Aon | Analytics Proprietary & Confidential 1 Risk. Reinsurance. Human Resources.
Aon Reinsurance Solutions
Reinsurance Market Outlook Supply Rebalance Still Positive for Cedents Chisinau, Moldova, October 2018
Aon | Analytics Proprietary & Confidential 2
Global reinsurer capital: alternative capital surge continues
Global reinsurance capital stood at USD605 billion at the end of June 30, 2018 Traditional capital fell 2 percent to USD507 billion, while alternative capital rose 10 percent to USD98 billion
Source: Company financial statements, Aon Analytics, Aon Securities Inc.
17 22 19 22 24 28 44 50 64 72 81 89 98
368 388 321
378 447 428
461 490 511 493 514 516 507 6% -17% 18%
18% -3% 11%
7% 6% -2% 5%
2% 0%
385 410
340 400
470 455 505
540 575 565
595 605 605
0
100
200
300
400
500
600
700
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 H1 2018
USD
(bill
ions
)
Traditional capital Alternative capital Global reinsurer capital
Aon | Analytics Proprietary & Confidential 3
Aon’s Reinsurance Aggregate (ARA) traditional capital
Total equity across the 21 ARA* companies fell by 4 percent Net income of USD9 billion was outweighed by dividends and share buybacks, foreign exchange losses, and unrealized
investment losses stemming from rising interest rates in the US
Source: Sources: Company financial statements / Aon Analytics *Companies in Aon’s Reinsurance Aggregate include: Alleghany, Arch, Argo, Aspen, AXIS, Everest Re, Fairfax, Hannover Re, Lancashire, MAPFRE, Markel, Munich Re, Partner Re, Ren Re, SCOR, Swiss Re, Validus and XL Catlin.
122 138 114
146 148 150 174 175 185 180 185 189 181
130 146
122
152 157 161 184 186 196 192 199 204 197
0
50
100
150
200
250
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1H 2018
USD
(bill
ions
)
Common equity Preferred shares Minorities Total Equity
Aon | Analytics Proprietary & Confidential 4
Reinsurance sector performance
Source: Aon Analytics *Companies included: Alleghany, Arch, Argo, Aspen, AXIS, Everest Re, Fairfax, Hannover Re, Lancashire, MAPFRE, Markel, Munich Re, Partner Re, Ren Re, SCOR, Swiss Re, Validus and XL Catlin.
Combined ratio improved marginally to 94.4 percent
For the first time in several years ordinary investment yield showed a small improvement at 2.7 percent while unrealized losses on bonds restricted the overall return to 2.9 percent
Annualized return was up marginally on the 8.4 percent reported in the first half of 2017(8.6 for 2018)
Valuations have ticked-up, influenced by significant M&A deals involving Validus, XL Catlin, and Navigators
0%
1%
2%
3%
4%
5%
2008 2010 2012 2014 2016 H1 2018
Ordinary investment return
0.60.70.80.91.01.11.2
2008 2010 2012 2014 2016 H1 2018
Valuation - Price to book
0%
5%
10%
15%
2008 2010 2012 2014 2016 H1 2018
Return on equity
70%
80%
90%
100%
110%
120%
2008 2010 2012 2014 2016 H1 2018
Combined ratio
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Alternative capital deployment
Larger ILS funds have shown significant growth in assets under management during 2018 and a number of new managers have entered the space
Source: Aon Securities, Inc.
0102030405060708090
100
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 H12018
Lim
it (U
SD b
illio
ns)
Catastrophe bonds Sidecars ILWs Collateralized re
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US reinsurance premium ceded
Total share of premiums ceded increased slightly from 2016 to 2017 (up 0.3% to 12.9%)
Although it remains the smallest dollar cession by segment, specialty lines saw the biggest percentage increase in premium
Source: SNL
0%
2%
4%
6%
8%
10%
12%
14%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Property Casualty Property and casualty Specialty
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US primary rate changes
US primary rates increased for commercial auto, commercial property, general liability and umbrella – The strongest annualized increase shown
is in commercial auto (8.0 percent) – Commercial property rates increased 2.5
to 3.5 percent for the last 3 quarters ending prolonged decreases since the end of 2013
– Umbrella turned positive for the first time in 2018, showing slight increases again following declines since the end of 2014
Workers’ compensation continues its decline averaging 2.5 percent reductions over the last 2 quarters and not having seen an increase since the end of 2014
Source: Council of Insurance Agents and Brokers
50%
70%
90%
110%
130%
150%
170%
190%
210%
230%
250%
Commercial auto Commercial propertyGeneral liability UmbrellaWorkers' compensation
Aon | Analytics Proprietary & Confidential 8
2018 catastrophe losses continues trending below average
Public and private insurance agencies have now sustained losses of at least USD29 billion – 52 percent of the 10-year average for
Q1, Q2, Q3 (USD56 billion) and 66 percent of the median (USD44 billion)
To date in 2018, severe convective storm (USD13 billion) remains the costliest globally, with most of those losses occurring in the United States – Severe Connective Storm losses for
US insurers have topped USD10 billion in every year since 2008
Through the middle of Q3 2018, the costliest insured events included: Windstorm Friederike in Europe, multiple outbreaks of severe weather and two major winter storms in the United States, and significant July flooding and the Osaka earthquake in Japan.
