Reinsurance Specialty Insurance - A Primer (MS) Mar 18 2014

Downloaded from Capital IQ by Damon Meng ([email protected]) at The Blackstone Group, Private Equity Group on Tuesday Apr 08 2014 10:13:56 PM, Sessionid:uaeu44kblinu052hza2rzvs1

A large profit contributor for re/insurers

Exploring how various areas work

Key trends going forward

ReinsuranceSpecialty Insurance – A Primer

M O R G A N S T A N L E Y R E S E A R C HEurope

Morgan Stanley & Co. International plc+

Maciej [email protected]+44 207 425 9104

Janet van den [email protected]+44 207 425 4055

18 March, 2014

Specialty Primer

Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.

For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Source: http://commons.wikimedia.org/

For the exclusive use of Damon Meng ([email protected]) at The Blackstone Group, Private Equity Group

mailto:[email protected]


M O R G A N S T A N L E Y R E S E A R C H

2

Specialty Insurance PrimerMarch, 2014

[3]

[5]

[18]

[20]

[33]

[36]

[40]

[51]

[57]

[62]

[67]

[71]

[75]

[78]

1. Definition of Specialty Insurance

2. Importance of Specialty Insurance

3. Marine, Aviation and other Transit (MAT) markets

4. Marine Insurance

5. In-land Marine

6. Kidnap and Ransom

7. Aviation Insurance

8. Energy

9. Political Risk and Political Violence

10. Credit Insurance

11. Surety

12. Specialty Casualty

13. Directors and Officers

14. Errors and Omissions

Table of Contents




3


Definition of specialty insurance

Specialty insurance can be broadly defined as the coverage of rare or unique items or events. The items or events covered are usually those

excluded from standard policies because of some unusual aspect. There is no clear line, though they tend to be complex or difficult to price risk areas.




4


Summary – Specialty is of rising importance, yet poorly understood

Speciality is difficult to define and the boundaries with other areas of insurance are blurry. However, we estimate that at least 30-70% of London market and 15-36% of European reinsurer non-life revenues relate to “specialty” lines.

The oversupply of global capital, combined with the advent of alternative capital solutions, has increased the importance of specialty lines as differentiators and earnings drivers for the industry.

The largest specialty line (by far) is Marine, followed by Credit & Surety, Directors and Officers and Aviation. In-land marine is also a substantial specialty line though it overlaps with other specialty and commercial insurance areas.

The largest lines have come under significant pricing pressure from oversupply of capital and competition, but players who exploit niche areas can still achieve returns well above cost of capital.

The growth outlook for speciality is strong due to emerging markets, rising global trade and unexploited areas in Western markets. However, the growth in the largest lines (transportation) is hampered by rising safety standards and falling losses.

Risk mitigation for insurers is very important in specialty lines and we detail the drivers in this report. However, an attractive feature is that many of the risks are non-correlated to each other, diversifying capital.




5


The Importance of Specialty Insurance

Source: http://commons.wikimedia.org/For the exclusive use of Damon Meng ([email protected]) at The Blackstone Group, Private Equity Group



6


Specialty insurance is a significant source of premiums for the London market

Source: Morgan Stanley Research estimates, based on most recent split available. For Swiss Re and Munich Re we include CorSo and Ergo premiums respectively in the base of the calculation for consistency of comparison with peers. *This estimate is a minimum % for Hiscox, as the split of reinsurance premiums between marine and non-marine is not disclosed. **Amlin does a lot of motor and property direct business which might arguably be called Specialty though we exclude it. A large chunk of the business is reinsurance and catastrophe reinsurance, which we haven’t considered here as specialty.

Exhibit 1: Estimated specialty insurance lines % of non-life gross written premiums

69.0%

62.0%

52.6%

36.3%

28.2%

20.0% 19.6%15.0% 13.4%

5.3%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Lancashire Hiscox* Catlin HannoverRe

Amlin** SCOR Munich Re Swiss Re Allianz AXA




7



Exhibit 2: Estimated specialty insurance lines % of total revenues

58.5%

43.0%

37.5%

24.2%20.3%

10.8%7.2% 6.6% 5.91%

1.67%0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Lancashire Hiscox* Catlin Amlin HannoverRe

SCOR Swiss Re*Munich Re Allianz AXA





8



8.76

4.70

3.86

2.84

2.12 1.991.54

1.22 0.990.40

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

Allianz Munich Re HannoverRe

Swiss Re AXA Catlin SCOR Hiscox* Amlin Lancashire

Exhibit 3: Estimated revenues from specialty insurance lines (in $bn)





9


Business mixes of London Market names – Amlin

12%

21%

27%

40%

Reinsurance

International P&C

Marine and Aviation

Commercial and Domestic

13%

10%

7%5%

16%

13%

8%

6%3%

19%

CargoOther marineAviation insuranceYachtBloodstockHullEnergyLiabilityWarSpecie

Exhibit 4: Amlin’s overall business mix Exhibit 5:Specialty lines within the Marine and Aviation division

Source: Morgan Stanley Research estimates Source: Morgan Stanley Research estimatesFor the exclusive use of Damon Meng ([email protected]) at The Blackstone Group, Private Equity Group



10


Business mixes of London Market names – Catlin

7%

22%

16%

12%

9%

34%

Reinsurance product group

Aerospace product group

Casualty Product Group

Energy/Marine Product Group

Property Product Group

Specialty/War & Political Risks

Exhibit 6: Catlin’s overall business mix

Source: Morgan Stanley Research estimatesFor the exclusive use of Damon Meng ([email protected]) at The Blackstone Group, Private Equity Group



11


Business mixes of London Market names – Hiscox

20%

15%

11%

10%

6% 2%

36%

ReinsuranceLocal E&O and CommercialSpecialtyArt and Private ClientPropertyMarine and EnergyGlobal E&O

Exhibit 7: Hiscox’s overall business mix

Source: Morgan Stanley Research estimatesFor the exclusive use of Damon Meng ([email protected]) at The Blackstone Group, Private Equity Group



12


Business mixes of London Market names – Lancashire

14%

20%

53%

2%11%

Property direct and facultative

Marine cargo

Property reinsurance

Aviation and satellite

Contingency

49%

31%

9%

7%4%

Property

Energy

Marine

Aviation

Lloyds

Exhibit 8: Lancashire’s overall business mix Exhibit 9: Some specialty lines are included in the Lloyds’ segment (4% of total non-life)

Source: Morgan Stanley Research estimates Source: Morgan Stanley Research estimates




13


Business mixes of European reinsurers – Munich Re

33%

33%

21%

13%

Primary InsuranceP&C ReinsuranceLife ReinsuranceMunich Health

39%

41%11%

3%6%

Property CasualtyMarineAviationCredit

Exhibit 10: Munich Re’s overall business mix Exhibit 11: Specialty lines ~20% of P&C Reinsurance





14


Business mixes of European reinsurers – Swiss Re

Exhibit 12: Swiss Re’s overall business mix Exhibit 13: Specialty lines ~15% of P&C reinsurance

48%

36%

9%7%

P&C ReinsuranceLife and Health ReCorporate SolutionsAdmin Re

38%

5%

3%

47%

3%4%

PropertyCasualtyMarineCreditEngineeringOther specialty





15


Business mixes of European reinsurers – Hannover Re

Exhibit 14: Hannover Re’s overall business mix Exhibit 15: Specialty lines are >25% of P&C reinsurance

56%

44%

P&C ReinsuranceLife and Health Re

37%

4%

5%

8%

9%

9%

28%

Target marketsGlobal reinsuranceMarineAviationCredit and SuretyStructured reinsuranceUK & direct business





16


Business mixes of European reinsurers – Scor

Exhibit 16: SCOR’s overall business mix Exhibit 17: Specialty lines are >20% of the Global P&C division

51%

49%

Global P&CLife

13%

11%

22%54%

TreatiesBusiness SolutionsSpecialty TreatiesJV & Partnerships





17


Specialty market sizes

0.0

4.0

8.0

12.0

16.0

20.0

24.0

28.0

32.0

36.0

Marine Creditand

Surety

Directorsand

Officers

Aviation Energy PoliticalRisk

PoliticalViolence

Kidnapand

Ransom

Exhibit 18: Estimated Market Sizes of Specialty Lines (US$ bn premiums)

Source: Morgan Stanley Research estimates




18


The Marine, Aviation and other Transit (MAT) Insurance Market





19


The Marine, Aviation and other Transit (MAT) Insurance Market

Note: Figures in brackets refer to 2012 estimates

a) Cargo policies cover transportation of goods or merchandise either by sea, air, or land

b) Outside the London Market, marine war risks are typically covered together with hull, cargo and liability policies. But for reporting purposes the related premiums may be excluded from IUMU statistics

*Swiss Re does not give an estimate for in-land marine. Our figure here comes from insurancenewsnet.com, citing Bestlink.

