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TRANSCRIPT
Martyn Street
Harish Gohil
23 September 2016
Global Reinsurance
A Rating Agency Perspective
1
Contents
1 Key Issues
2 Observations & Expectations
3 Solvency II developments
4 What Could Change the Rating Outlook?
2
Sector Outlook Negative, Rating Outlook Stable
Profit deterioration
1. Quality of earnings expected to deteriorate as underwriting margins and investment returns continue to fall
2. Smaller companies with limited diversification are at greatest risk of negative rating action
Pricing
1. Pricing conditions to remain challenging during 2017
2. Surplus of reinsurance capacity will create further downward pressure on premium prices
3. Slowing rate of price reductions will have limited significance in improving near-term profitability
Alternative capital
1. Growth of alternative reinsurance market has slowed
2. If this trend continues, it could signify reduced appetite for reinsurance risk
M&A
1. Consolidation among reinsurers has waned as companies digest recent deals
2. M&A likely to resume in the near term as companies consider strategic options to combat market stress
Key Issues
3
(USDm)
2017
forecast
2016
forecast
2015
actual
Net premiums written 102,060 101,050 99,067
Catastrophe losses 10,135 7,065 2,500
Net favourable prior year reserve development 2,990 3,945 4,833
Calendar year combined ratio (%) 99.2 94.2 86.8
Accident year combined ratio (%) 102.2 98.2 91.8
Accident year combined ratio ex catastrophes (%) 92.0 91.1 89.2
Shareholders’ equity (excluding Berkshire) 271,500 268,810 266,146
Net income ROE 8.0 8.5 9.8
2017/2016 Projections
Source: Fitch monitored universe of reinsurers
4
Date Event Location
Economic Loss
(USDbn)
Insured Loss
(USDbn)
April Earthquakes Japan 22-48 5.6
April Storm/hail US 3.5 3.1
May/June Storms/floods Europe 4.0 2.8
April Storms US 3.5 2.7
May Wildfires Canada 3.6 2.5
March Storms/hail US 2.0 1.5
1H16 total 68.0 28.0
1H15 total 46.0 16.0
10-year avg. 1H 102.0 26.0
30-year avg. 1H 63.0 15.0
Natural Catastrophe Events, 1H16
Source: Swiss Re – except 30-year average 1H, which is attributed to Munich Re NatCatService
5
Reported vs. Normalised Combined Ratio: 2011-2015 Average
106.0 90.4 91.1 90.6 90.3
95.0 94.3
95.2 96.6
98.5
70
80
90
100
110
2011 2012 2013 2014 2015
(%)
Major European Reinsurers Reported vs. normalised combined ratio
Average reported Average normalised
Note: Average for Hannover Re, Munich Re, SCOR and Swiss Re
Source: Company reports, Fitch
6
Normalised vs. Reported Combined Ratio: 2011-2015 by Co.
