails (2)
30
Hurricane Maria (2017) presented unique challenges due to scope of devastation
Limited local claim resources required adjusters from US to assist
Unfamiliarity with policy terms/conditions resulted in higher number of reopen claims and resulting loss
Prolonged settlement and usability exacerbated Contingent Business Interruption claims
Catastrophe Losses do have Reserve Tails (3)
31
Typhoon Jebi (2018) current loss estimates up to USD 16 billion vs original estimate of USD 2 - 3 billion. Some firm’s current loss pick of USD 8 - 10 billion
Japan fiscal year ends in March
Overlap with Typhoon Trami and a series of smaller losses, complicated claim and loss estimates
Preparation of Olympics stressed reconstruction resources driving up claims costs
Global Reinsurance - Market Developments
32
2017 Reinsurance Market Briefing, Monte Carlo10 September 2017
05
1015202530354045
1980-1989 1990-1999 2000-2009 2010-2018
USD
bill
ions
Losses Losses 2016 Losses 2017 Losses 2018
Wildfire Insured Losses Since 1980(USD billion at 2018 Prices)
2018
2017
20162010-2015
Source: Swiss Re Institute sigma
Possible Turn in Trajectory
Capital elasticity has flattened the reinsurance market cycle
USD 219 billion in Cat losses over a
24 month period ending
December 2018
Capacity crunch in
retrocession markets
Earnings under
pressure Increased
demand for reinsurance
33
Continued Market Uncertainty
MARKET UNCERTAINTY
Upward rate
pressure
Trapped Collateral
Loss Uncertainty
Loss creep from hurricanes and wildfire uncertainty
New capacity being held on the sidelines
Aggregation of losses across ILS fund sector
34
What has transpired
Predominately European renewals
that were less affected by the 2017
and 2018 CATs
Rates did increase 30% for loss affected
programs(Lloyd’s and US)
Supply and Demand imbalance lead to
retro pricing increases of
15-20%
Casualty programs saw modest rate
improvement with ceding commissions
flat to down
Overall renewal pricing – flat to up
January and June renewal negotiationsran late
35
What to Expect?
Capital markets continue to be the key to sustained rate increases at the mid-year renewals
An abundance of capital waiting on the sideline
The evolving interest rate environment is a new variable within the pricing equation
36
Market Momentum - AIG
37
Recruiting proven talent to change culture from the top
Aggressive underwriting actions:• Pricing • Reducing both gross and net limits • Exit underperforming risks• Increasing utilisation of reinsurance to reduce
earnings volatility
Market Momentum – Lloyd’s
38
Address underperformance and
irrational underwriting behaviour
Implementation of risk-based oversight for
underwriting performance
Limited capacity for worst performing syndicates
Annual planreviews
Performance Management
Directive(PMD)
Market Momentum – June 2019 Renewal Comments
39
Travelers CEO Alan Schnitzer: “In business insurance, we achieved renewal premium change of 6.7%, including renewal rate change of 3.6% in both cases the highest levels in five years”
Chubb CEO Evan Greenberg: “Pricing continuing to tighten while spreading to more classes and business segments, particularly in the US and London wholesale market. Also seeing early signs of market firming spreading to more territories around the world”
Market Momentum – June 2019 Renewal Comments
40
Munich Re Torsten Jeworrek: “We see potential for profitable growth in traditional areas of business. There are opportunities to write profitable business in the current market environment”
Everest Re CEO Dominic Addesso: “We continue to see positive momentum across the underwriting operations, with profitable growth opportunities materializing for both our insurance and reinsurance segments”
Global Reinsurance - Market Trends
41
Potential Opportunities
Cyber Flood Mortgage Terrorism InsurTech
Global Reinsurance Market Outlook
42
Headwinds TailwindsIntense competition Increasing alignment between traditional
and third-party capitalExcess capacity limits the potential forimprovement
Improving pricing discipline for property cat and retro in particular
Potential for increased inflation Accelerating pricing momentum at the primary insurance level
Less cushion in carried loss reserves US economic growth slows, but continues
Continued interest from third-party capital, even beyond prop-cat lines
Use of third-party capital in retrocession programs reducing earnings volatility
December 2018 – AM Best revised the outlook on the Global Reinsurance sector to Stable
AM Best’s Forthcoming Events ‒ Register Now
43
Reinsurance Market Briefing - ZurichSept. 18, Zurich
Insurance Market Briefing - GulfOct. 2, Muscat
Insurance Market Briefing - MENAOct. 7, Dubai
Insurance Market Briefing - EuropeNov. 12, London
Insurance Market Briefing - CanadaSept. 13, Toronto
For further information, visit AM Best’s events webpage