Sources: Swiss Re Economic Research & Consulting, Ascend Worldwide Limited, The International Union of Marine Insurers, and AON

MAT insurance

Aviation insurance (USD 6 bn)

Marine insurance (USD 38 bn)

Marine (USD 33 billion)

Airline (USD 2 billion)

Cargo (a) (b) Hull (b) Liability (incl. P&I) (b)

Airline (USD 2 billion)

Hull war & Excess

General Aviation Aero-space Space

Other transit (eg US inland marine) (USD 13 bn?)*

Offshore energy




20


Marine Insurance





21


Marine Insurance – key take-aways

1. Marine is the largest specialty insurance market with ~$33bn of premium (excluding P&I clubs)

2. It is >10% of the P&C premiums written by Amlin, Catlin and Lancashire and ~5% for the larger reinsurance names.

3. The major segments are cargo, hull, liability and energy, with cargo making up half of the total

4. Many included covers are not intuitive, e.g. fine art is often classified as marine cargo

5. Marine hull has not had a technical profit, overall, for the past 17 years according to IUMI

6. P&I clubs dominate the liability lines of marine, though this is under challenge

7. The Lloyds market, though a specialist in marine, is actually only a small part of the overall marine market, with large global carriers dominating this highly competitive space

8. Underlying risk pools are being driven up by rising global trade, although overcapacity of ships is damping some areas of risk. In addition, rising safety is also damping growth

9. Costa Concordia is a positive near-term influence on rates, but only in specific parts of the marine market, and the longer-term trend has been declining prices.




22


Marine Insurance – the economics

What is the value proposition for the customer?

The client receives protection against property and liability claims for damage related to marine activities. On top of ships, this can include cargo, ports, fine art (specie) or equipment.

What are the types of risks covered / services provided?

The marine insurance market can be subdivided into marine liability, hull and cargo insurance. Marine liability offers protection for third party liability or property damage while the client is engaged in marine operations. Marine hull insurance covers physical damage to marine vessels. Cargo insurance offers protection for damage or loss to cargo while in marine transit.

Energy can be included in marine (particularly downstream energy which can include oil platforms) yet most insurers have specialist energy downstream and upstream groups that sit together. We treat it separately in this primer.

How is the product sold?

Although some insurers have begun to market their products directly to clients, most marine insurance is still sold by way of brokers. Often coverholders (managing general agents, MGA) are employed for their specialist underwriting expertise and proximity to clients to distribute the products. For example, Amlin bought Lead Yacht Underwriters in 2011. This MGA has a global network of exclusive insurance brokers which distributes specialist yacht cover globally. It is the leader in the provision of super yacht insurance.For the exclusive use of Damon Meng ([email protected]) at The Blackstone Group, Private Equity Group



23


Marine Insurance – major market segments

Marine Insurance~$33bn gross written

premium FY12

Cargo53.4%* (~$17.6bn)

Hull25.7%* (~$8.5bn)

Liability**5.2%* (~$1.7bn)

Offshore energy15.7%* (~$5.2bn)

Ship cargo

Specie (valuable goods such as cash in transit,

jewellery, art)

Fine art (can include art hanging on gallery walls)

Goods in transit (including in warehouses)

Own equipment / tools

Ship hulls

Yachts (treated as separate class sometimes)

Construction of hull (e.g. Korean shipyards)

Sources: IUMI statistics. *Excludes reinsurance and pleasure craft, war, P&I from P&I clubs. Includes gross premiums before brokerage and commissions. **Note, liability excludes P&I club portion of P&I, which IUMI estimates as an additional $3.4bn FY12.

aka “upstream”

Mobile drilling units

Production platforms

Floating storage

Offshore construction activities

Protection and indemnity (compete with P&I clubs)

Marine general liability

Marine employer’s liability

Bumbershoot (umbrella) cover

Various focus liabilities areas (ship repairers’,

charterers’, stevedores’ etc)




24


Marine Insurance – major market players

2.58

1.48

0.91

0.65 0.600.43

0.280.08

0.00

0.30

0.60

0.90

1.20

1.50

1.80

2.10

2.40

2.70

Munich Re Allianz Swiss Re AXA Catlin HannoverRe

Amlin Lancashire

Exhibit 19: Estimated revenues from marine insurance (in $bn)





25


Marine Insurance – the economics

What are the common policy types?

All Risks – marine insurance is normally written under “all-risks” conditions rather than on a named peril basis, meaning that all risks are included, unless they are specifically excluded.

Voyage and time policies – The vessel or goods is insured for a particular voyage, regardless of the length of time it takes. Cargo is almost always insured on this basis.

Valued and unvalued policies – In a valued policy, the value of the subject matter is agreed upon in advance, whereas in an unvalued policy, the value is left to be calculated at a later time. Most hull and cargo insurance is written on a valued basis.

Floating policies and open cover – in a floating policy, the names of the ships, shipping dates and shipment values are only declared by the policyholder when the goods are shipped, and the amount of cover available is subsequently reduced by the declared values. These policies have mostly been replaced by open cover policies, where the policyholder instead makes declarations of shipment values after they have been transported, since the insured is covered for all shipments made within an agreed time period.

What is the market structure?

Worldwide marine insurance premiums are estimated at $33bn by IUMI (excluding P&I clubs), with cargo covers making up about half of that figure. While the Lloyds market is an important player, particularly in hull, the largest players globally are major commercial insurers such as Allianz and AXA. P&I clubs dominate the liability insurance space, (though this is being challenged by the growth in fixed premium P&I policies).




26


Marine Insurance – market structure

Europe43%

Asia / Pac32%

LATAM11%

North America

5%

Middle East6%

Africa3%

Sources: IUMI statistics. *Excludes reinsurance and pleasure craft, war, P&I from P&I clubs. Includes gross premiums before brokerage and commissions.

UK61%

Nordic29%

Japan7%

US3%

Exhibit 20: Global Marine Premiums* (~$33bn) FY12

Exhibit 21: Global P&I club ‘calls’ (premium) (~$3bn) FY12




27


Marine Insurance – the role of P&I clubs in marine insurance

The role of protection and indemnity (P&I) clubs (~$3bn premium / calls FY12 – IUMI statistics)

Although most marine insurers offer some liability covers, the dominant players in this market are the P&I clubs. These mutual pools have a long history and can be very large and sophisticated operations.

The key advantage that these clubs have is that they are not-for-profit, so they do not need to make a margin on their policies.

The disadvantage they have is that members do not know their premiums in advance – they may need to contribute more than they expect if there are losses suffered in the club. This creates volatility on earnings.

P&I clubs are facing a couple of key challenges over the next few years P&I clubs have traditionally focused on liability, though some have expanded a little into hull and cargo in recent years. Yet there are two big challenges facing the industry.

First, fixed premium policies, offered by traditional insurers, have been growing in popularity. The attraction of this cover for policyholders is the certainty of the level of premium against the more volatile club result.

Second, for European P&I clubs, Solvency 2 is both raising the administrative burden and punishing undiversified players through capital charges. These challenges are easier to meet for the largest P&I clubs, or those that are not based in Europe.

P&I clubs are significant buyers of reinsurance covers Although P&I clubs do compete directly with insurers, they are also large purchasers of reinsurance protection. This is done in order to reduce the volatility of earnings for club members and to protect against peak risks.

Some P&I clubs have even formed into clubs of clubs, where claims in excess of a certain amount are shared between the clubs and the group reinsurers itself as well. International Group (IG) is one such club of clubs. These players can be very large in scale and have the advantage of not needing to make profit on their capital.




28


Marine Insurance – cargo market – only a small fraction is placed in Lloyds

Europe43%

Asia / Pac32%

LATAM11%

Africa3%

Middle East6%

North America

5%


Exhibit 22: Global Cargo Premiums* (~$17bn) FY12

Exhibit 23: Marine Cargo Markets* (~$17bn) FY12

Japan10%

China9%

Lloyds7%

Germany7%

France5%

Brazil4%

Netherlands2%

Nordic2%

Italy3%

Russia4%

Other47%




29


Marine Insurance – cargo market – Lloyds capture more hull than cargo business

Europe51%

Asia Pac35%

LATAM6%

Africa1%

Middle East2%

North America

5%


Exhibit 24: Hull Premiums* (~$8bn) FY12 Exhibit 25: Hull Markets* (~$8bn) FY12

Lloyds14.8%

Nordic10.8%

China10.5%

Other36.1%

Korea3.7%

Italy3.7%

USA3.6%

Netherlands4.1%

France4.5%

Japan8.2%




30


Marine Insurance – there are many different types of potential clients globally

13.2%

10.7% 11.0%

6.0%

4.8%4.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Amlin Catlin Lancashire Munich Re Swiss Re Hannover Re


What types of clients are involved?

Clients of marine insurance are extremely diverse. Shipping companies, port operators, ancillary marine professions, fine art dealers, oil majors, refiners and private individuals are part of the universe of potential clients for this disparate field.

Europe and Asia Pacific are the largest markets globally for Cargo and Hull covers, though as with other lines the growth is largely in emerging markets.

Exhibit 26: Marine Insurance as a % of Non-Life Premiums




31


Marine Insurance – duration and risk management

What is the duration of the business?

Marine cargo and hull insurance are generally short-tailed business. Liability claims however can be much longer tailed, as the legal cases can take years to settle or resolve in court.