102 81 83 84 86 114 91 92 93 90 104 96 95 95 94 105 94 94 91 91
93 90
94 94
100
93 94 94
99 99 99
99 99 99 100
95 95 94 94 96
80
90
100
110
120
80
90
100
110
120
201
1
201
2
201
3
201
4
201
5
201
1
201
2
201
3
201
4
201
5
201
1
201
2
201
3
201
4
201
5
201
1
201
2
201
3
201
4
201
5
Swiss Re Munich Re Hannover Re SCOR
Major European Reinsurance Reported vs. Fitch normalised combined ratio
Swiss Re reported (LHS) Munich Re reported (LHS) Hannover Re reported (LHS)SCOR reported (LHS) Swiss Re normalised (RHS) Munich Re normalised (RHS)Hannover Re normalised (RHS) SCOR normalised (RHS)
Note: Reserve and natural catastrophe budgets vary annually for each company, figures rounded
Source: Company reports, Fitch
(%)
P:\PowerPoint\2016 PPT from
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10 Chart 2
7
Reported vs. Normalised Combined Ratio: 2015 Bridge
86.0 89.7
94.4 91.1
8.7 5.8 1.4 4.8 5.1
3.2 3.9 99.8 98.7 99.7
95.9
0
20
40
60
80
100
120
Reported Nat cat from expected Prior-year Normalised
Source: Fitch
2015
Swiss Re
2015
Munich Re
2015
Hannover
Re
2015
SCOR
8
Bermuda (Re)insurers Financial Performance
-4
-2
0
2
4
6
8
10
12
14
80
85
90
95
100
105
110
115
120
125
2010 2011 2012 2013 2014 2015 1H16
ROE (RHS) CY combined ratio (LHS) AY combined ratio (LHS) AY combined ratio ex. cats (LHS)
Source: SNL Financial, company reports
(%) (%)
9
Bermuda vs. North American (Re)insurers
-4
-2
0
2
4
6
8
10
12
14
16
18
20
2009 2010 2011 2012 2013 2014 2015 1H16
Bermuda ROE Advantage Shrinking
Bermuda North American
Source: SNL Financial, company reports
(%)
10
Bermuda vs. North American (Re)insurers (Cont.)
80
85
90
95
100
105
110
115
2009 2010 2011 2012 2013 2014 2015 1H16
CY Combined Ratios Converging
Bermuda North American
Source: SNL Financial, company reports
(%)
11
Reinsurance Renewal Pricing Trends
-30 -20 -10 0 10 20 30
US cat no loss
Cat loss hit
Cat no loss
Loss hit
No loss
(%)
Property (2016)
Source: Company and broker reports
-30 -20 -10 0 10 20 30
US general TPL
US motor (NL)
US motor (L)
XL loss hit
XL no loss
(%)
Casualty (2016)
Source: Company and broker reports
12
Portfolio Price Movements: Major European
-6
-4
-2
0
2
4
6
8
Hannover Munich SCOR Swiss
Overall Portfolio Price Movements Softening trend continues but viewed as manageable
2012 2013 2014 2015 2016
Source: Company disclosure
(%)
13
Alternative Reinsurance Capacity
0
2
4
6
8
10
12
14
16
18
20
YE08 YE09 YE10 YE11 YE12 YE13 YE14 YE15
(%)
Alternative Market Capacity Growth Slows
Alternative capacity as a % of global property catastrophe reinsurance limit
Source: Guy Carpenter Estimates
14
Catastrophe Bond Issuance
3.7 5.0
8.4
14.1
11.8 12.3 12.4 12.7
15.2
19.1
23.8 24.2 22.8
1.1 2.1
4.6
7.2
2.7 3.4
4.8 4.3 5.9
7.3 8.3
6.8
3.5
0
5
10
15
20
25
30
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1H16
(USDbn)
Issuance Slipping
Catastrophe Bonds (Non-Life)
Outstanding Issued
Source: Willis Capital Markets & Advisory
15
Tough sledding ahead
What goes up, must come down – significant maturities coming due ($7 B in 2017)
Unless there is a paradigm shift, we believe not much more growth
ILS Growth – needs a catalyst
0
5,000
10,000
15,000
20,000
25,000
YE2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20152016 - 1st halfNext 15 mos2017 - proj.
(USDbn) Outstanding Balance Maturities Issuance
Source: ???
