BEST S SPECIAL REPORT

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1 BEST S SPECIAL REPORT Our Insight, Your Advantage. Segment Review September 2, 2013 Young MENA insurance markets depend on international reinsurance support. Demand Continues Despite Shift Toward Higher Retentions International reinsurers play an important role in the Middle East and North Africa (MENA) insurance markets, providing capacity and technical expertise to local market participants, particularly on high-value risks. Primary insurers dependence on reinsurance support remains high among companies based in the region. MENA insurance markets generated more than USD 30 billion of premiums in 2012, with the vast majority of high-value commercial risks ceded into the international reinsurance market. Despite the region s economic slowdown in recent years, owing to depressed world financial markets, potential growth in commercial risks, such as infrastructure and energy, is expected to remain and continue to create opportunities for reinsurers. Most markets within the MENA region are open, with limited restrictions on reinsurance activities. However, there are initiatives to foster growth and retain business within the region. Mandatory cessions are important to the dynamics of some markets, such as in Algeria and Morocco. In these countries, local players are obliged to cede a proportion of their reinsured premiums to the state reinsurers. This emphasizes the state s involvement and intention to retain some of the risks within a country, or to support the country in case of natural catastrophes. Another mechanism in place to encourage retention is the establishment of longstanding local and regional reinsurance companies, in addition to reinsurance pools, whereby shareholders or pool members are largely local or regional insurance companies. In these cases, the companies may have vested interests in serving the local market and supporting the regional reinsurance markets. Some jurisdictions, such as Saudi Arabia, are introducing specific rules whereby an increasing proportion of total premiums must be retained within the country. This encourages higher participation in risks among local participants. Moreover, in many jurisdictions, most business must be placed through a local participant or sponsor. Despite these market dynamics, the MENA insurance markets are still young and depend on international reinsurance support, with local and regional reinsurers generally acting as followers in such markets. Analytical Contact Mahesh Mistry, London Mahesh.Mistry@ambest.com Researcher & Writer Yvette Essen, London This report was excerpted from A.M. Best s Global Reinsurance Segment Review: The Capital Challenge. Primary insurers have tended to maintain low retentions, relying heavily on the reinsurance market, in particular for commercial risks. This is in part a result of insurers encountering challenges in developing technical expertise, and partly due to the increased reinsurance commissions available. They have tended to be risk averse in part, while reinsurance commissions received have tended to cover the majority, if not all, of the commissions that insurers have been required to pay to agents. Despite insurers beginning to retain increasing amounts of business in recent years, the dependence on reinsurance remains high, with many risks being fronted locally and ceded to the international market. Copyright 2013 by A.M. Best Company, Inc. ALL RIGHTS RESERVED. No part of this report or document may be distributed in any electronic form or by any means, or stored in a database or retrieval system, without the prior written permission of the A.M. Best Company. For additional details, refer to our Terms of Use available at the A.M. Best Company website:

2 For international reinsurers with greater capacities and expertise, the MENA insurance market has presented opportunities to diversify risk into countries perceived to have low exposures to natural catastrophes. Although there are indications that some reinsurers have more recently been seeking to reduce their exposure to the region, plenty of reinsurance capacity remains in the market. Furthermore, the expansion of regional players operating within the Indian subcontinent, the Asia-Pacific territories and Africa has brought additional capacity to the market. MENA Market Strategies Vary Strategies adopted by reinsurers to penetrate the MENA markets vary considerably. Five years ago, reinsurers tended to operate from a distance, with the vast majority of commercial risks placed through the London market. However, the dynamics of the landscape have changed materially. The introduction of financial free zones, such as the Dubai International Financial Centre (DIFC) and Qatar Financial Centre (QFC), have helped open the market and encouraged international participants to establish operations in the region. This has been the case in particular for reinsurers and brokers, with most major insurance institutions having some form of regional presence. Proximity to the market