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Insurance Roadshow
2014
Paris, 22 January, 2014
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2014 – The Year Ahead for Fitch’s Insurance Group
Chris Waterman, Head of EMEA Insurance
Paris, 22 January 2014
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Agenda
Rating Trends in 2014
Key Risks Facing European Insurers
Fitch Initiatives for 2014
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Agenda
Rating Trends in 2014
Key Risks Facing European Insurers
Fitch Initiatives for 2014
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www.fitchratings.com
European Market Outlooks
Rating Outlook Sector Outlook
French Life
French Non-Life
Dec 13
Dec 13
Negative
Negative
Negative
Stable
German Life
German Non-Life
Dec 13
Dec 13
Stable
Stable
Negative
Stable
Italian Life
Italian Non-Life
Nov 13
Nov 13
Negative
Negative
Negative
Negative
Netherlands Life
Netherlands Non-Life
Dec 13
Dec 13
Negative
Negative
Stable
Stable
UK Life
UK Non-Life (London Market)
UK Non-Life (Regional Market)
Nov 13
Dec 13
Dec 13
Stable
Stable
Stable
Stable
Stable
Negative
Reinsurance Aug 13 Stable
Source: Fitch
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Insurer Outlooks Mostly Stable
67%
29%
4%
Stable Negative Positive
Dec 2012
Source: Fitch
Dec 2013
4%
28%
68%
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Rating Affirmations Dominate
-40
-30
-20
-10
0
10
20
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
(No.)
Source: Fitch
Credit Crunch
Eurozone Crisis
Rating Stability
Net Upgrades Less Downgrades
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Financially Strong Industry
22
54
16
4 5
25
52
16
2 6
0
10
20
30
40
50
60
AAA AA A BBB BB B
(%) Dec 12 Dec 13
Insurer Financial Strength (IFS) Ratings
Source: Fitch
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Agenda
Rating Trends in 2014
Key Risks Facing European Insurers
Fitch Initiatives for 2014
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www.fitchratings.com
European Insurance – Risk Radar
Source: Fitch
Equity and/ or Bond
Correction
Search for Yield
Regulatory risk
Steady Rebound in Interest
Rates
Weak Economy/
Low Int Rates
Eurozone Uncertainty
Sales Scandals
Large Int Rate Spike
Imp
act
Un
favo
rab
le
Imp
act
Fa
vo
rab
le
High Urgency
Imp
act U
nfa
vo
rab
le
Imp
act F
avo
rab
le
High Urgency Low Urgency
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Peripheral Eurozone – Sentiment Improving
0
5
10
15
20
25
30
35
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
(%) Greece Ireland Italy Portugal Spain
Source: Fitch
Peripheral Eurozone – 10 Year Bond Yields
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Search For Yield Continues
0
1
2
3
4
5
6
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
(%) France Germany Netherlands UK
Source: Fitch
Non-Peripheral – 10 Year Bond Yields
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Agenda
Rating Trends in 2014
Key Risks Facing European Insurers
Fitch Initiatives for 2014
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Prism FBM – Timeline to Implementation
Source: Fitch
Finalise model
Q1 2014
Beta test open
1st Oct 2013
2013 2014
Implementation
Q2 2014
Beta test closed
31st Dec 2013
Initial validation
complete
EMEA testing
Model development
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Prism FBM: Model Resources
Available to Issuers
• Model definition documenta
• Model engine
• User guide
Public
• Model definition documenta
a Exposure Draft
Source: Fitch
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Prism FBM – A Significant Step Forward
• More sophisticated approach to capital assessment
• Main tool to assess capital adequacy in EMEA and APAC
• Single framework for different regions and accounting standards
• Rating agency model – not an economic capital model
• Simplicity and increased transparency
• Single spreadsheet
• No hidden calculations
• No macros
• Expect further communication from Fitch after model finalisation
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Increased Transparency and Timeliness of Research
• Updated Insurance Rating Methodology
• Sector credit factors (SCFs)
• Clear communication of rating sensitivities
• Increased use of quantitative rating triggers
• 100% of rating reports less than 12 months old
• Publication of more topical special reports
• Increase in presentations and teleconferences
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People in pursuit of answers
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Disclaimer
Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources.
Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings
are inherently forward-looking, embody assumptions and predictions that by their nature cannot be
verified as facts, and can be affected by future events or conditions that were not anticipated at the
time a rating was issued or affirmed.
The information in this presentation is provided “as is” without any representation or warranty.
A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not
address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned.
A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its
agents in connection with a sale of securities.
Ratings may be changed or withdrawn at any time for any reason in the sole discretion of
Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not
a recommendation to buy, sell, or hold any security.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE
LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.
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New York One State Street Plaza
New York, NY 10004
London 30 North Colonnade
Canary Wharf
London E14 5GN
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Behind our Ratings: Fitch’s Rating Process & Insurance Methodology
Harish Gohil, Managing Director
Paris, 22 January 2014
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Agenda
Rating Process
Insurance Ratings Methodology
• Criteria
• Key Rating Factors
• Peer Comparison
Summary
Q&A
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Steps in the Rating Process
Rating
Initiated
Lead and
backup
analyst
assigned
Company sends accounts, other info
Dates for meeting
Review of
public and
non-public
information
Questions
sent to
issuer
Replies in advance of
management meeting
Management
meeting
Further
analysis
Rating
committee
presentation
Rating
committee
review and
decision
Preparation of
final rating
report and
press release
Ratings
published; full
rating report
available to
subscribers
Ongoing dialogue and surveillance
1
2
3
4
5
6
7
8
9
10
6
7
8
9
10
1
2
3
4
5
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Fitch Rating Criteria
One-stop shop for
• Key credit factors
• Hybrid securities
• Group rating methodology
• Notching methodology
• Start-up and run-off companies
• Short-term ratings
• Recovery analysis
• Captive insurance companies
Separate ILS criteria
Criteria Updated & Enhanced
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Fitch Sector Credit Factors
Increased Transparency
• Supplementary reports describing the key
credit factors used to analyse the
European life and non-life
insurance sectors
• Including various median financial ratios
by rating category, as well as charts that
demonstrate how key qualitative factors
can affect a typical rating range
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Key Credit Factors for (Re)Insurance Ratings
Key Qualitative Factors
• Sovereign and country-related
constraints
• Industry profile and operating
environment
• Market position and size/scale
• Ownership
• Corporate governance and management
Key Quantitative Factors
• Capitalisation and leverage
• Debt service capabilities and
financial flexibility
• Financial performance and earnings
• Investment and asset risk
• Asset/Liability and liquidity management
• Reserve adequacy
• Reinsurance, risk mitigation,
catastrophe risk
Source: Fitch - Insurance Rating Methodology, 13th November 2013
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Key Credit Factors for (Re)Insurance Ratings
Key Qualitative Factors
• Sovereign and country-related
constraints
• Industry profile and operating
environment
• Market position and size/scale
• Ownership
• Corporate governance and management
Key Quantitative Factors
• Capitalisation and leverage
• Debt service capabilities and
financial flexibility
• Financial performance and earnings
• Investment and asset risk
• Asset/Liability and liquidity management
• Reserve adequacy
• Reinsurance, risk mitigation,
catastrophe risk
Source: Fitch - Insurance Rating Methodology, 13th November 2013
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Industry Profile & Operating Environment
IFS rating category AAA AA A BBB <BBB
Non-Life
Reinsurance Lines
Composite
Life/Annuity
Ratings Range Based on Industry Profile/Operating Environment
Source: Fitch
