2018 Reinsurance Market Briefing - Zurich

Transcription

1 FIFA Museum AG 2018 Reinsurance Market Briefing - Zurich 6 June 2018

2 2018 Reinsurance Market Briefing - Zurich Welcome Nick Charteris-Black Managing Director, Market Development EMEA 2018 Reinsurance Market Briefing - Zurich 6 June

3 Agenda 10:10 Global Reinsurance Outlook Greg Carter, Managing Director, Analytics EMEA 10:40 Keynote Presentation: ILS and the Alternative Capital Markets 11:20 Dirk Lohmann, Chairman & CEO Secquaero Advisors Ltd 11:40 Methodology Update Presentation: An update on Best's Credit Rating Methodology (BCRM) for (Re)Insurance Companies Overview of outcomes for Global Reinsurance segment Mathilde Jakobsen, Director, Analytics 12:20 European Primary Insurance trends including Market Outlooks and impact on reinsurance sector Catherine Thomas, Senior Director, Analytics 13: Reinsurance Market Briefing - Zurich 6 June

4 Disclaimer AM Best Company (AMB) and/or its licensors and affiliates. All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT AMB s PRIOR WRITTEN CONSENT. All information contained herein is obtained by AMB from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. Under no circumstances shall AMB have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of AMB or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if AMB is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities, insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specific purpose or purchaser. Credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. Credit ratings do not address any other risk, including but not limited to, liquidity risk, market value risk or price volatility of rated securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY AMB IN ANY FORM OR MANNER WHATSOEVER. Each credit rating or other opinion must be weighed solely as one factor in any investment or purchasing decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security or other financial obligation and of each issuer and guarantor of, and each provider of credit support for, each security or other financial obligation that it may consider purchasing, holding or selling Reinsurance Market Briefing - Zurich 6 June

5 Disclaimer US Securities Laws explicitly prohibit the issuance or maintenance of a credit rating where a person involved in the sales or marketing of a product or service of the CRA also participates in determining or monitoring the credit rating, or developing or approving procedures or methodologies used for determining the credit rating. No part of this presentation amounts to sales / marketing activity and A.M. Best s Rating Division employees are prohibited from participating in commercial discussions. Any queries of a commercial nature should be directed to A.M. Best s Market Development function Reinsurance Market Briefing - Zurich 6 June

6 2018 Reinsurance Market Briefing - Zurich Global Reinsurance Outlook Greg Carter Managing Director, Analytics - EMEA 2018 Reinsurance Market Briefing - Zurich 6 June

7 Reinsurance Market Dynamics Convergence Capital Low Investment Yields Intense Competition Outlook? Inflation Potential Earnings Strained Excess Capital 2018 Reinsurance Market Briefing - Zurich 6 June

8 Global Reinsurance Performance Results & Trends 2018 Reinsurance Market Briefing - Zurich 6 June

9 Total Economic and Insured Losses Annual Change (%) 10-Year Average USD Billions USD Billions USD Billions Economic Losses Nat Cat % 178 Man-made % 12 Total % 190 Insured Losses Nat Cat % 51 Man-made % 7 Total % 58 Source: Swiss Re Institute 2018 Reinsurance Market Briefing - Zurich 6 June

10 Global Combined Ratio 120% 100% 87.8% 89.8% 95.2% 95.2% 109.8% 33.7% 94.6% 50% 45% 40% 80% 31.9% 33.6% 34.3% 34.7% 33.6% 35% 30% Expense Ratio 60% 25% Loss Ratio 40% 20% 55.9% 56.2% 56.0% 60.5% 76.1% 61.0% 20% 15% 10% Loss Reserve Development 5.7% 5.4% 6.0% 5.8% 4.2% 5.4% 5% 0% yr Avg 0% Source: A.M. Best data and research 2018 Reinsurance Market Briefing - Zurich 6 June

11 Global Return on Equity Return on Equity Five-Year Average 14% 12% 13.0% 11.6% 10% 8% 6% 9.8% 8.4% 4% 2% 0% -2% % Source: A.M. Best data and research 2018 Reinsurance Market Briefing - Zurich 6 June

12 Global Return on Equity Five Year Average 9% 8.5% 8% 7% 6% 5% 4.7% 4% 3% 2% 1% 0% Five -Year Average Return on Equity Five -Year Average Return on Equity Excluding Loss Reserve Development Source: A.M. Best data and research 2018 Reinsurance Market Briefing - Zurich 6 June

