Global Reinsurance Peer Review

Transcription

1 Reinsurance Peer Review Business conditions for the global reinsurance industry remain weak. The soft cycle is proving to be deeper and longer than many market participants anticipated in. have responded by tweaking their business mix and asset portfolios while their capital, ERM, and competitive positions should enable them to withstand the unfavorable conditions for the time being. We forecast deteriorating earnings over the next two years, but capital buffers should remain resilient. We expect few rating changes over the next 12 months.

2 Hannover Re Everest Re Scor Odyssey Re PartnerRe Allied Transatlantic Endurance Swiss Re XL Catlin RenaissanceRe Munich Re Amlin Arch Re Validus Axis Sirius Aspen Lloyds Lancashire Hiscox Competitive Position Pricing pressure is beginning to show through in the top line are responding by shifting their business mix to less price sensitive lines; but falling prices and rising expense bases are leading to deteriorating technical performance. Evolution Of Net Premiums Written Over Time Amount of nonproportional premium has declined by 13% since ; overall premium fell nearly 3% over the same period. London and Prop-Cat Players saw a large reduction in non-proportional premium in ; other peer groups followed suit in Non-proportional RE NPW Total NPW Proportional Versus Excess Of Loss Business In response to drastic rate decreases in non-proportional lines reinsurers have shifted to proportional and primary business; some peer groups are seeing increases of over 10 ppts. Industry-wide; proportional business has risen to 64% in 15 from 56% in Avg. Avg. 15 % % Proportional/Primary NPW15 15 Large Midsize London Prop-cat/ Short-tail Total Net Expense Ratio Those who control expenses will have a competitive advantage; But the industry is swimming against the current; the sector s expense ratio has risen 4.1 ppts since. % 50 5yr Avg Net Sector Average Expense Ratio - 15 (LH) 45 (LH) Yearly Avg (RH) Underlying Combined Ratios Excluding Catastrophe Losses And Reserve Releases Underlying margins are weakening and reinsurers can t always rely on benign catastrophe losses and reserve releases. Cat losses have averaged 4 ppts of the combined ratio since (Long-term avg. 10 ppts). Underlying Combined Ratio (%) London Reinsurance Large Midsize Prop-cat/Short-tail Reinsurance Peer Review

3 Capital Adequacy The sector still carries AAA capital adequacy, in aggregate, and appears to have the ability to absorb pricing pressure and weaker earnings for at least the next months However, the sector s capital adequacy has deteriorated slightly for the first time since, as pricing declines and returns to shareholders have offset strong headline earnings. Evolution Of Total Adjusted Capital (TAC) Versus Target Capital TAC has grown by 4% (CAGR) since ; outpacing capital requirements growth of 3% $ Bil. 260 TAC Target Capital A level Historical Sector Capital Adequacy By Rating Level Capital adequacy down slightly on both a relative and absolute basis. 15 Excess capital at year-end 15 down to $59 billion at the A level from $61 billion in but the buffer is still resilient to moderate shocks or weaker earnings. Excess capital down 3% to $59 billion in 15 Asset risks have increased by 2 ppts since % Redundancey /(Deficiency) 45 BBB A AA AAA Non-life reserve risk charges have declined by 4 ppts since Average Capital Adequacy By Peer Group, London and Mid-sized players saw average capital adequacy improve, as TAC growth outpaced increased capital requirements. Large s and Prop-cat/Short-tail players adequacy weakened in 15. % Redundancey /(Deficiency) 50 AAA AA A BBB AAA - Reinsurance Large Midsize London Prop-cat/ Short-tail Reinsurance Peer Review 3

4 Financial Flexibility have various options available to access capital and liquidity in the event that they need to recapitalize following a large loss Financial Leverage and Fixed Charge Coverage Average financial leverage at year-end 15 is 17% and fixed charge coverage averages 10x. We anticipate stability as many have taken advantage of low rates to refinance and lock in lower coupons. % Leverage (LH) Fixed Charge Coverage (RH) Leverage Avg. (LH) FCC Avg. (RH) x 10 But companies will have to demonstrate a strong track record of success and differentiation in order to draw investors capital through the traditional route rather than to alternative capital sources. 5 0 Amlin Aspen Sirius AXIS Allied World Lancashire Transatlantic Swiss Re Endurance SCOR PartnerRe RenaissanceRe Validus Arch Re Hannover Re Munich Re Everest Re Hiscox Lloyds 5 0 The industry s average Price/Book ratio is at 1.1x as of beginning of August; above the historical average of 0.9x Catastrophe Exposure Cat Exposure: Cumulative iness Scoring, Jan. 1, 16 Catastrophe risk appetites at one-in-250 year return period is 33% of common shareholders equity. On average, a one-in-10 year annual aggregate loss would not deplete more than 70% of annual profits before tax. We consider that, at an aggregate level, the sector s extremely strong capital position makes it more resilient to extreme events 15 Of the 21 global reinsurers under review 15 are likely to maintain a capital adequacy of at least BBB following a one-in-250 year aggregate loss from natural disasters. Relative Index Scoring Renaissance Re Everest Re Aspen Lancashire Validus Amlin Lloyds AXIS Sirius Odyssey Re Partner Re Transatlantic Endurance AlliedWorld XLCatlin Scor Swiss Re Hannover Re Hiscox Munich Re Arch Re This chart is based on blended ranking of cat risk metrics developed by S&P. 4 Reinsurance Peer Review