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Market Position and Size/Scale
IFS rating category AAA AA A BBB <BBB
Large market position and size/scale
Medium market position and size/scale
Small market position and size/scale
Ratings Range Based on Market Position and Size/Scale
Source: Fitch
Size guidelines for Medium category:
• Non-Life: EUR3bn ≤ GWP ≥ EUR1bn
• Life: EUR40bn ≤ Assets ≥ EUR10bn
• Life: EUR4bn ≤ Equity ≥ EUR1bn
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Median Capital Adequacy Ratio Guidelines
• Fitch Prism Factor Based Model Score
Capitalisation and Leverage
AAA AA A BBB
Net premiums written/equity (non-life) (x) 0.5 1.1 1.8 2.5
Net leverage (non-life) (x) 2.0 3.5 5.0 7.0
Gross leverage (non-life) (x) 2.5 4.0 6.2 8.5
EU solvency I ratio (%) 220 175 150 125
Financial leverage (%) 7 20 28 35
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Debt Service Capabilities & Financial Flexibility
Median Fixed Charge Coverage Ratio Guidelines
AAA AA A BBB
IFRS/Local GAAP Fixed Charge Coverage Ratio (x) 18 12 7 3
IFS rating category AAA AA A BBB <BBB
Effective
Generally Effective, but
Some Weaknesses Noted
Weak
Financial Flexibility
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Financial Performance and Earnings
Median Financial Performance Ratio Guidelines
AAA AA A BBB
Combined ratio (Non-life) 85% 95% 103% 110%
Operating ratio (Non-life) 75% 85% 93% 100%
Return on equity 16% 12% 8% 4%
Return on assets (Life) 1.4% 1.1% 0.9% 0.4%
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Weighting of Key Credit Factors
• No formal quantitative
mechanism
• Rating committee judgement
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Peer Group Comparison – Example
Company
IFS rating of
operating
entities
Total NPW
(USDm)
Combined
ratio 5-year
avg. RI (%)
Combined
ratio 5-year
avg. (%)
NPW/
equity
Shareholders’
equity
(USDm)
ACE Ltd AA/Stable 16,075 74.1 91.3 0.58 27,531
Berkshire Hathaway AA+/Stable 35,727 94.7 93.1 0.19 191,588
Everest Re AA-/Stable 4,081 97.5 99.9 0.61 6,733
Munich Re AA-/Stable 64,581 100.4 100.0 1.85 35,938
Partner Re AA-/Stable 4,567 96.8 96.8 0.76 6,933
Hannover Re A+/Positive 15,917 98.4 98.1 2.04 8,799
Lloyd’s of London A+/Positive 30,882 94.8 93.7 0.99 31,121
SCOR A+/Stable 10,990 99.7 98.4 1.77 6,300
Swiss Re A+/Stable 25,344 93.6 93.0 0.75 34,026
Source: Fitch
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Key Rating Factors – Example
Rating factor Forward trend Score Relative weighting
Industry profile and operating environment AA/A Moderate
Market position and size/scale A High
Capitalisation and leverage Stable AA High
Debt service capabilities/financial flexibility Favourable BBB Moderate
Financial Performance and earnings Stable A Moderate
Investment and Asset risk Unfavourable A Moderate
Asset/liability and liquidity management Stable AA Low
Reserve adequacy Stable A Moderate
Reinsurance/risk mitigation/catastrophe Stable A Low
Corporate governance and management Effective
Ownership Neutral
Sovereign/country-related constraints n.a.
Final Implied Ratings Category A
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Summary
• Rigorous rating process
• Key credit factors – qualitative and quantitative
• Ratings range tables – median guidelines by rating category
• No formal quantitative weightings – committee judgement
• Transparency in published research
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Related Research
All relevant Fitch research can be found on the Insurance page via our website
www.fitchratings.com
Insurance Rating Methodology – Amended, November 2013
Non-Life Insurance (Europe) Sector Credit Factors – May 2013
Life Insurance (Europe) Sector Credit Factors – May 2013
Reinsurance (Global) Sector Credit Factors – August 2013
Prism Factor-Based Capital Model: Exposure Draft – Model definition document –
October 2013
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Disclaimer
Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources.
Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings
are inherently forward-looking, embody assumptions and predictions that by their nature cannot be
verified as facts, and can be affected by future events or conditions that were not anticipated at the
time a rating was issued or affirmed.