13 Market Capacity 2018 Reinsurance Market Briefing - Zurich 6 June

14 Top 10 Largest Reinsurance Groups Reinsurance WP Total Life & Non-Life (USD m) Shareholders Gross Net Funds Swiss Re 35,622 33,570 35,716 Munich Re 33,154 31,891 33,493 Hannover Ruck 17,232 15,192 10,264 SCOR 14,569 13,238 7,055 Berkshire Hathaway 12,709 12, ,359 Lloyd's 11,576 8,694 34,101 RGA 10,107 9,249 7,093 China Re 7,857 7,517 10,384 Great West Lifeco 6,195 6,112 13,857 Korean Re 5,554 3,903 1,755 Source: A.M. Best data and research. Ranked by unaffiliated gross premium written in Reinsurance Market Briefing - Zurich 6 June

15 Estimate for Dedicated Reinsurance Capacity (USD Billions) Convergence Capacity Traditional Capacity * Forecast Source: A.M. Best and Guy Carpenter Reinsurance Market Briefing - Zurich 6 June

16 Convergence Capacity 90 Convergence Capacity 14 CAT Bonds 70 USD Billions USD Billions Number of Deals E* ILW Collateralized Re Catastrophe Bonds CAT Bonds Issued Number of Deals 0 Source: * Forecast by Guy Carpenter and A.M. Best data and research Source: A.M. Best and Artemis 2018 Reinsurance Market Briefing - Zurich 6 June

17 Market Strategies & Opportunities 2018 Reinsurance Market Briefing - Zurich 6 June

18 Global Market Strategies In A.M. Best s opinion Client Agent & Broker The market will continue to become more efficient as all players strive to become closer to the client Primary Insurance Company Reinsurance Broker Reinsurance Company Convergence Capital 2018 Reinsurance Market Briefing - Zurich 6 June

19 Opportunities for the Reinsurance Sector Cyber Insurance Flood Mortgage Terrorism InsurTech 2018 Reinsurance Market Briefing - Zurich 6 June

20 Global Reinsurance Outlook Headwinds Intense competition Unabated interest from third-party capital Excess capacity hinders improvement Potential for increased inflation Reserve release declines Earnings under pressure Tailwinds Cession rates increasing Cat losses temporarily stabilise rates Favourable reserve development Strong risk-adjusted capital Increase in interest rates M&A Although capitalisation remains strong and rate deterioration halted, pressure on margins continues. Over the intermediate term, returns for some reinsurers will fall short on a risk-adjusted basis. Maintain negative outlook Reinsurance Market Briefing - Zurich 6 June

21 A.M. Best 2018 Reinsurance Market Briefing ILS and Alternative Markets Zurich Dirk Lohmann Secquaero Advisors Ltd June 6, 2018 Insurance-Linked Securities from

22 Agenda 01 Introduction History of ILS and Alternative Capital in the Reinsurance Market 2017 What happened? 2018 Expectations and Reality Outlook Prospects for Growth Source: Secquaero Advisors Ltd 22

23 Personal Introduction Dirk Lohmann 38 years management / underwriting experience 17 Years with Hannover Re 4 Years with Zurich Financial Services 3.5 Years with Converium CEO of Secquaero Advisors Ltd since Extensive experience and innovation in the field of insurance securitization KOVER (1994, Hannover Re) First securitization of non-life catastrophe risk into capital markets K2 Portfolio Swap (1996, Hannover Re) First securitization to include aviation risk in addition to catastrophe risk. First Portfolio based transaction to use an ISDA as documentation Trinom (2001, Zurich Re) First multi-event, multi-peril securitization (US Wind & EQ, Euro Nat Cat perils) Helix 04 (2004, Converium) First second event only multi-peril 144A securitization (U.S. Wind & Quake, Euro wind, Japan Quake) Award winning transaction SQ ReVita (2011, Secquaero) First Value in Force Life Securitization in note format with active transaction management, transparent reporting and specific risk mitigants SQ ReVita II (2016, Secquaero) Winner of Trading Risk Life ILS Transaction of the Year Award 23

24 Introduction to Secquaero Founded in 2007 Launched first ILS fund in June 2008 Affiliated with Schroders since June Now a consolidated subsidiary of the Schroders Plc Group Exclusive advisors to Schroders on insurance-linked investments Jointly manage with Schroders over $3 billion on ILS Assets Active investor in all classes of insurance risk (not just catastrophe) Total team of 22 investment professionals with in excess of 200 years industry experience What does the name Secquaero mean? Quaero: I seek, look for, strive for, endeavour, seek to obtain (Latin) Sec + Quaero = seeking solutions in securitization Source: Secquaero Advisors Ltd 24