is seen as increasingly important to understanding the market s characteristics; creating closer ties between companies and cedents; and demonstrating a keen willingness to support the market. While some reinsurers have left the market, overall the number of participants and capacity continue to increase. A growing amount of business is being placed directly within the MENA region, with this trend likely to continue. For reinsurers, risk selection is critical, with risk management practices of clients and cedents being important to the quality of risk underwritten. Cession rates vary significantly among MENA insurers, although in general the level of business ceded has gradually decreased in the past few years. A.M. Best s analysis of 130 companies based in the Gulf Cooperation Council (GCC) countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) shows that in 2002 more than 60% of direct premiums written were ceded (see Exhibit 1). However, in 2011, cession rates for companies in this data set were less than 40% of risks. Exhibit 1 Global Reinsurance Premium Cession Rates in Select Regions ( ) GCC 40 Far East 30 Indian Subcontinent Levant 20 Developed 10 CIS GCC (Bahrain, KSA, Kuwait, Oman, Qatar, UAE) Levant (Jordan, Lebanon, Turkey) Indian Subcontinent (India, Pakistan) CIS (Kazakhstan, Russia, Ukraine) Far East (Malaysia, Thailand, Vietnam) Developed (France, Germany, UK) Source: Best's Statement File Global 2

3 The reduction in part indicates a change in the market s mix of business, with health care playing an increasingly important role in insurers profiles. The retention on medical remains high, and therefore primary insurers have improved their overall retention. For commercial risks, retention is gradually improving as companies seek to increase expertise and retain larger lines, yet insurers are still largely dependent on reinsurers. A.M. Best s analysis compares the performance of 1,766 companies in 19 countries over nine years. The data show that while GCC companies have improved retention ratios, they continue to cede the largest proportion of their premiums compared with other markets. Premium cession levels are approximately double those of the 111 companies that comprised the data set for the Commonwealth of Independent States (CIS) Kazakhstan, Russia and Ukraine and the 1,191 entities analysed in the developed markets of France, Germany and the United Kingdom. The MENA market largely utilizes proportional reinsurance, although there has been a gradual shift toward nonproportional cover in recent years. Within the region there is extensive use of bouquet treaties, whereby most non-life lines are placed together under the same treaty to service group multirisk accounts. This makes pricing the treaty for the whole portfolio more critical, factoring in both under- and overperforming lines. In most cases, health care is placed separately. Historically, MENA insurers have benefited from reinsurance rates that have been among the lowest in emerging markets. While reinsurance prices have been under pressure in recent years, it is likely that prices are starting to increase in the short term. For rates to materially increase there would need to be a major shock to the reinsurance market. This could be triggered by a major catastrophe in the region, or a series of large losses on high-value risks, such as in energy and infrastructure risks. Medical business has historically been written on a proportional basis. However, the level of competition in medical has contributed to losses among many insurers and reinsurers. The latter may have suffered more in some instances because of the outwards commission structures attached to these treaties. As a result, reinsurers are dictating terms more aggressively as they threaten to remove capacity, move from treaties to excess-of-loss cover, reduce commissions or shift to sliding-scale commissions. The dominance of medical in the region makes it important for the markets to have reinsurers continued support. In the medium term, MENA insurers are under pressure to maintain greater focus on technical profitability, given depressed investment returns. There is pressure from reinsurers to increase rates, enforce stricter terms or reduce commission levels, which will further encourage companies to concentrate more on gross rather than net profitability. Furthermore, insurers are taking active steps to improve profitability, with increased retentions as one measure. They are also performing back-testing (sometimes with the assistance of third parties) on their reinsurance utilization to see the overall benefits of reinsurance coverage, aiming to leverage their positions to negotiate improved terms and conditions. Retakaful Trends Retakaful operators represent an important sector of the MENA reinsurance market, although these tend to be young companies finding it difficult to establish themselves and create a balance between market franchise and profitability. Rather than distinguish themselves through targeting new, untapped market segments, Retakaful operators tend to compete directly with their conventional counterparts. Given that some existing conventional reinsurers benefit from strong reputations and economies of scale, Retaka- 3