The information in this presentation is provided “as is” without any representation or warranty.
A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not
address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned.
A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its
agents in connection with a sale of securities.
Ratings may be changed or withdrawn at any time for any reason in the sole discretion of
Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not
a recommendation to buy, sell, or hold any security.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE
LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.
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New York One State Street Plaza
New York, NY 10004
London 30 North Colonnade
Canary Wharf
London E14 5GN
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French Insurance Under Contrasted Trends
Marc-Philippe Juilliard, Senior Director
Paris, 22 January 2014
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Agenda: Life Market
Retrospective Review
• Slowing Down of Growth
• Competition Landscape
• Market Trends
• Profitability
Prospective Review
• Business Outlook
• Evolution of Solvency
• Rating Outlook
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Agenda: Life Market
Retrospective Review
• Slowing Down of Growth
• Competition Landscape
• Market Trends
• Profitability
Prospective Review
• Business Outlook
• Evolution of Solvency
• Rating Outlook
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Historic Growth
0
20
40
60
80
100
120
140
160
0
200
400
600
800
1 000
1 200
1 400
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Life technical reserves at 31 December (LHS) Life premium income (RHS)
Source: FFSA-GEMA
Life Insurance in France: A Mature Market
(EURbn)
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Top 10 French Life Insurers
Premium written in 2012
(EURbn)
Total market
(%)
CNP 19.3 17.1
Crédit Agricole Assurance (Predica) 15.6 13.8
BNP Paribas Assurance 10.3 9.1
AXA France 9.3 8.2
Groupe des Assurances du Crédit Mutuel 8.7 7.7
Société Générale Insurance 7.7 6.8
Generali France 6.2 5.5
Allianz France 5.2 4.6
AG2R La Mondiale 4.4 3.9
Aviva France 3.6 3.2
Total 90.3 80.0
Source: FFSA/Fitch estimates
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Market Trends
• Moderate demand for euro-denominated products due to low return
• Both short-term and long-term interest rates remain lower than life insurance expected return
offered in 2013
• Recycling is resuming but not to the same extent as during the past decade
• Banks still need on balance-sheet savings products
• Bancassurers are impacted
• Moderate appetite for unit-linked policies due to market volatility
• Rising premiums amid recovering equity markets
• Offensive marketing campaigns and product innovation hardly compensate for volatility risk
• Sales of variable annuities remain symbolic
• Increase in lapses
• Lapse rate durably at high level – volatile net collections
• General trend due to ageing population and poor economic environment
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Profitability
0
2
4
6
8
10
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013E
Average rate of return on traditional policies
Investment income/actuarial reserves
Return for Livret A(%)
Source: FFSA-GEMA, Fitch
Yield Offered by Euro-Denominated Life Insurance Policies and Livret A
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Agenda: Life Market
Retrospective Review
• Slowing Down of Growth
• Competition Landscape
• Market Trends
• Profitability
Prospective Review
• Business Outlook
• Evolution of Solvency
• Rating Outlook
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Business Outlook
• Volatile growth in new business volume forecast for life insurance
• Less free cash flow to be invested due to economic challenges
• Low bonus rates make the euro product less attractive
• Banks push for liquidity
• Change in risk-free perception – fly to tangibility
• Unit-linked products unlikely to escape their vicious circle
• Volatile impact on both life insurer’s solvency and profitability
• Benefits payments expected to remain at high level
• 40% of total life premiums during the 1990s
• >60% every year since 2007 (93% in 2011, >100% in 2012, ~ 90% in 2013)
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Business Outlook (cont.)