Source: Aon Analytics
0
20
40
60
80
100
120
140
USD
bill
ion
(201
8)
Drought Earthquake EU windstormFlooding Other Severe weatherTropical cyclone Wildfire Winter weather
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Largest historical wildfire insured loss events
2018 fires are unusual for multiple reasons: the timing (July/August), the fire behavior, and the meteorological parameters which caused the extensive spread
July and August 2018 fires in California follow what was the costliest year ever recorded for the insurance industry with the wildfire peril in 2017 causing insured losses of more than USD14 billion
Only ten individual fires have prompted more than USD1 billion in payouts (2018 USD) – Of those 10 events, five have occurred in the last 36 months – The Carr Fire is poised to become the sixth such event.
Source: Aon Analytics
Oct. 2017
Oct. 1991 May 2016 Oct. 2017 Oct. 2007 Dec. 2017 Nov. 2003 Nov. 2003 Feb. 2009 Sep. 2015
0123456789
Tubbs (US) Tunnel(US)
FortMcMurray(Canada)
Atlas (US) Witch (US) Thomas(US)
Cedar (US) Old (US) BlackSaturday(Australia)
Valley (US)
USD
bill
ion
(201
8)
Aon | Analytics Proprietary & Confidential 10
A.M.Best’s Credit Rating Methodology (BCRM) update: Balance sheet strength
Majority of companies rated under the updated criteria have a “Strongest” or “Very Strong” balance sheet strength assessment whereas very few companies (1 percent in total) are rated “Weak” or “Very Weak”
North America region has the highest percentage of “Strongest” companies while only 6 percent of companies in APAC region have received the “Strongest” assessment
Rating Agency and regulatory: Focus on Transparency
Note: Charts are based on the global (P&C, L&H and composite) companies whose assessments have been updated through August of 2018 (about 75 percent of rated units)
1% 1% 1% 7% 7% 4%
2% 11%
16% 14% 17% 22%
30%
45% 42% 44%
64%
51%
30% 35% 33%
13% 6%
Total NorthAmerica
Caribbean& LatAm
EMEA APAC
1127 841 70 107 109
Strongest
Very Strong
Strong
Adequate
Weak
Very Weak
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While the BCAR threshold to be eligible for the “Strongest” assessment is 25 points at the 99.6 VaR, most companies achieve scores well in excess of this minimum
Similar to the prior BCAR model, the median scores are significantly higher than the minimums – For example, as shown in the chart, the median BCAR for companies receiving the “Strong” assessment is 31 points
which is well over the 25 minimum
BCRM Update: Balance Sheet Strength Assessment – Median BCAR
-60
-40
-20
0
20
40
60
80
VaR 95.0 VaR 99.0 VaR 99.5 VaR 99.6
Strongest Very StrongStrong AdequateWeak
Balance Sheet Strength Count
Median BCAR
VaR 95.0 VaR 99.0 VaR 99.5 VaR 99.6
Strongest 342 75 64 59 57 Very Strong 510 71 59 53 51 Strong 184 60 46 37 31 Adequate 73 43 19 6 3 Weak 11 25 -11 -26 -45 Very Weak 7 -14 -60 -79 -85 Total 1127 70 58 52 50
Aon | Analytics Proprietary & Confidential 12
Majority of companies in our database are receiving an “Adequate” operating performance assessment – Of the 18 companies that earned a “Very
Strong” assessment thus far 12 are US P&C insurers
– The median 5 year combined ratio for “Very Strong” companies is 80 percent and 10 year is 82 percent with a low volatility of 6.5 (based on the standard deviation of the 5 year combined ratio)
No company has yet received a “Very Weak” assessment and only 7 companies have “Weak” operating performance so far (6 in US, 1 in Bermuda) – The EMEA region is rated best in terms of
operating performance with only 8 percent having a negative notch and the highest percentage of companies receiving a positive notch
BCRM update: Operating performance
1% 1% 16% 17%
10% 8% 14%
52% 52% 54% 52%
52%
30% 28% 36% 39% 33%
2% 2%
Total NorthAmerica
Caribbean& LatAm
EMEA APAC
1127 841 70 107 109
Very Strong (+2)
Strong (+1)