Title
2015 / 2016: AIG – Bellemeade Re (mortgage
insurance)
Zurich / Credit Suisse – Operational Re
P:\PowerPoint\2016 PPT from
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Sheet1 Chart 1
16
Basic Hurdles Still Exist for Cat Bonds – though changes are in the air
Niche market
Expensive to structure
Lack of robust secondary market
Seasonality
Peak perils
Lack of standardization
Private placements
Peak Multi-peril
47%
US Wind 24%
US Quake 13%
Euro Wind 5%
Japan Quake
7%
Other 4%
Source: Willis Capital Markets (June, 2016)
Outstanding Perils P:\PowerPoint\2016 PPT from
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18 Chart 1
17
0
5,000
10,000
15,000
20,000
25,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016(2ndQtr)
(Axis Title)
Source: Fitch
Par Outstanding
Lehman Bros Default (2008): Ajax Carillon Newton Re Willow Re
Katrina (2005): Kamp Re Avalon Re
Over $1.8 B of new
issuance has JP EQ
(between 2013 and 2015)
2011: Tohuku: Muteki Tornados: Mariah Re
Superstorm: Sandy (2012)
Will Investors Leave When Claims Happen? – doesn’t seem so based on past events
P:\PowerPoint\2016 PPT from
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19 Chart 2
18
Evolution of Reinsurers’ Market Position
19
Major European Reinsurers’ Solvency
302
221 211
223
312
0
40
80
120
160
200
240
280
320
Munich Re Hannover Re SCOR Swiss Reª
Strong Level of Coverage
a 223% represents coverage under Swiss Solvency Test, the regime that Swiss Re operates under
Source: Fitch
Target range (%)
20
Three elements separately assessed to determine whether equivalent
Reinsurance supervision
Solvency assessment
Group supervision
Types of equivalence
Full (unlimited), temporary (end-2020, extendable by one year) and provisional (10 years, renewable for
10 year period)
Third country effects
Non-EEA reinsurers when involved in EEA reinsurer contracts
Non-EEA subsidiaries of EEA (re)insurers
Non-EEA (re)insurers with EEA subsidiaries without EEA sub-group with EEA parent
Equivalence
21
Global Progress for Equivalence
Bermuda and Switzerland
a Excludes captives and SPVs b Reinsurance supervision granted temporary equivalence for 5 years
Source: Fitch
Bermudaa
Switzerland
Full equivalence
Brazil
USA
Australia
Japanb
Canada
Mexico
Provisional
– Solvency assessment only
22
“..it would be unacceptable to us if firms were to use this
market (reinsurance) primarily as a tool to achieve
regulatory arbitrage..”
(Andrew Bulley, Prudential Regulation Authority 28 April 2016)
23
Longevity Continues to Develop GWP
0
200
400
600
800
1,000
1,200
1,400
1,600
2011 2012 2013 2014 2015
Hannover Re
Source: Fitch
(EURm)
0
100
200
300
400
500
600
2011 2012 2013 2014 2015
SCOR
(EURm)
0
50
100
150
200
250
300
350
400
450
2011 2012 2013 2014 2015
Munich Re
(EURm)
24
1. Deterioration in sector profitability, even if capital remains strong
Run-rate combined ratio stay closer to 100% (2017 forecast is 99.2%)
Return on equity dropped below 10% (2017: 8.0%)
What has changed since sensitivities were first assigned?
Since first assigning these sensitivities in September 2014, interest rates and the risk profile of many
reinsurers have reduced
Where are Negative rating actions most likely?
Individual negative rating actions are possible if a raised combined ratio or sub-10% ROE indicated a
significant impairment in a company’s financial condition
2. Catastrophic loss with interest rate spike
Catastrophic loss in excess of USD70bn coupled with a sudden spike in interest rates of 300bps or more
What Could Lead to a Negative Rating Outlook?
25
Fitch research can be accessed via our website www.fitchratings.com
1. Global Reinsurance Guide 2017 (September 2016)
2. 2017 Outlook: Global Reinsurance (September 2016)
3. Bermuda (Re)Insurers’ Financial Performance (August 2016)
4. Insurance Peer Review: Major European Reinsurers (August 2016)
5. Global Reinsurers’ Mid-Year 2016 Financial Results (August 2016)
6. Asian Reinsurance Markets (August 2016)
7. Latin American Reinsurance (August 2016)
8. Reinsurance in a Solvency II World (June 2016)
Related Research
26
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
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The information in this presentation is provided “as is” without any representation or warranty. A Fitch Ratings credit rating is
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