• After two decades of strong growth, the life insurance market gradually reaches
maturity
• More than two thirds of life technical reserves related to old contracts (more than 8 years)
in 2013
• Management of lapses is a challenge for traditional insurers
• Some developments would likely accelerate the distrust for life insurance in the
coming years:
• Any further government project to reduce tax advantages, especially if implementation involves
existing policies
• Although unlikely in the short term, sharp increase in interest rates could have a negative impact,
even more than in 2008, as both premiums and lapses could be affected at the same time
• Reduced incentive granted to policyholders to buy protection and pension products sold by
private insurance organisations
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Evolution of Solvency
0
4
8
12
16
20
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Shareholder's equity/actuarial reserves
Shareholder's equity and unrealised capital gains or losses/actuarial reserves(%)
Source: FFSA-GEMA
Changes in Solvency Margins
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Rating Outlook
• Fitch rating and sector outlooks for the French life industry remain negative
• Unfavourable trends could lead to further rating downgrades
• Pressure on profitability expected to be strong due to:
• Low interest rate environment
• More conservative asset allocation with very little equities and no reinvestment in Southern
European sovereign debt
• Competition on bonus rates
• Volatile impact from unit-linked product sales
• Capital adequacy is unlikely to recover promptly
• Solvency 1 ratios artificially boosted by low interest rates on government bonds
• But profitability is increasingly under pressure
• Capital intensive business mix
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Agenda: Non-Life Market
Retrospective Review
• Historic Growth
• Competition Landscape
• Bancassurance
• Profitability
Prospective Review
• New Sources of Growth
• Tariffs
• Solvency
• Rating Outlook
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Agenda: Non-Life Market
Retrospective Review
• Historic Growth
• Competition Landscape
• Bancassurance
• Profitability
Prospective Review
• New Sources of Growth
• Tariffs
• Solvency
• Rating Outlook
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Historic Growth
Source: FFSA-GEMA
The Slow Growth of Non-Life Insurance in France
0
10
20
30
40
50
60
70
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
(EURbn) Non-life premiums Acccident & health premiums
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Top 10 French Non-Life Insurers
Premium written in 2012
(EURm)
Total market
(%)
Covéa (MAAF, MMA, GMF) 9,600 14.2
Groupama 8,000 11.8
Sferen (MACIF, MAIF, MATMUT) 7,800 11.5
AXA France 6,800 10.0
Allianz France 5,700 8.4
Generali France 4,300 6.3
Crédit Agricole Assurances 2,500 3.7
Groupe des Assurances du Crédit Mutuel 2,300 3.4
CNP 1,900 2.8
Aviva France 1,300 1.9
Total 40.2 74.0
Source: FFSA and Fitch estimates
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Bancassurance
• Increasing success of bancassurance in non-life
• 4% market share in 1994
• 12% market share in 2012
• Privileged position to distribute simple non-life insurance policies packaged with
financial products or on a standalone basis
• Still below average retention rate but improving gradually
• Two market leaders: Credit Agricole Assurance and Groupe des Assurances du Crédit
Mutuel – two thirds of non-life premiums collected by subsidiaries of banks in 2012
• Most players posted above market average growth in 2012-2013
• JV between La Banque Postale and Groupama has successfully started to operate
• All non-life bancassurers display very ambitious goal for the coming years in
individual lines
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Profitability
90
95
100
105
110
115
120
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
(%)
Source: FFSA-GEMA, Fitch estimates
Evolution of Net Combined Ratio:
Close to 100%, limited room for improvement
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Agenda: Non-Life Market
Retrospective Review
• Historic Growth
• Competition Landscape
• Bancassurance
• Profitability
Prospective Review
• New Sources of Growth
• Tariffs
• Solvency
• Rating Outlook
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New Sources of Growth Difficult to Tap
• Increase in the number and severity of natural disasters