What are the key risks to the re/insurer?

1) Demand and pricing are strongly affected by shipping capacity and fuel prices: the current shipping capacity overhang has depressed freight prices, while fuel prices have risen. These factors have made clients very resistant to rate increases.

2) Ships have become larger, more expensive, and more complex, while litigation is continually increasing. This has made it more difficult to properly price marine risks.

3) Globalisation has made risks more interdependent. This has created accumulation risk for insurers, where they can experience large losses from the same event, due to policyholder or geographical concentrations (many policyholders transporting cargo in the same vessel, or cargo and vessels being concentrated in one location)

How does an insurer minimise risks?

Accumulation risks: a good understanding of these risks can ensure underwriting properly takes them into account.

Rising claims: insurers need to keep premiums in line with rising exposures in order to ensure they have sufficient capital to pay out larger claims.




32


Marine Insurance – risk mitigation

The safety of marine voyages has been steadily improving, reducing the probability of loss. However, competition has ensured that rates are reflecting this lower loss trend.

0.00%0.04%0.08%0.12%0.16%0.20%0.24%0.28%0.32%0.36%0.40%

1996 1998 2000 2002 2004 2006 2008 2010 2012

Exhibit 27: Total Marine Losses as a % of Vessels*

Sources: Clarkson Research Services, World Bank and Swiss Re Economic Research and Consulting calculations




33


In-land marine





34


In-land marine – clarifying the definition

What is in-land marine?

Inland Marine is a difficult to define area. It includes goods in transit and associated risks (warehouse etc) and in that way overlaps with marine cargo – though transport need not be by sea. However, it also covers a wide range of other risks, such as construction equipment, fine art, computer data, amongst others. It overlaps with commercial property and liability policy lines in many ways as well, so boundaries are blurry.

Types of coverage- Cargo insurance – similar to marine cargo policy- Builders’ risk – property on or off a building site related to a construction work- Equipment floater – equipment wherever it is placed within a geography- Fine arts – art galleries, paintings, other artworks- Floater policy – personal property located anywhere in a geography- Installation floater – property being installed by contractors- Warehouse liability – similar to a commercial liability cover- Accounts receivable – the risk that lost or destroyed records cause a loss (not default of debtor).

Allianz categorises in-land marine into four areas:- Construction,- Transportation,- Communications / technology,- Specialty (fine art, jewellers, financial institutions, tank storage).For the exclusive use of Damon Meng ([email protected]) at The Blackstone Group, Private Equity Group



35


In-lane marine – insurers and clients involved in the market

Largest players

CNA, Liberty, ACE, Chubb, Travellers, Allianz, Swiss RE, Munich Re are the large players. Listed London market names also participate in this market.

What are the key risks to the re/insurer?

The risks are varied, but the predominant focus is on short-tail property risks. The largest commercial coverage areas are said to be builder’s risk, motor truck cargo and contractor’s equipment. However, liability cover is also sometimes offered with these policies. The type of cover can be very specialised and tailored to the individual clients’ risk profile.

Key clients include…

Truckers, railroad companies, warehouse owners, jewellers, art galleries, financial institutions, museums, real estate developers, contractors / sub-contractors, property owners, broadcasters, government agencies, manufacturers.




36


Kidnap and Ransom





37


Kidnap and Ransom – value proposition and risk coverageWhat is the value proposition for the customer?

There are two components to the cover: financial and service related. The financial side relates to covering the costs of ransom, negotiation, transport, legal fees, liability (if victim sues), medical fees and any ancillary payments related to a kidnapping event. Often, however, the more important value proposition is from the risk services offered post event. These relate to information, advisory and extraction services provided by specialist risk consultancies globally who align themselves with insurers. Buying the insurance gives access to these services when needed.


The policy is typically triggered upon the detention with duress with the demand of a ransom payment. The requirement of a ransom demand is not always required – so politically motivated detention can be covered. Detention for criminal acts by the insured are covered if those acts are not illegal in their home country, though this can be a grey area depending on the facts of the case. Robbery is excluded.

By purchasing the cover, the policyholder has access to the risk provider that the insurer has relations with. Often the risk management service is exclusively tied to an insurer, so the best way for a policyholder to ensure they can access that service is through an insurance policy. That service at the front end includes information and advisory on criminal, political and terror risks across geographies and at the back end includes hostage negotiation, extraction and a variety of logistical support functions for the insured.




38


Kidnap and Ransom – market size, structure and client baseHiscox the dominant player via its response provider Control Risk

The entire K&R market is only ~$250m GWP globally, so it is a very small one. “Piracy” is a very small related market which predominantly has grown into its own since 2007 when the Indian Ocean saw a rise in incidents, but is now shrinking due to the better security in that area. It is not technically part of the K&R market.

The K&R market includes private individual as well as corporate business. Hiscox, which has a 60-70% share in the market, does approximately half of its business with individuals mostly directly, and half through brokers for companies.

The individual segment is largely focused on LATAM where kidnapping for ransom is relatively more common than in other regions. Customers are motivated both by the excellent reputation of Control Risks, Hiscox’s exclusive risk management partner, and by Hiscox’s own reputation for prompt and fair claims handling and service. In the case of private individuals, the financial protection is also important.

On the corporate side, buyers vary, but energy, mining and related companies are a relatively large part of the customer pool. For these buyers, the information and recovery service component of the cover is critical to the purchasing decision. Increasingly, K&R cover is seen as part of “due diligence” for companies which send their employees into riskier areas of the world.

The loss ratios for K&R have been very strong historically (<40%) with low volatility and little correlation with other types of risk. This has encouraged more entrants into the market. AIG is thought to have a ~10% share of the market, with Chubb, Travellers and Liberty also large players. Catlin, XL and Aspen are smaller aspiring players in this market.




39


Kidnap and Ransom – products and key trendsProduct types

The two major product types are family protection for private clients and corporate protection for enterprises. In the latter case, all employees and their families are typically covered by the policy, while in the former it is those members listed on the policy.

Common policy extensions include business interruption and political evacuation. The latter involves removing people from a country which experiences a specific rise in threat level.

The policies are usually re-underwritten annually, though up to 3 year cover is available. The duration of the liability is usually short tail, although the liability element of the cover (victim suing the insured company) can take longer to settle.

Key trends

Awareness of the policy cover is rising and it is increasingly becoming a standard policy that businesses buy to protect their employees that travel into risk zones.

Emerging market penetration of the policy is still very low, but rising. For example, Chinese business people travelling to riskier EM markets are increasingly being covered by this type of policy.

The rise of trade and commerce with more dangerous parts of the world is increasing the risk pool over time. Though some areas see a reduction of risk (Colombia), typically it is rising in other parts. For the exclusive use of Damon Meng ([email protected]) at The Blackstone Group, Private Equity Group



40


Aviation





41


Aviation Insurance – key take-aways

1. Around $6bn of direct GWP covering all types of aviation property and liability areas, including ancillaries such as airports, manufacturers and aviation workers.

2. A competitive market with overcapacity.

3. Risk pools rising due to ever rising numbers of global passengers, yet falling due to rising safety standards and lower frequency of accidents.

4. A volatile line in some areas, particularly liability. A single large loss, such as Air France in 2009, can cause >$1bn of losses. A multi-plane event such as 9/11 can eliminate many years’ worth of low loss profits.

5. Includes satellite covers which can be launch products (short tail) or in orbit (longer tail). Again, almost a binary outcome with either a very low loss ratio or total write-off of the technology.

6. Underwriting, use of specialist knowledge and data, is very important for this business line.

7. AV52 – liability from losses external to an aircraft caused by a criminal or terrorist act, is a new class that grew rapidly post 9/11, yet has been shrinking lately, increasingly included in the standard wording of aviation cover.




42


Aviation Insurance – major market players

0.96

0.70

0.57

0.410.36

0.25

0.05

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

Allianz Munich Re Hannover Re Amlin Catlin AXA Lancashire

Exhibit 28: Estimated revenues from aviation insurance (in $bn)





43


Aviation Insurance – the economicsWhat is the value proposition for the customer?

Aviation insurance protects aviation companies and private individuals from losses arising from physical damage to aircraft and cargo or liability claims caused by the ownership, operation and maintenance of aircraft.


Aviation insurance broadly covers two main risks: 1) the risk of physical damage to aircraft, cargo or satellites, and 2) the risk of third party liability claims for bodily harm or property damage caused by aircraft or airport operations.

Coverage is typically distinguished on the basis of the client, where there are four main categories: 1) Commercial airline insurance 2) Aerospace (manufacturers and service providers) 3) General aviation (a catch-all category that includes commercial rentals, charters, aerial photography, powered parachutes, aircraft for private business and pleasure) 4) Space (risks associated with the launch and operation of satellites, generally divided into “launch” and “in orbit” policies).