Adequate (0)
Marginal (-1)
Weak (-2)
Very Weak (-3)
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Overall, 44 percent of companies receive a negative notch for the business and 41 percent have the “Neutral” assessment – Only 13 percent of companies in our database so far
have received a positive notch for this category – Of the 23 companies that received the “Very
Favorable” assessment, 9 are large, global reinsurance companies
– The 26 companies with a “Very Limited” business profile cite high product and geographic concentration
Surplus size affects business profile assessment significantly: – 53 percent companies with surplus greater than
USD1 billion have positive assessment, followed by 40 percent “Neutral” and 7 percent “Limited”
– No negative notching in Caribbean & Latin America and APAC region for larger companies
– Only 10 out of 548 companies with surplus less than USD100 million have positive business profile assessment; 72 percent have a negative notch
BCRM update: Business profile
2% 3% 4%
44% 48%
26% 32% 33%
41% 36% 71% 55% 46%
11% 11% 3%
8% 17%
2% 2% 5%
Total NorthAmerica
Caribbean& LatAm
EMEA APAC
1127 841 70 107 109
Very Favorable (+2)
Favorable (+1)
Neutral (0)
Limited (-1)
Very Limited (-2)
Aon | Analytics Proprietary & Confidential 14
Out of the 37 companies with “Very Strong” ERM assessment so far, 30 are rated “A+” and above and 7 are rated “A”
Geographically, 27 of the 37 “Very Strong” assessments went to US insurers, 2 are domiciled in Bermuda, 1 Canadian, 1 in APAC and remaining 6 represent European companies
No companies have yet received “Very Weak” assessment and only 17 companies have the “Weak” assessment with “-2” notch. Of the 17 “Weak” companies are 5 are in the US, 1 Caribbean, 8 in APAC and 3 are African companies.
86 companies fall under the “Marginal” ERM assessment with a “-1” notch, out of which 1 is rated “A”, 9 rated “A-“, 21 rated “B++”, and rest “B+” or lower
BCRM update: Balance sheet strength
2% 3% 7% 8% 7% 4% 14% 9%
88% 89% 94% 78% 83%
3% 4% 6%
Total NorthAmerica
Caribbean& LatAm
EMEA APAC
1127 841 70 107 109
Very Strong (+1)
Appropriate (0)
Marginal (-1)
Weak (-2)
Very Weak (-3/-4)
Aon | Analytics Proprietary & Confidential 15
International Financial Reporting System (IFRS) Update
January 1 2021 effective date is fast approaching – Insurers around the world are launching or progressing on their implementation efforts. – Reporting systems need to be ready to prepare 31 December 2020 comparative information which will accompany
the 31 January 2021 results IFRS 17 is expected to cost European insurers as much as Solvency II, if not more. Some jurisdictions, such as Russia, Hong Kong and South Korea have declared that they will require the Standard from
2021 European insurers are awaiting the final endorsement advice to be issued by EFRAG (EU Parliament’s advisory body) in
December 2018 that will precede the Parliament’s vote on adoption. Understanding of requirements for reinsurance contracts held, which differ slightly from those for the underlying contracts
and will bring some changes to the current practice, is still evolving. – The IASB indicated reinsurance as being one of the top issues on the horizon whose complexity has been
underestimated. Aon has established a global IFRS 17 practice group to coordinate work of our experts in our offices around the world to help clients through: • our expertise in reinsurance contracts and the ability to help structure reinsurance covers that will optimize the
new balance sheet and profit or loss, • proprietary tools such as PathWise and ReMetrica for modelling, and • expert consultancy.
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About Aon
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© Aon plc 2018. All rights reserved.
The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.