2008 Cat Market Update Global Reinsurance Division Ken Radigan (212) 266 – 5992 [email protected].
State of the Global Reinsurance Market
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Transcript of State of the Global Reinsurance Market
State of the Global Reinsurance Market
May 17, 2016
Panelists:Bob DeRose – Vice PresidentSteve Chirico – Assistant Vice PresidentGreg Reisner – Assistant Vice PresidentSusan Molineux – Senior Financial Analyst
Moderator:John Andre – Group Vice President
A.M. Best Briefing - Bermuda
Disclaimer
A.M. Best Briefing - Bermuda 2
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May 17, 2016
Discussion Outline
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Global Reinsurance Results and Trends
Impact of Alternative Capital
The Merger and Acquisition Phase
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Global Reinsurance
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Global Reinsurance Resultsand
Trends
May 17, 2016
Market Reinsurers Have…
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Negative Outlook
Increased client
retentions
Excess capacity
Capital convergence
Benign cat losses
Questionable underwriting
discipline
Declining reserve
redundancies
Low investment
yields
May 17, 2016
6
Combined Ratios by Sector
A.M. Best Briefing - Bermuda May 17, 2016
Note: “Big Four” refers to the Big Four European Reinsurers
Big
Four
Lloy
d's
US & BDA
Big
Four
Lloy
d's
US & BDA
Big
Four
Lloy
d's
US & BDA
Big
Four
Lloy
d's
US & BDA
Big
Four
Lloy
d's
US & BDA
Big
Four
Lloy
d's
US & BDA
2010 2011 2012 2013 2014 2015
0%
20%
40%
60%
80%
100%
120%
99% 95% 93%
107% 108% 107%
91% 91% 93% 91% 87% 87%92% 88% 87% 92% 90% 89%
Loss Ratio Expense Ratio
Return on Equity by Sector
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2010 2011 2012 2013 2014 2015
-5%
0%
5%
10%
15%
20%
European "Big Four" US & Bermuda MarketLloyd's Five Year Average
Reinsurance Capacity Utilization
A.M. Best Briefing - Bermuda 8May 17, 2016Source: A.M. Best research and data
Capacity Utilization Based on Aggregate Risk-AdjustedCapitalization of Rated Balance Sheets
2012 2013 2014 2015E50%
60%
70%
80%
90%
100%
Capital Management
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2010 2011 2012 2013 2014 2015 -
50
100
150
200
250
300
194 194 218 215 235 232
10 14 20 25
33 38
- 2 4 6
14 21
Global ReinsuranceShareholders' Equity plus Share Repurchases & Dividends
Shareholders' Equity (End of Period) Share Repurchases Common and Preferred Dividends
Shar
ehol
ders
' Equ
ity (U
SD B
illio
ns)
10
Global Reinsurance
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Impactof
Alternative Capital
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Alternative Capital
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Market still heavily influenced
by global leaders –
that won’t change anytime soon
Cultural issues no longer
limiting M&A – it is happening
Alternative capacity is driving
change
Alternative capital is driving a great deal of structural change in the market
However, do not lose sight of the fact that the market continues to be heavily influenced by the global reinsurance leaders
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12
Top 50 Global Reinsurers
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The Top 10 global reinsurance companies continue to strongly influence the landscape
Reinsurance Premiums Written
2015 Life & Non-Life (USD m)
Ranking Company Name Gross Net
1 Munich Reinsurance Co. 39,035 37,761 2 Swiss Reinsurance Co. Ltd. 33,276 31,640 3 Hannover Rueckversicherung AG 17,457 15,100 4 Berkshire Hathaway Inc. 14,919 14,9195 SCOR S.E. 13,756 12,324 6 Lloyd’s 13,199 10,416 7 Reinsurance Group of America Inc. 9,118 N/A 8 China Reinsurance (Group) Corp. 8,506 7,991 9 PartnerRe Ltd. 5,932 5,720
10 Everest Re Group Ltd. 5,749 5,257
Life and Non-Life GPW Distribution by Ranking
May 17, 2016Source: A.M. Best data and research
Rank 1-10
72%
Rank 11-2013%
Rank 21-30
7%
Rank 31-405%
Rank 41-503%
13
Dedicated Reinsurance Capacity
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Total Dedicated Reinsurance Capacity (USD billions)
Note: * Estimate by Guy Carpenter and A.M. BestSource: A.M. Best, Guy Carpenter
2012 2013 2014 2015E* -
50
100
150
200
250
300
350
400
450
Estimate for Total Dedicated Reinsurance Capacity
Traditional Capacity Convergence Capacity
14
CAT Bond Issuances
A.M. Best Briefing - Bermuda May 17, 2016
Source: A.M. Best Research and Artemis
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160
1000
2000
3000
4000
5000
6000
7000
8000
9000
Property and Casualty Industry
Year
Cata
stro
phe
Bond
s (M
illio
ns o
f USD
)
15
Convergence Products