2.1%

7.7%

6.0%

2.3%

5.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Amlin Catlin Lancashire Munich Re Hannover Re


Exhibit 29: Aviation Insurance as a % of non-life premiums

0.000

0.500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

1996 1998 2000 2002 2004 2006 2008 2010 2012ee =estimate Sources: IUMI, Ascend Worldwide Limited and Swiss Re Economic Research and Consulting calculationsAirline figures are premiums net of brokerage fees and commissions

Exhibit 30: Global Hull and Liability Premiums (USD bn)




44


Aviation Insurance – market structure


This is primarily a brokered market with extensive use of MGAs.


There are a wide variety of aviation insurance writers globally. Some of the major underwriters include AXA and Generali in Europe and AIG and Berkshire Hathaway in the United States. Lloyds and the London market are very prominent in placing aviation risks. One distinct feature of the market is the limited number of insureds.

Vertical placing

One common feature of airline fleet insurance programmes is vertical placement, a type of risk placement that is not common in most other London Market businesses. In this system, risks are placed with the following re/insurers first, conditional on certain lead re/insurers taking the risk. The lead re/insurer may receive different pricing, terms and conditions from the following re/insurers, and the following re/insurers will not be aware of the price the lead is getting for the risk, and thus will each need to set a price for their own share.

All-risk policies

Aviation hull and liability contracts are usually “all-risk” policies, meaning that any risk that the contract does not specifically exclude is automatically covered. War risks are usually excluded. Terrorism risks were not traditionally excluded; however this inclusion was quickly withdrawn subsequent to 9/11 and has only recently begun to be partially reinstated, with a cap on third- part liabilities.


Generally, aviation insurance is a short-tail business. One exception occurs in space insurance, where satellites may be in operation for 10-20 years, and companies may buy coverage for losses in excess of a predetermined amount.




45


Aviation Insurance – risks for the insurer

What are the risks to the re/insurer?Catastrophe risk. Since aircraft must be built light, they are considerably more susceptible to substantial damage or total loss. Furthermore, when accidents occur, personal injury, loss of life and property damage frequently accompany the physical damage to the aircraft. This creates a catastrophe scenario, and claims can quickly exceed the premiums written. In the case of satellites, the risk is binary – even a minor problem means that the satellite must be written off as a total loss.

Limited number of plane types risk. Compounding the problem of catastrophe loss exposure, aviation insurers have a constrained ability to diversify their risks. This is due to a) the limited amount of aircraft in operation compared to other lines of insurance, which prohibits insurers from using the law of large numbers to accurately predict losses and b) the unique nature of each individual risk, where both the probability of loss and the value at risk (aircraft or satellite value) varies widely from one risk to the next.

Unusual liability risks. Aviation liability payouts are unusual in that the jurisdiction, cause of death and nationality of passenger can determine the level of compensation payout. In an air crash, the hull loss is often much smaller than the liability loss.

How does an insurer minimise risks?Prudent risk selection and pricing helps insurers minimise risks. Underwriters must be knowledgeable about the structural and technological problems of flight as well as the physiological problems experienced by pilots. They need to keep up with the fast changes occurring in the industry and price their policies accordingly. Rates for both hull and liability insurance should depend upon the age, type and value of the aircraft, the experience of the pilots and crew, and the routes frequently flown. Liability rates should also depend upon the capacity of the aircraft, passenger make up and past details of revenue passenger kilometres flown.

Insurers can also reduce their risks by offering clients restricted coverage, or requiring special operating conditions, such as using co-pilots when flying in high traffic areas.




46


Aviation Insurance – Specific examples

Lancashire and AV52

Lancashire’s AV52 business line covers third party liability claims arising from aviation war, hijacking and other perils. Passengers and cargo are not covered, nor is hull damage, only bodily injury of third parties in the event of an aviation accident. So for example, if a plane crashes into the sea due to a hijacking, AV52 does not pay out, though it would if the plane crashed on land and caused damage to property or hurt people. In line with its specific risk appetite, Lancashire excludes US commercial airlines from its coverage. While a large loss would create high earnings volatility, to date the portfolio has been extremely profitable for the group.

In 3Q12 Lancashire re-entered the launch and in-orbit satellite market. This increased further with the acquisition of Cathedral which writes mostly through a delegated authority (Satec).

Munich Re’s approach to aviation / space

Munich Re presented on aviation / space in an investor day in 2012. They outlined that they do not play in every market, instead specialising where they can add most value. For example, in space they focus on the short-tail launch product, rather than in-orbit. Global aerospace pools make up the bulk of what they write, where Munich Re competes on financial strength, line size and ability to write complicated and unusual risks. They also own Pritchard, a Lloyds underwriter that specialises in 3rd / 4th tier airline risk.

Their approach to the market has delivered a combined ratio of ~83% on average from 2007-11 with an expectation of <95% going forward. In 2011, when the combined ratio fell to 59.9%, aviation / space contributed €205m to the Munich Re EBIT – a material addition.




47


-20%

-10%

0%

10%

20%

30%

40%

50%

2007 2008 2009 2010 2011 2012 2013

Loss

ratio

0

10

20

30

40

50

60

70

80

90

$m G

WP

avia

tion

/ spa

ce

Net loss ratio NEP

Aviation – Lancashire aviation – satellite losses in 2013 raised the loss ratio

Source: Lancashire.

Exhibit 31: Lancashire’s loss ratio and NEP aviation – strong cycle management has kept claims low

Trend is distorted by a large satellite loss in January 2013. Underlying the loss ratio should still be elevated at ~20-25% due to the addition of

satellite business which creates IBNR going forward. Despite all this, even in 2013 the loss ratio was very low compared to many primary insurance

lines.




48


Aviation – Munich Re delivered €205m PBT in aviation in 2011

Source: Munich Re.

300

350

400

450

500

550

600

650

700

2007 2008 2009 2010 2011

€m G

WP

avia

tion

/ spa

ce

40%

50%

60%

70%

80%

90%

100%

110%

Com

bien

d ra

tio

GWP (LHS) CoR (RHS)

Air France loss – Munich Re was technically profitable in a year when

the aviation industry suffered a significant claims event.

Exhibit 32: Munich Re’s Aviation and Space lines – very profitable over time




49


Aviation industry trends

0.00%

0.02%

0.04%

0.06%

0.08%

0.10%

0.12%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Note: Figures do not include corporate jet and military transport accidents/hijackings

Sources: Clarkson Research Services, Flight Safety Foundation, World Bank and Swiss Re Economic Research and Consulting calculations

0.00

0.50

1.00

1.50

2.00

2.50

3.00

1996 1998 2000 2002 2004 2006 2008 2010 2012

Note: Total and partial airline hull losses are deflated by aircraft average fleet values in an attempt to account for the impact on claims of rising aircraft values

Sources: Ascend Worldwide Limited and IUIAI

Exhibit 33: Total Losses as a % of Average Fleet Values*

Exhibit 34: Fatal Accidents per Million Flights*Fatal accidents have been falling consistently for 20 years although the losses as a % of aircraft values have shown an inconsistent

record over the past 10 years.




50


Aviation – the Air France Flight 447 Loss

How did the accident occur?

• Flight 447 from Rio de Janeiro to Paris crashed on June 1, 2009. All 228 passengers and crew were killed.• The aircraft lost radio contact while flying through a storm over the Atlantic ocean• When the black box of the aircraft was recovered, it was revealed that the airspeed sensors had

malfunctioned. The stall warning sounded but the pilots, believing that the air speed was too high, had therefore exacerbated the problem by pulling the aircraft nose up, instead of pushing it down to recover from a low air speed. As a result, the aircraft stalled and fell out of the sky

What were the overall insured hull and liability losses?

• Overall liability claims of €450m-500m• The insured value of the Airbus 330 was around $100m

Who were the main insurers involved?

• Air France and KLM’s insurers included AXA as lead insurer, Allianz and AIG




51


Energy





52


Energy Insurance – market segments

Downstream Midstream Upstream (offshore)

Refineries Transportation by pipeline or vessel

Exploration, development and production assets and activities, offshore and onshore

Petrochemicals and chemical plants

Gathering, separation and storage

Production platforms

Gas works Mobile offshore drilling units

Terminals and tank farms Floating production storage off- loading units

Underground storage Offshore activities

Underground storage

Sources: Allianz




53


Energy Insurance – the economics


Companies are compensated for damages to equipment, losses from supply chain disruption and litigation fees and settlements from law suits.


Energy insurance can be categorised as property coverage, third party liability coverage and renewable energy. Products are typically considered to be either offshore or onshore covers. Property coverage protects against damages to installations, rigs, refineries and plants, and also provides coverage for business interruption and supply chain risk as a result of these damages. Third party liability provides indemnification for liabilities arising from energy operations. Renewable energy insurance specifically covers companies specialised in renewable energies such as hydro and solar.


A wide range of clients purchase energy related coverage: oil exploration companies, refining companies, rig operators and manufacturers, oil transporters, gas and petrochemical plants, and solar panel installation contractors. A limitation of the market is that oil majors are much larger than most insurers, so they often choose to self-insure. E.g. the Gulf of Mexico liability loss was minor, due to low insurance penetration for liability (though property cover is more common).