• Cost of natural perils in France exceeded EUR34bn over the past 20 years
for non-life insurers
• Fast growing risk adversity = rising demand for insurance, but…
• Not all risks can be priced using actuarial methods
• Cost of insurance must be acceptable to policyholders
• Lower flexibility for tariff increases
• Long-term care insurance market:
• Government’s proposals again expected in 2014
• Involvement of private insurers is unclear
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The Particular Case of Healthcare Insurance
-3
0
3
6
9
12
0
40 000
80 000
120 000
160 000
200 000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
(EURm) Health expenses (LHS) Growth rate (RHS) (%)
Source: FFSA-GEMA, Fitch estimates
Changes in Health Expenses
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Impact of Tariffs Increases Is Visible
• Tariffs increased further on all lines in 2012-2013
• No material natural catastrophe event since H1 2010
• Yet, attritional claims remain at high level, supported by challenging economic
environment and mid-size climatic events
• Drop in asset returns expected due to low interest rate environment and more
conservative asset allocation
• Further increases in tariffs increasingly difficult to implement due to poor
economic environment
• Stabilization in tariffs likely occur as of 2014 unless material natural
catastrophes occur
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Solvency Evolution
• Compared to life insurers, non-life insurers tend to have:
• Absence of investment guarantees offered
• Still higher allocation to investments in equities
• Solvency in 2014 should be:
• Positively impacted by the satisfactory profitability and the still low interest rates
environment leading to high unrealised capital gains on bonds
• Negatively impacted if equity markets were to deteriorate by year-end or if any
significant winter period natural catastrophe was to occur
• The prospect of Solvency II has encouraged insurers to gradually de-risk their
investment portfolios as new rules should penalise insurers who take risks on
their asset side
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Rating Outlook
• Fitch Ratings sector outlook for the French non-life industry remains stable
• Operating profitability should plateau in 2013-2014
• Impact of tariff increases
• Moderately benign claims environment so far
• However, pressure remains on top line and attritional claims
• Operational performance not expected to be materially boosted by investment
results in the near future
• Credit quality of French non-life insurers reflects the limited growth and profit
improvement potential of the market
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Related Research
All relevant Fitch research can be found on the Insurance page via our website
www.fitchratings.com
2014 Outlook: French Life Insurance
Low Interest Rates Dragging Down Profitability - 12 December 2013
2014 Outlook: French Non-Life Insurance
Weak Growth but Resilient Performance - 12 December 2013
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Disclaimer
Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources.
Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings
are inherently forward-looking, embody assumptions and predictions that by their nature cannot be
verified as facts, and can be affected by future events or conditions that were not anticipated at the
time a rating was issued or affirmed.
The information in this presentation is provided “as is” without any representation or warranty.
A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not
address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned.
A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its
agents in connection with a sale of securities.
Ratings may be changed or withdrawn at any time for any reason in the sole discretion of
Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not
a recommendation to buy, sell, or hold any security.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE
LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.
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New York One State Street Plaza
New York, NY 10004
London 30 North Colonnade
Canary Wharf
London E14 5GN
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Coffee Break
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Global Reinsurance Bond Yields and Softening Prices Set to Test Management Strategy