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Basis Risk – The risk that a convergence instrument may not fully trigger when the sponsor suffers a loss
Tail Risk – The risk borne by a sponsor if an entity to which it cedes business is insufficiently capitalised
Credit, Default and Recovery Risk – Transactions that involve payment obligations from third parties
Investment Performance Risk – For transactions that rely on investment earnings and return on investments
Structuring Risk – Transactions involving securitizations where cash flows are an essential source of investor repayment
Modelling Risk – Transaction where modelling performed by third-party consulting firms
Risks associated with convergence products
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16
Global Reinsurance
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Alternative Capital“Hedge Fund Re”
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17
Alternative Capital
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Asset Manager View
• Permanent capital to earn fee income
• Tax deferred returns• Cost free“float” if done
correctly• Provide another product for
potential investors
Reinsurer View
• Can toggle between asset and liability risk providing more cycle management opportunity
• Float can generate more income than plain vanilla portfolio
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Hedge Fund Reinsurance Model
18
Alternative Capital
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Build
• Long-term capital• Recruit leadership talent• Build infrastructure• Develop relationships• Obtain acceptable rating • Gain market acceptance
Partnership
• Long-term capital• Draw from existing talent• Established infrastructure• Benefit from existing relationships• Reduce ramp-up risk• Alignment of interest• Obtain acceptable rating• Gain market acceptance
May 17, 2016
Hedge Fund Reinsurance Model Continues to Gain Interest
19
Alternative Capital
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Hedge fund reinsurers
Greenlight Re
Build
FSR “A”
Third Point
Re
Build
FSR “A-”
Hamilton Re
Build
FSR “A-”
PAC Re
Partner
Rating Withdrawn
Watford Re
Partner
FSR “A-”
Fidelis
Build
FSR “A-”
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Global Reinsurance
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The Mergerand
Acquisition Phase
The Drive for Efficiency
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Client
Agent & Broker
Primary Insurance Company
Reinsurance Broker
Reinsurance Company
Convergence Capital
The market will continue to
become more efficient as all
players strive to become closer to
the client
May 17, 2016
The Base Case for M&A
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Broader product capability
Broader geographic reach
Greater influence with brokers and
cedants
Greater attractiveness to
third-party capital
M&A
Most M&A deals in the current reinsurance market are focused on one, if not all, of these four categories
23
Reinsurers Price-to-Book Value excluding AOCI as of 2015
A.M. Best Briefing - Bermuda
The increase in valuations helps when buying from a “currency” perspective Alternatively, companies typically don’t want to sell themselves below book value
May 17, 2016
40
60
80
100
120
140
160
180
200
220
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Pric
e/B
ook
Valu
e
Years
Average
Current P/BV: 1.10x Average 1993-Present: 1.16x
Low Reached March 2009 (0.75x BV)
Peak reached February 2002 (1.83x BV)
1.0x P/BV
Source: Company reports, Bloomberg, A.M. Best data and research
Appendix
May 17, 2016A.M. Best Briefing - Bermuda 24
Current Market Conditions
It’s a “buyer’s market”
Primary companies
strategically buying
Increased use of alternative
capacity
Terms and conditions broadened
Rate on line under
pressure – especially loss-free business
Industry consolidation is creating a ripple effect
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26
Catastrophe Rates
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Navigating the Market
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Sources: GC Analysis, SNL, Bloomberg
28
Alternative Capital
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Capital Market /
Reinsurers Convergence
Relatively attractive
returns
Uncorrelated asset class
Limited investment alternatives
Better understanding
of risk
Losses have been limited
thus far
Tax advantage
return
Permanent source of
capital
Cost-free float
Hedge Fund
Model
May 17, 2016
State of the Global Reinsurance Market
May 17, 2016
Panelists:Bob DeRose – Vice PresidentSteve Chirico – Assistant Vice PresidentGreg Reisner – Assistant Vice PresidentSusan Molineux – Senior Financial Analyst
Moderator:John Andre – Group Vice President
A.M. Best Briefing - Bermuda