Property coverage is usually short tail, whereas liability coverage can be significantly longer tailed.For the exclusive use of Damon Meng ([email protected]) at The Blackstone Group, Private Equity Group



54


Energy Insurance – market structure


The products are usually sold through brokers.


There are many large and small energy underwriters worldwide. Some write energy insurance as a specialty line, others write some onshore risks as part of their general property and casualty books or, in the case of some reinsurers, package marine and energy coverage together on a whole account basis. Munich Re previously attempted to build an energy liability franchise, but the oil majors were not willing to take up the opportunity. In the UK, the largest energy insurance market is the Lloyds market. Of the business transacted at Lloyds, 6% is energy underwriting (CII).

2.7%

8.4%

33.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Amlin Catlin Lancashire0

5

10

15

20

25

3019

92

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

WELD Energy Losses (USD bn) Estimated Global Energy Premiums

Source: Morgan Stanley Research estimates Source: Willis Energy Loss Database as at April 1, 2013

Exhibit 35: Energy Insurance as a % of Non-Life Premiums Exhibit 36: Global energy losses have often exceeded written premiums




55


Energy Insurance – market structure – Lloyds the dominant player

Lloyds57.9%

Brazil4.4% Nigeria

4.6%

UK (IUA)4.3%

Other28.8%

Exhibit 37: Offshore energy premiums* (~$5bn) FY12

Source: IUMI statistics. *Excludes reinsurance and pleasure craft, war, P&I from P&I clubs. Includes gross premiums before brokerage and commissions.




56


Energy Insurance – risk mitigationWhat are the risks to the re/insurer?

Aggregation risk - energy extraction, production and distribution facilities are often concentrated in areas greatly exposed to natural forces. For example, the many oil platforms concentrated in the gulf of Mexico are at risk of damage due to seasonal windstorms. The result of this is that insurers can be overexposed in the case of a particularly bad year for natural disasters. This risk is increasing as climate change increases the volatility of global weather conditions, and companies seek to build assets in even more remote and inhospitable areas.

Volatile commodity prices - When oil prices are high, business interruption costs from damaged equipment can exceed the property damage costs. The extent of these losses may be hard for insurers to estimate when underwriting contracts. In addition, since the increase in oil prices after a natural disaster offsets the losses in production from damaged sites, some larger energy companies have found it economical to self insure. This recent move towards self insurance is resulting in lost business for insurers.

How can an insurer minimise risks?

Aggregation risk:Limits on coverage - insurers can place aggregate sub-limits on coverage for particular areas or types of natural

disasters. Deductibles can also be increased for storm losses.Greater risk differentiation - selective underwriting can be used by insurers to properly take into account the

differences in storm resistance between older and more modern platforms and installations.

Volatile commodity prices: many insurers have moved toward an agreed value form of contract, where the price of oil for any relevant claims is fixed at the start of the contract. For the exclusive use of Damon Meng ([email protected]) at The Blackstone Group, Private Equity Group



57


Political Risk and Political Violence





58


Political Risk Insurance – economics and market structure


Provides balance sheet protection for companies investing and operating in countries where political risk is high, primarily emerging market economies.


Risk of loss from expropriation of assets by governments, losses of trade and investments due to capital controls, and risk of non-payment for goods and services in emerging markets. Typically there are exclusions for nuclear and biological issues, default or insolvency of the insurer, or illegal acts by the client. Most coverage is in emerging markets, and the greatest concentration of coverage is therefore in larger emerging markets such as Brazil, Russia, and Turkey.


This product is exclusively sold through brokers.


There are about 40-50 insurers globally who provide political risk coverage to commercial banks, traders, and corporates with assets in emerging markets. The big three brokers (Marsh, Aon and Willis) do not dominate in this market. Small niche brokers instead transact most of the business. The global market size for private clients is estimated at $2bn in gross written premiums.


There are four main categories of clients who seek political risk coverage: 1) traders who sell and store goods 2) Companies investing and operating internationally - ie. factories, oil rigs, 3) Public sector clients, such as export credit agencies and multilaterals, and 4) commercial banks who trade in goods and services and deal in commodity flows.For the exclusive use of Damon Meng ([email protected]) at The Blackstone Group, Private Equity Group



59


Political Risk Insurance – risks for the insurer

What are the risks to the re/insurer?

Adverse selection – Since political risk insurance is not mandatory, adverse selection can play a role, where clients are predominantly those companies who expect to invest in or increase their trade through countries or regions that are particularly high risk.

Moral hazard – Those companies who are covered for political risk may tend to select credit counterparties who are riskier, or act in a more hazardous manner in general, increasing the likelihood of government actions against them.


Adverse Selection – client selection and underwriting is very important. Often the insurer will spend many months in discussions with a prospective client before deciding whether to underwrite them or not. Risk sharing clauses can also be placed in policies in order to ensure that interests are aligned.

Moral hazard – again, underwriting the client is very important, since misbehaviour by the client can impact the probability of adverse actions by a government. The insurer must look at the past history of behaviour of the prospective client, since patterns are likely to persist. In terms of non-payment protection, political risk coverage is applied transaction by transaction, rather than in aggregate for the client, as is the case for credit insurance. This ensures that the client maintains cautious counterparty selection.


This is a short-tail business. Payments made be made some months after a loss has occurred (in the case of Catlin 180 days is a typical waiting period) in order to allow for recoveries, since a lot of claims actually resolve themselves over a 6 month period. Multi-year policies may be written.




60


Political Violence Insurance – economics and market structure


The client receives protection for loss to their physical assets as a result of riots, political violence, terrorism or civil conflicts.


The loss or damage of buildings or other structures is covered. This loss can be a result of civil riots, civil war, terrorism, rebellions. War in the traditional sense (between two countries) is usually excluded, though it may be exceptionally written into the policies in exchange for an additional premium from the client. Even in those cases, war between any two of the major five powers (US, UK, China, Russia or France) is usually excluded. In contrast to political risk coverage, political violence coverage is concentrated in developed countries.


This product is exclusively sold through brokers.


This is still a fairly niche market - there are only 20-30 insurers worldwide. The client base is in the thousands, since anyone who buys property insurance may also buy political violence cover for that property. Unlike for political risk insurance, the big three brokers dominate in this market. Marsh and Willis, for example, control 60-70% of the business into London. The size of the private market is estimated at US$1.2bn.


The main clients are those who have heavy asset exposure to cities and city centres, or manufacturers who operate large sites with many assets.




61


Political Violence Insurance – risks for the insurer


Aggregation risk – a single event may result in high aggregate losses for the insurer if many assets have been underwritten in a concentrated area.

Volatile/unmodelled risks – underwriting assets in regions where the risk situation is very volatile, or there is simply not enough historical data to properly price the risk, can put the insurer at risk of large unexpected losses.


Aggregation risk – insurers may impose stringent caps on aggregate exposures to help mitigate this risk. Other insurers may instead look only at the probable maximum loss (PML), resulting in more lenient underwriting than those who apply a cap, since PML does not aggregate exposures.

Volatile/unmodelled risks – the best way for an insurer to avoid these risks is simply to avoid underwriting in regions where the risk is not stable or able to be underwritten


This is a short-tail business. Policies are 12 months in duration, back to back with standard property insurance.




62


Credit Insurance

Source: http://commons.wikimedia.org/For the exclusive use of Damon Meng ([email protected]) at The Blackstone Group, Private Equity Group



63


Comparing Credit and Surety

Source: Munich Re investor briefing October 11, 2012 1triggers include a breach of obligations by the principal; unsuccessful litigation by the beneficiary due to insolvency of the principal; possible loss mitigation through fulfilment of the obligations by a substituting principal. 2 e.g. bid bond, advance payment bond, performance bond and maintenance bonds

Credit Insurance Surety Bonds

Sensitivity to Economic Cycles

This is a cyclical industry, where corporate insolvency is negatively correlated with

economic growth. This means that claims will increase during periods of weak or negative

economic growth

Less cyclical than credit insurance; potential claims depend on multiple triggers1. Contract surety claims rise when economic

activity falls, as contractors are more likely to become insolvent when construction activity is weaker. However this cyclicality is

mitigated by contract surety bonds that are based on anti-cyclical governmental infrastructure projects.

Contract Duration This is a short term business. Credit periods are usually less than 180 days.

Surety is a medium to long-term business, with contracts lasting on average 2-3 years, and up to 7 years. This is because surety bonds are often used to cover all the stages of construction or

engineering projects by different bond types2

Underwriting Success Factors

Insurers must conduct thorough due diligence of potential customers. Exposure limits and

retention rates are also tools that can be customised in the contracts to mitigate risks

for the insurer

Properly assessing the technical capacity and financial resources of the principal to determine the probability of breach

of contract and to price the bonds accordingly

Market Structure

This market is highly concentrated. There are three global leaders: Euler Hermes, Atradius

and Coface. These three firms, along with Sinosure, control 75-80% of the global market.

Banks compete with specialty surety firms and composite insurers for business. There are no real global leaders, as each

market is very specific, due to legal and regulatory circumstances that differ between countries.




64


Credit Insurance – the economicsWhat is the value proposition for the customer?