5 Investment conservative asset portfolios have helped to insulate their balance sheets from market turbulence since the global financial crisis in 08 However returns on investments have suffered as a result. The sector has sufficient capital to take more asset risk, but companies have been reluctant to take it on. Credit Average credit quality of reinsurers portfolios has fallen from the AA range to the A range since 10 as BBB-rated bonds have increased to 12% of the portfolio (7%). Large global players have the highest allocation to credit risk; while London companies have the most conservative allocation of their credit portfolios. AAA Sovereign AAA AA A BBB BB B CCC/C Unrated Total Prop-Cat/Short-tail London Midsize Large 0% % 40% 60% 80% 100% Slight trend towards riskier assets: 10% Equities (7% in ) 6% Sub IG Bonds (4% in ). Net Investment Yield We forecast return on investment (ROI) of 2.1% in 16 and 1.9% in 17. Large Midsize Prop-Cat/Short-Tail London 3.5 Average asset duration is 3.2; Liability duration is 3.7. % Sector ROI has declined by 60 bps since. This represents about 1.7 ppts of ROE lost Reinsurance Peer Review 5

6 Ratings Score Snapshots* Company Name Financial Strength Rating Outlook Anchor Business Profile IICRA Competitive Position Financial Profile Allied World Assurance Co. Holdings AG A Stable a- Intermediate ly Arch Capital Group Ltd. A+ Stable a Intermediate AXIS Capital Holdings Ltd. A+ Stable a+ Very Intermediate Very ly Endurance Specialty Holdings Ltd. A Stable a- Intermediate Sirius International Group Ltd. A- Stable a- Intermediate Large Hannover Rueck SE AA- Stable aa- Very Intermediate Very Very Lloyds A+ Stable a+ Very Intermediate Very ly Munich Reinsurance Co. AA- Stable aa- Very Intermediate Very SCOR SE AA- Stable aa- Very Low Very Swiss Reinsurance Co. Ltd AA- Stable aa- Very Intermediate London Very Amlin PLC A Stable a- Intermediate Aspen Insurance Holdings Ltd. A Stable a- Intermediate Hiscox Insurance Co. Ltd. A Stable a- Intermediate Upper ly Upper Midsize Everest Re Group Ltd. A+ Stable a Intermediate Partner Re Ltd. A+ Negative a+ Very Intermediate Very Transatlantic Reinsurance Co. A+ Stable a Intermediate XLIT Group A+ Positive a+ Very Intermediate Very Property-Catastrophe / Short-Tail Specialists Lancashire Insurance Co. Ltd. A- Positive a- Intermediate Upper RenaissanceRe Holdings Ltd. AA- Stable aa- Very Intermediate Very Validus Holdings Ltd. A Stable a Intermediate *As at August 11, 16 6 Reinsurance Peer Review

7 Ratings Score Snapshots (continued)* Company Name Capital & Earnings Position Financial Flexibility Enterprise Mgmnt Management & Governance Holistic Analysis Liquidity Allied World Assurance Co. Holdings AG Very High Satisfactory 0 Exceptional Arch Capital Group Ltd. Very Satisfactory 0 AXIS Capital Holdings Ltd. Very High Satisfactory 0 Endurance Specialty Holdings Ltd. High Satisfactory 0 Sirius International Group Ltd. High Adq, Controls Satisfactory 0 Exceptional Large Hannover Rueck SE Very 0 Exceptional Lloyds Very High 0 Munich Reinsurance Co. Very 0 Exceptional SCOR SE Very Very 0 Exceptional Swiss Reinsurance Co. Ltd Very 0 Exceptional London Amlin PLC High Very Satisfactory 0 Aspen Insurance Holdings Ltd. Very High Very Satisfactory 0 Hiscox Insurance Co. Ltd. High 0 Exceptional Midsize Everest Re Group Ltd. Partner Re Ltd. Transatlantic Reinsurance Co. XLIT Group High Satisfactory 0 High Adq, Controls Satisfactory 0 High Satisfactory 0 High Satisfactory 0 Exceptional Property-Catastrophe / Short-Tail Specialists Lancashire Insurance Co. Ltd. Very Very High Satisfactory -1 RenaissanceRe Holdings Ltd. Validus Holdings Ltd. *As at August 11, 16 High Very 0 High Satisfactory -1 Reinsurance Peer Review 7

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