4 ful operators find it difficult to establish profitable operations. Moreover, pressure from shareholders to service capital can lead to the pursuit of premium income through pricing practices. Retrocession should ideally be placed with Retakaful companies, but in reality, a lot of the risk is ceded to conventional reinsurers, as Retakaful operators have insufficient capacity to support large and volatile commercial risks or lack the ratings required by the ultimate insureds. Ratings Issues for MENA Reinsurers All A.M. Best-rated reinsurers based in the MENA region have secure Financial Strength Ratings (FSRs). The highest rating achieved at present is an FSR of A (see Exhibit 2). In all but two instances, the outlook for the FSR and Issuer Credit Rating (ICR) is stable. Exhibit 2 Middle East & North Africa A.M. Best-Rated Reinsurance Companies Ratings as of Aug. 16, Best s Financial Best s Long- Strength Term Issuer Rating Credit (FSR) Rating (ICR) Best s FSR & ICR Outlook Most reinsurers in the MENA countries are now underwriting business outside of the region. While the markets continue to expand, reinsurers will find opportunities to grow but need to ensure underwriting is adequately controlled. FSR & ICR Rating Action MENA insurers operating in countries that have suffered from regional political and economic instability have seen their top lines affected. However, many A.M. Best-rated Middle Eastern reinsurers have shown resilience in their operating performances due to their diversified portfolios and flexible business continuity plans. Reinsurers have felt obliged to support affected markets during the turbulent period however, after the initial unrest, policy wording has materially tightened in the region, driven by the international reinsurance market s desire to alleviate uncertainty or conflict arising from strike, riot and civil commotion (SRCC) definitions. Furthermore, in relation to the uncertainty of natural catastrophes across the world and the increased frequency of regional catastrophe events, focus has increased on introducing event limits in the region. This should provide further protection to reinsurers in the event of a major adverse loss scenario. These issues over the past few years have highlighted the need for greater transparency in policy wording and conditions offered in MENA markets. Rating Effective Date Domicile Company AMB # Algeria Compagnie Centrale de Reassurance B+ bbb- Stable Affirmed July 18, 2013 Bahrain ACR ReTakaful MEA B.S.C. (c) A- a- Stable Affirmed Dec. 20, 2012 Bahrain Arab Insurance Group (B.S.C.) B++ bbb+ Stable Affirmed Dec. 18, 2012 Bahrain Trust International Insurance & Reinsurance Co. B.S.C. (c) Trust Re A- a- Stable Affirmed Aug. 30, 2012 Kuwait Al Fajer Retakaful Insurance Co. K.S.C. (Closed) B++ bbb+ Stable Affirmed July 10, 2013 Kuwait Kuwait Reinsurance Co. K.S.C. (Closed) A- a- Stable Affirmed April 25, 2013 Lebanon Arab Reinsurance Co. S.A.L B+ bbb- Stable Affirmed Dec. 11, 2012 Morocco Societe Centrale de Reassurance B++ bbb Negative Affirmed July 10, 2013 Qatar Q-Re LLC A a Stable Assigned Nov. 26, 2012 Tunisia Societe Tunisienne de Reassurance B+ bbb- Stable Affirmed July 10, 2013 Turkey Milli Reasurans Turk Anonim Sirketi B+ bbb- Negative Affirmed April 5, 2013 United Arab Emirates Gulf Reinsurance Ltd A- a- Stable Affirmed Aug. 2, 2013 Source: Best s Statement File Global; Ratings as of Aug. 16,

5 Exhibit 3 Top 50 Global Reinsurance Groups Ranked by gross premium written in (USD Millions) Reinsurance Premiums Written Life & Non-Life Non-Life only Ratios 1 5 Total Shareholders Funds Loss Expense Combined 2013 Ranking Company Gross Net Gross Net 1 Munich Reinsurance Co. 2 $37,251 $36,167 $22,539 $22,038 $36, % 30.0% 91.2% 2 Swiss Reinsurance Co. Ltd. 31,723 25,344 19,468 15,117 34, Hannover Rueckversicherung AG 2 18,208 16,231 10,201 9,060 8, Lloyd s 3,4 15,785 11,371 15,770 11,358 31, Berkshire Hathaway Inc. 5 15,059 15,059 9,668 9, ,588 N/A N/A SCOR S.E. 12,576 11,286 6,146 5,558 6, Reinsurance Group of America Inc. 8,233 7, ,910 N/A N/A N/A 8 China Reinsurance (Group) Corp. 6,708 6,471 4,184 4,090 7, Korean Reinsurance Co. 6 5,113 3,390 5,113 3,390 1, PartnerRe Ltd. 4,712 4,567 3,910 3,768 6, Everest Re Group Ltd. 4,311 4,081 4,311 4,081 6, Transatlantic Reinsurance Co. 3,577 3,456 3,577 3,456 4, London Reinsurance Group Inc. 3,319 3, N/A N/A N/A 14 Assicurazioni Generali SpA 2,979 2, , General Insurance Corporation of India 6 2,776 2,534 2,758 2,520 5, XL Group plc 2,364 2,209 2,008 1,885 11, QBE Insurance Group Ltd. 2,265 1,675 2,265 1,675 11, MAPFRE RE, Compania de Reaseguros, S.A. 7 2,256 1,953 1,890 1,850 1, The Toa Reinsurance Co., Ltd. 6,8 2,155 1,821 2,155 1,821 2, Odyssey Re Holdings Corp. 2,044 1,916 2,044 1,916 3, R+V Versicherung AG 9 2,017 1,972 1,981 1,955 2, Tokio Marine Holdings, Inc. 6,8 1,966 1,579 1,966 1,579 