Credit insurance covers trade payables of businesses against non-payment through default or insolvency. In addition, credit insurers often provide services around credit risk selection and recoveries. Those services may be outsourced or sold separately to the insurance.


Credit insurance covers the risk of non-payment by a creditor due to late payment or insolvency. The insurer steps into the shoes of the seller and attempts to recover what is possible. Credit information is very important to the insurer, but also to the insured in selecting customers. Clients tend to be any business which has credit receivables, especially where a single large default could be material. Geographically, the US is relatively underpenetrated by this cover.


There are two key risks: liquidity of the economy, and asymmetry of information. • liquidity: if liquidity dries up in an industry or economy then late payments rise. Insolvencies rise when liquidity falls,

boosting credit insurance claims. Generally credit insurance is a cyclical business, with the highest risk when an economy is on the downturn.

• Information asymmetry: between the insurer and insured. The insured knows the customers and may have been working with them for many years. The insurer must do careful due diligence to ensure that the credit situation of customers does not deteriorate unexpectedly.


Underwriting the client – ensuring no irregularities in the business. Thorough review of customers, due diligence against credit agency information. Specific limits to prevent over exposure, with reviews if any customer credit is higher. Retention by the insured to align incentives. Effective recovery process to ensure minimisation of losses once they occur. Fast response in pricing to changing market dynamics.




65


Credit Insurance – market structureHow is the product sold?

Often directly by the credit insurer but also through brokers.


The credit insurance market is concentrated outside of the US. By far the three largest primary players are: Atradius (Cattalana Occidente), Euler Hermes (50% Allianz) and Coface (Natixis). Global primary market premiums for credit and surety insurance are estimated at approximately €13bn or US$17.8bn. Munich Re, Swiss Re, SCOR and Hannover Re are all active reinsurers in the credit market. The market originated in Western Europe and penetration is still highest there.


Credit insurance is a short-tail business with claims made within 30-90 days of non-payment and recoveries chased for 1-3 years generally. Contracts are typically 12 months in length, so re-pricing is possible, although it is seen as a “partnership” business rather than a commodity business.

8.0%

3.0%3.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Hannover Re Munich Re Swiss Re


Exhibit 38: Credit Insurance as a % of Non-Life Premiums




66


Credit Insurance – other parts of the value proposition

1) A hidden bank

By allowing businesses to select risks more carefully and by protecting against the volatility of a non- payment, credit insurers improve their clients’ business proposition by improving the credit terms they can offer their own clients. In this way, credit insurers are like “invisible banks” which help promote credit creation.

2) Enhancing business credit selection

Their presence discourages poor behaviour because non-payment can damage a business’s credit availability across the market if a credit insurer knows of their default. The recoveries function allows a business to use the credit insurer as the “bad guy” collecting debts without damaging the client relationship.

3) As a form of collateral

The presence of credit insurance helps make the trades payable a better form of collateral for bank loans, so usually helps in securing these at better terms. However, credit insurance will not pay out if terms are not followed by the business. As the bank cannot ensure the business acts in line with the policy, it is considered an imperfect form of collateral. It is possible to assign insurance loss rights to a debt provider, which improves the bank’s standing in an insolvency situation of the business.




67


Surety





68


Surety – the economicsWhat is the value proposition for the customer?

Protects a company against the risk that a counterparty to a contract fails to meet their obligations. The policyholder is compensated for losses resulting from the failure of the second party to fulfil those obligations.

Terminology:• The obligee - the beneficiary of the obligation• The principal - the party who will be performing the contractual obligation • The surety - assures the obligee that the principal can perform its obligation


Surety insurance, sold as “surety bonds”, covers the losses caused by breach of contractual or legal obligations. They are not actually contracts of insurance, but rather contracts of guarantee. This is because, similar to credit insurance, surety bonds entitle the surety to seek reimbursement from the principal in the event that the surety must pay the obligee.

There are two main categories of surety bonds: 1) contract bonds and 2) commercial bonds.

• Contract bonds: these bonds make up the majority of surety bonds. Most often used in the construction industry, they guarantee that a general contractor will meet all the obligations of a contract, or that a contractor will enter into a contract if its bid is accepted.

• Commercial bonds: guarantee the performance of other commercial undertakings. These can include:– License and permit bonds, which are sometimes prerequisites to receiving licenses or permits, are guarantees to a government and

its constituents that a company will comply with an underlying law or regulation. – Bail bonds: ensure a person in jail will appear in court after having been released. The bail money will be forfeited to the court if the

person does not appear.– Appeal bonds: guarantee that the payment of an original judgement will be made in the event that an appeal fails.– Fiduciary bonds: ensure that an individual will perform a fiduciary duty, usually handling money or an estate, according to a court’s

instructions – Public official bonds: guarantee the faithful performance of elected or appointed public officials




69


Surety – market structure


This product can be sold through brokers, or directly by the insurer or bank offering the product. It is purchased by the principal, who is the contracting party, rather than by the obligee, to whom the contractual obligation is owed.


The surety industry is quite concentrated. The top five companies have over 50% of the market and the top 10 companies make up 67% of the market. The top five companies globally are Travelers Group, Liberty Mutual insurance Group, Zurich Insurance group, CNA Insurance Group, and Chubb & Son Group. Swiss Re, Arch Capital and Berkshire Hathaway are major reinsurers active in this market.

60-70%of all surety bonds are written in the US, due to the size of the economy and regulatory requirements. All public projects in the US must utilise contract surety bonds as a prerequisite.

Who are the clients?

Clients are typically companies active in the construction, engineering, waste services, and brewing and beverage industries.


The majority of the surety bond business is medium to long term duration, with the average being 2-3 years. However, some contracts can last up to 7 years for large infrastructure projects or commercial bonds covering the performance of public officials. Other contracts, such as bail bonds, can be shorter term in duration, as they cover a single event with a foreseeable maturity date.




70


Surety – risks for the insurer

What are the risks to the re/insurer?• Liquidity: for contract bonds, if liquidity dries up in an industry or economy then contractor insolvencies are more likely,

and claims will rise. Although the surety industry as a whole is less cyclical than the credit insurance market, contract bonds comprise a large proportion of the market, so this is still a significant risk for writers of surety bonds.

How does an insurer minimise risks?• Underwriting the client – in terms of contract bonds, this means assessing the technical capacity and financial

resources of the contractor to determine the likelihood that the project will be completed on time and in the correct manner. For commercial surety bonds, the type of due diligence required is highly specific to the type of bond.

• Recovery process: Similar to credit insurance, since the insurer must seek indemnification directly from the principal, an efficient recovery process can help to minimise losses.




71


Specialty Casualty





72


Casualty – some general points

Definition• Casualty insurance is technically third party liability cover. That includes bodily injury but also

personal injury (financial, reputational, IP etc).• Casualty insurance is not neatly divided out of other specialty lines – P&I in marine is a form of

casualty as is MTPL in motor lines. • “Specialty” casualty is also hard to define. We will focus on professional liability (E&O) and director

and officers, though many other lines could be considered “specialty” as well. • 40% of global liability is US based – driven by the more litigious nature of that market against other

parts of the world. Common law countries are generally over-represented in liability lines.

Longer-tail lines, in general• Casualty tends to be longer tail for many reasons. A big driver is that liability is often determined via

legal processes which can take longer. Sometimes the claims themselves take a while to emerge, such as those of professional negligence. Even when the claims are known, they can develop for years. For example, bodily injury claims can develop depending on how well the injured party recovers.

• Claims made vs. occurrence. Historically, many policies were made on an occurrence basis. This meant that any insured loss which occurred in the contract period was covered, even if it was claimed much later. Nowadays, many contracts are on a claims made basis. These policies only pay out if a valid claim is lodged within or shortly after the contract period (strictly defined). The effect of claims made is to significantly “shorten the tail” on claims reserves.




73


General liability

Coverage A

Coverage B

Coverage C

Other liability lines (“specialty”)

Employment practices

Owners and Contractors Protective Liability

Professional Liability

Environmental

Directors and Officers

Other lines

Bodily injury and property damage liability cover

Personal and Advertising (libel, slander, wrongful arrest, invasion of privacy etc)

Medical payments

Coverage B and C can be

eliminated from the policy, A is the core of the

contract

Clean up from pollution and any liability arising from the pollution

Wrongful termination, harassment, discrimination of employees

Protects owner from liability caused by people working in or around a property

1. Medical malpractice 2. Errors and Omissions

Protect a company from losses from losses due to security violations, shareholder claims, employment and

environmental claims

Include liquor liability (licensed premises for actions of patrons), fiduciary liability (aka pension trust liability), umbrella / excess liability (if other covers are blown)

Casualty – rough map to US casualty lines. We focus on lines in bold.

Source: Property & Casualty General Insurance Primer, Werbel Publishing Company, 2005




74


Case study – the Catlin approach to US casualty

Market position – very small market share Catlin writes $1bn of premiums in its US business, of which 65% is casualty. This makes Catlin a tiny player in the >$200bn casualty market in the US. Business is sourced through brokers, though Catlin operates in many different locations in order to access business that does not go to the hubs.