Martyn Street, Director
Paris, 22 January 2014
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Agenda
1.1.14 Renewal
Expectations and Observations
Alternative Reinsurance
Rating Outlook
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Recent Reinsurance Renewal Pricing Trends
Renewal Season Pricing Developments
January 2014 US wind loss-hit: -10% to +5%
US loss-free: -10% to -20%
International property loss-hit: Flat to +5%
Casualty no loss emergence: Flat to -20%
June/July 2013 US property loss-hit: -5% to +5%
US property loss-free: -10% to -20%
Florida property loss-free: -15% to -25%
Casualty no loss emergence: Flat to declining
April 2013 Japanese property loss-hit: Flat to +10%
Japan wind and flood loss-free: Flat to down 2.5%
US property loss-free: -5% to -10%
Source: Company and broker reports
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Month Event Location
Economic Loss
(USDbn)
Insured Loss
(USDbn)
July Hailstorms Germany 4.8 3.7
May / June Floods Central Europe 15.2 3.0
May Tornadoes US 3.1 1.8
March Severe storms US 2.2 1.6
June Floods Canada 5.7 1.6
Overall 2013 Total 125.0 31.0
Total 2012 173.0 65.0
Total 2011 400.0 119.0
2013 Sees Reduced Natural Catastrophe Losses
Source: Munich Re NatCatService
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Uneven Capital Development
-15
-10
-5
0
5
10
15
Pla
tin
um
(N
/R)
Fa
irfa
x (
A-)
Asp
en
(N
/R)
Sw
iss R
e (
A+
)
XL
(A
p)
Pa
rtn
erR
e (
AA
-)
Mu
nic
h R
e (
AA
-)
Va
lidu
s (
A)
Ha
nn
ove
r R
e (
A+
p)
Eve
rest (A
A-)
Axis
(A
+)
Wh
ite
Mo
un
t. (
A)
Ace
(A
A)
SC
OR
(A
+)
Alli
ed
Wo
rld
(A
+)
Mo
ntp
elie
r (A
)
En
du
ran
ce
(N
/R)
Alle
gh
an
y (
A+
)
Arc
h (
A+
)
Re
nR
e (
A+
)
Be
rksh
ire
(A
A+
)
(%)
Change Q313 Equity – Reinsurers
Note: IFS Ratings, N/R - Not Rated, p - Positive Outlook
Source: Fitch
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Invested Asset Allocation
Major Asset Classes – 2012
Note: Combined composition for Hannover Re, Lloyd’s of London, Munich Re, SCOR & Swiss Re
Source: Fitch
• Fixed-income remains major class
• Conservative risk appetite
• Key focus for 2014
• Duration management
• Increasing risk appetite
Real
estate
1%
Cash & bank
deposits
11%
Bonds
57%
Loans
11%
Deposits
with
cedents
9%
Other
invested
assets
5%
Shares
4%
Mortgages
2%
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Operating ROE Declines in Recent Years
Average Operating ROE
Source: Fitch
-5
0
5
10
15
20
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
(%)
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Significant Variation in ROE
Group Operating ROE 2008-2012 Average
Source: Fitch
-5
0
5
10
15
20
Ha
nnove
r R
e
Mu
nic
h R
e
Ace
Lim
ited
Alli
ed W
orld
W.R
. B
erk
ley
Arc
h C
ap
ital
Llo
yd's
Re
nR
e
Va
lidus
Axis
Sw
iss R
e
SC
OR
Eve
rest R
e
En
dura
nce
XL
Asp
en
Pla
tinum
Be
rkshire
Hath
aw
ay
Pa
rtnerR
e
Mo
ntp
elie
r R
e
Alle
ghan
y
Wh
ite M
ounta
ins
Fair
fax
(%)
Median = 8.5%
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Reinsurance Combined Ratio Volatility
2008-2012
Size of bubble denotes NWP
Source: Fitch, companies
55
65
75
85
95
105
115
0 5 10 15 20 25 30 35 40
(Average combined ratio, 2008-12)
(Standard deviation, 2008-12)
Median = 93.8%
Me
dia
n =
10
.9%
Everest
Montpellier Lloyd's Swiss Re
PartnerRe
Endurance
Validus
Hannover
Munich Re
Ace
Aspen
AXIS Berkshire
White
Mount
Fairfax SCOR
Platinum
XL
Arch
RenRe
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Continued Favourable Reserve Development
-10
-6
-2
2
6
10
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Q313
(%)
Source: Fitch analysis of reserving data of 17 North American reinsurers
Actual Expected
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Prior Year Development Remains in Surplus
50
60
70
80
90
100
110
Endura
nce
Fa
irfa
x
W.R
. B
erk
ley
XL
Axis
Hann
over
Re
Arc
h C
ap
ital
Alli
ed W
orld
Aspen
White M
ounta
ins
Alle
ghan
y
SC
OR
Ace
Evere
st
Re
Berk
shire
Llo
yd
's
Mun
ich R
e
Part
nerR
e
Valid
us
Sw
iss R
e
Mon
tpelie
r R
e
Pla
tinum
RenR
e
(%) Calendar Accident
2012 – Calendar and Accident Year Combined Ratio
Source: Fitch
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Valuation Multiples Remain Below Pre-Financial Crisis
Reinsurer Market Price/Tangible Book Value
Source: SNL Financial
0,5
0,6
0,7
0,8
0,9
1,0
1,1
1,2
2007 2008 2009 2010 2011 2012 Q313
(x)
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Alternative Capital: Threat or Opportunity?