35,196 N/A N/A N/A 23 Catlin Group Ltd. 1,860 1,614 1,860 1,614 3, Axis Capital Holdings Limited 1,830 1,815 1,830 1,815 5, Caisse Centrale de Reassurance 1,719 1,719 1,645 1,595 2, MS&AD Insurance Group Holdings, Inc. 6,8,10 1,700 N/A 1,700 N/A 28,740 N/A N/A N/A 27 Amlin plc 1,592 1,278 1,592 1,278 2, RenaissanceRe Holdings Ltd. 1,552 1,103 1,552 1,103 3, IRB - Brasil Resseguros S.A. 1, , , Arch Capital Group Ltd. 1,282 1,227 1,282 1,227 5, Deutsche Rueckversicherung AG 1, , Aspen Insurance Holdings Ltd. 1,228 1,157 1,228 1,157 3, White Mountains Insurance Group, Ltd. 1, , , Validus Holdings, Ltd. 1,154 1,009 1,154 1,009 4, Endurance Specialty Holdings, Ltd. 1,119 1,087 1,119 1,087 2, ACE Ltd. 1,070 1,025 1,070 1,025 27, American Agricultural Insurance Co Alterra Capital Holdings Ltd , Pacific LifeCorp ,497 N/A N/A N/A 40 Maiden Holdings, Ltd , ACR Capital Holdings Pte, Ltd Allied World Assurance Co. Holdings, AG , Montpelier Re Holdings Ltd , African Reinsurance Corp NKSJ Holdings, Inc. 6, ,857 N/A N/A N/A 46 Milli Reasurans Turk Anonim Sirketi Platinum Underwriters Holdings Ltd , Wilton Re Holdings Ltd ,540 N/A N/A N/A 49 W.R. Berkley Corp , Central Reinsurance Corp Note: Premium figures for all companies exclude affiliated business. 1 Non-life only. 2 Net premiums written data not reported, net premiums earned substituted. 3 Lloyd s premiums are reinsurance only. GPW for certain groups within the rankings also may include Lloyd s Syndicate GPW when applicable. 4 Total shareholders funds includes Lloyd s members assets and Lloyd s central reserves. 5 Loss reserve and expense ratio detail not available on a GAAP basis. 6 Fiscal year-end March 31, Total shareholders funds, life & non-life NPW and non-life NPW figures were revised after report published on Sept. 2, Total shareholders funds includes catastrophe and price fluctuation reserves. 9 Ratios are as reported and calculated on a gross basis. 10 Non-affiliated reinsurance information only available on a gross basis. 11 Data and ratios based on U.S. statutory filing. 12 Total shareholders funds includes equalization and unexpired risk reserve. N/A Information not applicable or not available at time of publication. Source: A.M. Best data & research

6 MENA markets allow reinsurers to diversify into relatively less catastrophe-prone territories. While insurers seek to increase their retention levels, reinsurers will continue to play an important role in the market. As the complexity of the market develops, the presence of reinsurers and proximity to clients in the region will remain important. For information about A.M. Best s ratings for the Middle East & North Africa region, please contact Vasilis Katsipis at Published by A.M. Best Company Special Report Chairman & President Arthur Snyder III Executive Vice President Larry G. Mayewski Executive Vice President Paul C. Tinnirello Senior Vice Presidents Manfred Nowacki, Matthew Mosher, Rita L. Tedesco, Karen B. Heine A.M. Best Company World Headquarters Ambest Road, Oldwick, NJ Phone: +1 (908) WASHINGTON OFFICE 830 National Press Building th Street N.W., Washington, DC Phone: +1 (202) MIAMI OFFICE Suite 949, 1221 Brickell Center Miami, FL Phone: +1 (305) A.M. Best Europe Rating Services Ltd. A.M. Best Europe Information Services Ltd. 12 Arthur Street, 6th Floor, London, UK EC4R 9AB Phone: +44 (0) A.M. Best asia-pacific LTD. Unit 4004 Central Plaza, 18 Harbour Road, Wanchai, Hong Kong Phone: A.M. BEST MENA, SOUTH & CENTRAL ASIA Office 102, Tower 2 Currency House, DIFC PO Box , Dubai, UAE Phone: Copyright 2013 by A.M. Best Company, Inc., Ambest Road, Oldwick, New Jersey ALL RIGHTS RESERVED. No part of this report or document may be distributed in any electronic form or by any means, or stored in a database or retrieval system, without the prior written permission of the A.M. Best Company. For additional details, see Terms of Use available at the A.M. Best Company Web site Any and all ratings, opinions and information contained herein are provided as is, without any expressed or implied warranty. A rating may be changed, suspended or withdrawn at any time for any reason at the sole discretion of A.M. Best. A Best s Financial Strength Rating is an independent opinion of an insurer s financial strength and ability to meet its ongoing insurance policy and contract obligations. It is based on a comprehensive quantitative and qualitative evaluation of a company s balance sheet strength, operating performance and business profile. The Financial Strength Rating opinion addresses the relative ability of an insurer to meet its ongoing insurance policy and contract obligations. These ratings are not a warranty of an insurer s current or future ability to meet contractual obligations. The rating is not assigned to specific insurance policies or contracts and does not address any other risk, including, but not limited to, an insurer s claims-payment policies or procedures; the ability of the insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. 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