What does Catlin cover? Catlin’s focus is on short-tail lines. 65% of the US casualty book is in short-tail professional lines or shorter tail general casualty such as construction. Key areas include architects and engineers, professional liability of construction, environmental, NY construction, general liability (but book starts in 2012), financial institutions (in its infancy). They also have a small healthcare book. Much of the business is on a claims made basis, although generally that cover is extended back to when the client first started with Catlin. This lengthens the tail over time, but ensures client loyalty as well. Catlin avoids workers compensation, MTPL and master policy business. Most clients are SMEs.

What is the approach to growth? Catlin grows largely via hiring key people and allowing them to stay in their base geography. The business must be profitable post brokerage but before central costs as a rule of thumb. The underwriting process is seen as the core differentiator.

Key risks and trendsManaging the tail – generally the claims made portion of the book is settled within 3-5 years and the occurrence basis is settled between 4-5 years, so not as long a book as might be imagined. Catlin keeps limits small where it can - $1-2m is common. Financial institutions is growing rapidly due to the claims activity in this area. Several players have been pulling back from this area, causing rates to harden. Prices are generally hardening partly because of the impact of the low yield environment, but also due to the drying up of reserves from historically profitable older years. Frequency and severity trends have generally been benign over the past few years. There was an expectation that the downturn would lead to more incentive for claims to be made, but that was not really the experience.




75


Directors and Officers





76


Directors and Officers (D&O) insurance – the economics


Provides defence, investigation and settlement cost coverage in the case of litigation for the directors and officers of a company, as well as for the company itself.


D&O policies are written as all-risk policies, where the policyholder is covered for defence and settlement costs for anything they are sued for, unless it is explicitly an exclusion of the policy. This can be misrepresentation, mismanagement, and security class actions. Fines by regulators are not covered and fraud and improper personal gain are exclusions that are rarely applied.


Change in the litigation environment – lawyers are continually finding new ways to allege corporate wrongdoing, increasing the number of claims.

Change in the regulatory environment – new types of regulation or stricter enforcement of regulations could lead to elevated claims.

Political Risk – this can drive the regulatory enforcement behaviour of the government.

Markets can quickly proceed with unproven business models – an example of this is the IT bubble, which, when it burst, led to a large increase in lawsuits and subsequent claims.




77


Directors and Officers (D&O) insurance – market structure

Who are the clients?

Corporations with officers and directors are the main clients. Since companies are often co-defenders in cases alongside their directors, the policies are written to protect both the officers and the company balance sheet itself.


Predominantly a brokered market, where relationships and claims handling reputation are very important. Managing general agents (MGAs) are also active in this market. They issue their own product, which is backed by an insurer or syndicate.


Most policies are written in the United States, which is a multibillion ($4-7bn) dollar market for D&O insurance, due to the litigious environment. (Source: Hiscox). The international market, in contrast, is only $1-1.5bn in size, with several hundred million of that written in London, the centre of international D&O insurance. AIG, Chubb, Ace, XL and Houston Casualty are major underwriters in the United States, while Beazley is the biggest underwriter in the Lloyds market. In London, 45-50 carriers offer some level of international D&O capacity, so competition is strong


Typical duration for D&O coverage is 3-6 years, however some claims may take 10-15 years to settle, since they are based on legal cases. The policy length is usually 12 months.




78


Errors and Omissions





79


Errors and Omissions (E&O) insurance – the economics


Professional indemnity cover against being sued by a customer. ~$11.1bn GWP in the US as at FY11 according to MarketStance (a US insurance data provider).


Predominantly negligence, but also IP and breach of copyright. Cyber liability is a growth area for the space as that risk pool is expanding rapidly.


Predominantly a brokered market due to the complex nature of the product.


Systemic loss risk - An entire profession repeating a mistake that causes a liability again and again. E.g. IFA miss- selling. Another example is how photographic agencies copyright images on-line, using software to search for all breaches and then suing non-compliant users. A final example would be if a downturn in the economy led to a scaling back of IT projects and clients finding “issues” in the work completed.

Severity risk - The client may have higher exposures than originally considered


There are a wide variety of E&O writers globally and it is an important business line for the Lloyd’s market. AIG, QBE, Zurich and Allianz are major writers globally. RSA is very large in the UK. E&O is a major business line for Hiscox. The largest E&O markets are common law countries, so US, Australia, UK and Canada. European countries having growing protection. The growth in litigious trends is a key driver for the size of the E&O market globally.




80


Errors and Omissions (E&O) insurance – risk mitigation


Systemic risks – can be predictable Macro drivers can be foreseen – a crash in real estate leads to surveyor misquoting. Can exclude some types of claim, e.g. against insolvency of IFAs.

Severity risks – underwrite the client Look closely who the client’s work is for, what they do, their track record and the quality of the

business. Underwrite large clients closely, small clients can be quicker, though sometimes very large losses

can come from clients with very cheap policies.

E&O writers must have strong legal representation, both internally and through a panel of legal providers.

E&O writers will act to mitigate losses for clients by instructing them to amend practices (e.g. re-printing faulty brochures etc) and will also defend them in court. Often E&O writers will represent their clients not just to mitigate loss, but to argue against the claim – occasionally winning and recovering the legal fees. ~20-30% of claims paid are for legal fees, while 70-80% are for payouts for claims.

Policies can be limited to a particular jurisdiction or can be world-wide. Can be written on an “any one claim” basis limit, or can be aggregate covers. Retentions vary by size of limits placed; small companies can have very low retentions.




81


Errors and Omissions (E&O) insurance – other factors


E&O has a duration of ~5-6 years. Claims are based on legal cases, which means they can take many years to resolve. Can be “claims made”, though typically that excludes claims from incidents prior to the first year of coverage with the insurer, i.e. coverage is continuous from first purchase of the policy.


Traditional lines are generally compulsory forms of insurance and can be commoditised, “minimum terms” policies. E.g. Law Society defines unfavourable terms for legal indemnity treaties.

Emergent lines are often driven by contractual needs, are non-compulsory, so can go up and down according to the need of the client. Generally the trend is for E&O to grow into new professions over time, so penetration is increasing.

Traditional• Lawyers

• Accountants• Architects• Surveyors

Emergent• IT professionals

• Management consultants• Recruitment consultants

• Estate agents• Media professionals

E&O

Exhibit 39: E&O coverage can be broken down by client type into Traditional and Emergent lines

Source: Morgan Stanley Research




82


Errors and Omissions (E&O): Case Study - the Hiscox approach

Market approach

Strong focus on emergent professions and on SMEs. These include management consultants, IT, media, estate agents and recruitment consultants. Focus on small ticket frequency business, although about 20% of sum-at-risk is big ticket. Avoid the big 5 accounting firms, focus is on smaller end of traditional lines. Write only on a claims made basis, limited to original policy inception and continuous.

Small ticket book has low underwriting needs and can be inconsistent cover because smaller firms close, merge or drop cover more frequently. Around 10-15% turnover of this book. Larger ticket book tends to be on media + tech. This is re-underwritten every year with a detailed look at who the client is working with.

Distribution

80% of business brokered but 20% direct sales as well via phone and on-line. “Local” E&O looks at the local geographic market. Biggest is UK, although they do sell in France, Germany and the US. Cover is for all claims made globally, but if the client has no physical presence in a foreign market, they can usually have the matter transferred to UK jurisdiction (US is a lot more expensive).

Economics

Hiscox writes 100% of the entire client’s E&O business; they do not follow the subscription market (because SMEs can be covered by a company of Hiscox’s size). The combined ratio varies dramatically between types of client, but is generally 85% to 90%. Reinsurance purchased to limit any given claim to a maximum of £3m, but will write up to £10m covers for individual tickets.

Claims management

15 people in claims team, of which 12 are lawyers. A panel of law firms used for specialist advice needs. For the exclusive use of Damon Meng ([email protected]) at The Blackstone Group, Private Equity Group



83


Legal Protection Insurance – how it differs from E&O

Legal protection insurance is usually an “add on” product sold together with motor or household insurance

It protects the policyholder from legal costs associated with the object insured, for example the costs of going to court to settle liability after a car accident

The two main forms are before-the-event, usually sold together with other products, or after-the-event, which protects against legal costs after an accident

After-the-event legal cover typically is taken by those hiring no-win no-fee legal services and protects against cost claims of the other side of the case

While E&O is sold to businesses, legal protection is sold more broadly. E&O is considered a specialty insurance product, while legal protection is far more commonly sold

Legal protection insurance is by its nature jurisdiction specific and can vary substantially between countries

Legal protection insurance requires significant legal expertise. However, it is a low premium product where small numbers of cases make up the majority of claims over a large population pool.

While E&O covers legal protection as well, it also actually covers the underlying liability. Legal protection only covers the legal costs of defending or making a claim, not the actual liability once it is determined.