• ″We may well be seeing a fundamental shift in the way risk is capitalised″, John
Nelson, Chairman Lloyd’s of London
• ″How sustainable is it (ILS)? It hasn’t been tested so we don’t know″, Torsten
Jeworrek, Chairman of Reinsurance Committee, Munich Re
• ″Reinsurers will have to adapt″, Alex Moczarski, CEO Guy Carpenter
• ″It will go from being a competitive threat to being part of traditional reinsurers’
business plans″, Bryon Ehrhart, Chief Strategy Officer, Aon Benfield
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Alternative Market Capacity Continues to Grow
Alternative Capacity as a % of Global Property Catastrophe Reinsurance Limit
Source: Guy Carpenter Estimates
0
2
4
6
8
10
12
14
16
YE 2008 YE 2009 YE 2010 YE 2011 YE 2012 YE2013(Projected)
(%)
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Catastrophe Bond Market Reaches Record Size
3,1 3,6 3,7 5
8,4
14,1
11,8 12,3 12,4 12,7
15,2
20,3
0,8 1,4 1,1 2.1
4,6
7,2
2,7 3,4
4,8 4,3 5,9
7,5
0
2
4
6
8
10
12
14
16
18
20
22
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
(USDbn) Outstanding Issued
Source: Willis Capital Markets & Advisory, Aon Benfield Securities Inc.
Catastrophe Bonds (Non-Life)
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ILS – Capacity Providers
Investor by Category – 2013
Note: Year ending June 30
Source: Aon Benfield Securities
• Institutional and mutual fund
provision grows
• Majority of capital continues to
come from U.S.
• Opinion divided on what is driving
growth
CAT
fund
43%
Institutional
41%
Hedge fund
2%
Mutual fund
12%
Reinsurer
2%
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Rating Outlook Stable
• Last revised from Negative in November 2009
• Majority of ratings expected to be affirmed in next 12-24 months
• Supporting factors: Strong capitalisation and continued profitability
• Challenges: Price softening and continued low investment yield
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Related Research
Fitch research can be accessed via www.fitchratings.com/insurance
• Bermuda 2014 Market Update (January 2014)
• Global Reinsurance Guide 2014 (September 2013)
• Alternative Reinsurance 2013 Market Update (September 2013)
• 2014 Outlook: Global Reinsurance (August 2013)
• Global Reinsurers’ Mid-Year 2013 Financial Results (August 2013)
• Reinsurance (Global) Sector Credit Factors (August 2013)
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Disclaimer
Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources.
Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings
are inherently forward-looking, embody assumptions and predictions that by their nature cannot be
verified as facts, and can be affected by future events or conditions that were not anticipated at the
time a rating was issued or affirmed.
The information in this presentation is provided “as is” without any representation or warranty.
A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not
address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned.
A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its
agents in connection with a sale of securities.
Ratings may be changed or withdrawn at any time for any reason in the sole discretion of
Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not
a recommendation to buy, sell, or hold any security.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE
LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.
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New York One State Street Plaza
New York, NY 10004
London 30 North Colonnade
Canary Wharf
London E14 5GN
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Bernard Spitz
Président de la Fédération Française
des Sociétés d’Assurance
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Disclaimer
Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources.
Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings
are inherently forward-looking, embody assumptions and predictions that by their nature cannot be
verified as facts, and can be affected by future events or conditions that were not anticipated at the
time a rating was issued or affirmed.
The information in this presentation is provided “as is” without any representation or warranty.
A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not
address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned.
A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its
agents in connection with a sale of securities.
Ratings may be changed or withdrawn at any time for any reason in the sole discretion of
Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not
a recommendation to buy, sell, or hold any security.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE
LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.
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New York One State Street Plaza
New York, NY 10004
London 30 North Colonnade
Canary Wharf
London E14 5GN