84


Warranty and Indemnity Insurance

Warranty and indemnity insurance is used in conjunction with M&A. Typically the seller provides warranties to the buyer on a range of matters including title, tax, property, IP, employment and other commercial matters. This cover protects against misrepresentations in these matters

There are two types of policy – sell-side and buy-side. It protects either the seller from innocent misrepresentations to the buyer, or the buyer from innocent or intentional misrepresentations from the seller

The advantage of cover is that the protected party gets quick settlement. The seller avoids having proceeds of sale tied up while disputes are argued and the buyer does not need to wait until the seller has sufficient funds to pay them for a misrepresentation

The cover assists in completing M&A by reducing the risks to both parties of a problem in the representations around the sale process. It reduces the need to set aside reserves for potential liabilities

Policies can be multi-year for the duration of any transaction period. Price is usually 1-2% of limits insured. Defence costs are also typically covered yet the policies usually do have an excess

Common exclusions include: any forecasts, anything known by the insured, criminal fines / penalties, post closing adjustment mechanisms and fraud




85


Disclosure SectionMorgan Stanley & Co. International plc, authorized by the Prudential Regulatory Authority and regulated by the Financial Conduct Authority and the Prudential Regulatory Authority, disseminates in the UK research that it has prepared, and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000, research which has been prepared by any of its affiliates. As used in this disclosure section, Morgan Stanley includes RMB Morgan Stanley (Proprietary) Limited, Morgan Stanley & Co International plc and its affiliates.

For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA.

For valuation methodology and risks associated with any price targets referenced in this research report, please contact the Client Support Team as follows: US/Canada +1 800 303-2495; Hong Kong +852 2848-5999; Latin America +1 718 754-5444 (U.S.); London +44 (0)20-7425-8169; Singapore +65 6834-6860; Sydney +61 (0)2-9770-1505; Tokyo +81 (0)3-6836-9000. Alternatively you may contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY 10036 USA.

Analyst Certification

The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Maciej Wasilewicz.

Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.

Global Research Conflict Management Policy

Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies.

Important US Regulatory Disclosures on Subject Companies

The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.

Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report.

Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.

STOCK RATINGS

Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.




86


Disclosure Section (cont.)Global Stock Ratings Distribution

(as of February 28, 2014)

For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal- weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.

Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months.

Analyst Stock Ratings

Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.

Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.

Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.

Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.

Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.

Analyst Industry Views

Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below.

In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below.

Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below.

Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index..

Coverage Universe Investment Banking Clients (IBC)

Stock Rating Category Count% of Total Count

% of Total IBC

% of Rating Category

Overweight/Buy 1015 34% 303 37% 30%Equal-weight/Hold 1307 44% 392 48% 30%Not-Rated/Hold 100 3% 24 3% 24%Underweight/Sell 538 18% 90 11% 17%Total 2,960 809




87


Disclosure Section (cont.)Important Disclosures for Morgan Stanley Smith Barney LLC Customers

Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC or Morgan Stanley or any of their affiliates, are available on the Morgan Stanley Wealth Management disclosure website at www.morganstanley.com/online/researchdisclosures. For Morgan Stanley specific disclosures, you may refer to www.morganstanley.com/researchdisclosures.

Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest.

Other Important Disclosures

Morgan Stanley is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Matrix at http://www.morganstanley.com/matrix.

Morgan Stanley Research is provided to our clients through our proprietary research portal on Matrix and also distributed electronically by Morgan Stanley to clients. Certain, but not all, Morgan Stanley Research products are also made available to clients through third-party vendors or redistributed to clients through alternate electronic means as a convenience. For access to all available Morgan Stanley Research, please contact your sales representative or go to Matrix at http://www.morganstanley.com/matrix.

Any access and/or use of Morgan Stanley Research is subject to Morgan Stanley's Terms of Use (http://www.morganstanley.com/terms.html). By accessing and/or using Morgan Stanley Research, you are indicating that you have read and agree to be bound by our Terms of Use (http://www.morganstanley.com/terms.html). In addition you consent to Morgan Stanley processing your personal data and using cookies in accordance with our Privacy Policy and our Global Cookies Policy (http://www.morganstanley.com/privacy_pledge.html), including for the purposes of setting your preferences and to collect readership data so that we can deliver better and more personalized service and products to you. To find out more information about how Morgan Stanley processes personal data, how we use cookies and how to reject cookies see our Privacy Policy and our Global Cookies Policy (http://www.morganstanley.com/privacy_pledge.html).

If you do not agree to our Terms of Use and/or if you do not wish to provide your consent to Morgan Stanley processing your personal data or using cookies please do not access our research.

Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the circumstances and objectives of those who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of an investment or strategy will depend on an investor's circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments.

The fixed income research analysts, strategists or economists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues (which include fixed income trading and capital markets profitability or revenues), client feedback and competitive factors. Fixed Income Research analysts', strategists' or economists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability or revenues of particular trading desks.

The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common equity securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities/instruments or derivatives of securities/instruments of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities/instruments or derivatives of securities/instruments of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons.




88


Disclosure Section (cont.)With the exception of information regarding Morgan Stanley, Morgan Stanley Research is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue equity research coverage of a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel.

Morgan Stanley Research personnel may participate in company events such as site visits and are generally prohibited from accepting payment by the company of associated expenses unless pre-approved by authorized members of Research management.

Morgan Stanley may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report.

To our readers in Taiwan: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL"). Such information is for your reference only. The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. Morgan Stanley Research may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities/instruments. MSTL may not execute transactions for clients in these securities/instruments. To our readers in Hong Kong: Information is distributed in Hong Kong by and on behalf of, and is attributable to, Morgan Stanley Asia Limited as part of its regulated activities in Hong Kong. If you have any queries concerning Morgan Stanley Research, please contact our Hong Kong sales representatives.

Morgan Stanley is not incorporated under PRC law and the research in relation to this report is conducted outside the PRC. Morgan Stanley Research does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals, licenses, verifications and/or registrations from the relevant governmental authorities themselves.

Morgan Stanley Research is disseminated in Brazil by Morgan Stanley C.T.V.M. S.A.; in Japan by Morgan Stanley MUFG Securities Co., Ltd. and, for Commodities related research reports only, Morgan Stanley Capital Group Japan Co., Ltd; in Hong Kong by Morgan Stanley Asia Limited (which accepts responsibility for its contents); in Singapore by Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore (which accepts legal responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research); in Australia to "wholesale clients" within the meaning of the Australian Corporations Act by Morgan Stanley Australia Limited A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents; in Australia to "wholesale clients" and "retail clients" within the meaning of the Australian Corporations Act by Morgan Stanley Wealth Management Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents; in Korea by Morgan Stanley & Co International plc, Seoul Branch; in India by Morgan Stanley India Company Private Limited; in Indonesia by PT Morgan Stanley Asia Indonesia; in Canada by Morgan Stanley Canada Limited, which has approved of and takes responsibility for its contents in Canada; in Germany by Morgan Stanley Bank AG, Frankfurt am Main and Morgan Stanley Private Wealth Management Limited, Niederlassung Deutschland, regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin); in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that Morgan Stanley Research has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the US by Morgan Stanley & Co. LLC, which accepts responsibility for its contents. Morgan Stanley & Co. International plc, authorized by the Prudential Regulatory Authority and regulated by the Financial Conduct Authority and the Prudential Regulatory Authority, disseminates in the UK research that it has prepared, and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000, research which has been prepared by any of its affiliates. Morgan Stanley Private Wealth Management Limited, authorized and regulated by the Financial Conduct Authority, also disseminates Morgan Stanley Research in the UK. Private UK investors should obtain the advice of their Morgan Stanley & Co. International plc or Morgan Stanley Private Wealth Management representative about the investments concerned. RMB Morgan Stanley (Proprietary) Limited is a member of the JSE Limited and regulated by the Financial Services Board in South Africa. RMB Morgan Stanley (Proprietary) Limited is a joint venture owned equally by Morgan Stanley International Holdings Inc. and RMB Investment Advisory (Proprietary) Limited, which is wholly owned by FirstRand Limited.

.For the exclusive use of Damon Meng ([email protected]) at The Blackstone Group, Private Equity Group



89


Disclosure Section (cont.)The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial Services Authority (the DFSA), and is directed at Professional Clients only, as defined by the DFSA. The financial products or financial services to which this research relates will only be made available to a customer who we are satisfied meets the regulatory criteria to be a Professional Client.

The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA.

As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations.

The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties or representations relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages relating to such data. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and S&P. Morgan Stanley Research or portions of it may not be reprinted, sold or redistributed without the written consent of Morgan Stanley.

Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley




90


The Americas

1585 BroadwayNew York, NY 10036-8293United States+1 212 761 4000

Europe

20 Bank Street, Canary WharfLondon E14 4ADUnited Kingdom+44 (0)20 7425 8000

Japan

4-20-3 Ebisu, Shibuya-kuTokyo 150-6008Japan+81 (0) 3 5424 5000

Asia/Pacific

1 Austin Road WestKowloonHong Kong+852 2848 5200

©2014 Morgan Stanley


Reinsurance Specialty Insurance - A Primer (MS) Mar 18 2014

Documents

Transcript of Reinsurance Specialty Insurance - A Primer (MS) Mar 18 2014