25 25 History of ILS and Alternative Capital in the Reinsurance Market

26 History of U.S. P&C Industry Capital inflows after major dislocations in the market Class of 1985 ACE XL Casualty Crisis Class of 1993 Cat Ltd. Global Capital Re IPC Re La Salle Re Mid Ocean Re Partner Re Renaissance Re Tempest Re Hurricane Andrew Class of 2001 Arch Aspen Axis AWAC Da Vinci Re Endurance Goshawk Re Montpelier Re Olympus Re 9/11 and Reserve Strengthening Katrina, Rita & Wilma Class of 2005 Aeolous Re Ariel Re Flagstone Harbor Point Lancashire New Castle Re Validus Amlin Bermuda Hiscox Bermuda & Sidecars US Tornados, Japan & N.Z. EQ Class of 2011 ILS Managers & Sidecars Legend: Partner Re Start-up backed by Venture Capital and still trading Cat Ltd- - Start-up that has since been acquired / consolidated Aelous Re / Side Cars / ILS Managers Alternative capital market vehicles Hard Market Catastrophe Event Source: A.M. Best; Insurance Information Institute 26

27 Why is ILS attractive to Investors? Source: Schroders 27

28 The case for ILS Attractive returns, excellent diversification Cat Bonds Equities IG Bonds Hedge Funds Commodities High Yield Bonds Annual return (USD) 7.6% 7.6% 5.6% 2.0% 6.2% 8.5% Volatility annual 3.2% 14.0% 6.1% 4.5% 22.6% 10.0% Positive months 92% 67% 70% 66% 58% 71% Cat bonds positive if index negative 86% 84% 85% 91% 86% Worst month -6.5% -16.8% -14.9% -9.9% -27.8% -17.3% Date of worst month Sept 17 Oct 08 Oct 08 Oct 08 Oct 08 Oct 08 Source: Bloomberg, Swiss Re. Data from January 2002 to 29 December Cat Bonds: Swiss Re Global Cat Bond Index, Equities: S&P500 Total Return Index, IG bonds: JP Morgan IG Corporate Total Return Index, Commodities: S&P Goldman Sachs Commodity Index, Hedge Funds: HFRX Equally Weighted Index, High Yield Bonds: Merrill Lynch Global HY Index. Cat bonds positive if index negative refers to monthly performance of Swiss Re Global Cat Bond Index vs. other indices. Worst month figure refers to the Swiss Re Cat Bond Index, which suffered the biggest draw-down over all cat bond indices in March

29 ILS How it all began From a modest start to a major force in the insurance industry in 20 years hannover re Kover Ltd $100,000,000 Insurance Linked Notes January Hurricane Andrew 1994 KOVER 1st Transfer of Cat risk to Captial Markets 1997 Georgetown Re 1st 144a Cat Bond 2005 Katrina, Rita & Wilma Most expensive Cat year in history 2014 $60 to $75 bn 20% of Cat Market Source: Wikipedia, Secquaero Advisors Ltd, AON Benfield

30 ILS Market ILS continues to take share, record issuance of cat bonds in 2017 Alternative capacity in the global property catastrophe reinsurance (on limit) alternative capital traditional capital 86 Annual issuance volume of cat bonds ( YTD) 35,000m 30,000m 25,000m 20,000m 15,000m 10,000m 5,000m 0m 800 1,500 1,800 2,800 3,000 4,000 5,000 5,000 6,500 9,000 16,000 14,500 14,000 14,000 14,500 17,000 21,000 25,200 25,960 26,820 30,240 33, Issued Outstanding Source: Chart left Aon Benfield Analytics July 2017, chart right: Artemis.com, March

31 What happened?

32 2017 in review Eventful year Very active event year in rd most expensive year in terms of insured losses after 2011 and major land fall hurricanes, 2 strong Mexico earthquakes and California wildfires for total insured losses which could exceed USD 125 billion. Results were in line with expectations based on modelled losses of events. Frequency was more of an issue than the severity of individual events. As a consequence, collateralized re covers and cat bonds with aggregate triggers were more exposed than per occurrence triggered instruments Insured losses by year by type Source: Schroders, AON Benfield Anaylitics, January

33 Hurricane Irma A near miss for the industry Total return (Jan = 100; August and September 2017) bps Wed Modelled insured loss > USD120 bn Fri Modelled insured loss > USD bn Sun Modelled insured loss > USD bn Swiss Re Global Cat Bond /08/ /08/ /08/ /08/ /08/ /08/ /08/ /08/ /08/ /08/ /08/ /08/ /08/ /08/ /09/ /09/ /09/ /09/ /09/ /09/ /09/ /09/ /09/ /09/ /09/ /09/ /09/ /09/ /09/2017 Source: Bloomberg, Swiss Re, Lane Financial LLC. Left hand chart: Swiss Re Global Cat Bond TR index, BofA Merrill Lynch Global High Yield Index, BofA Merrill Lynch Global Broad Market Corporate Index as of September 29, Right hand chart: Lane Financial LLC All Cat ILS market spreads, BofA Merrill Lynch Global High Yield OAS, BofA Merrill Lynch Global Broad Market Corporate OAS as of September 29, Past performance is no guarantee of future results. Investors cannot invest directly in any index. 33

34 Outlook for Renewal Pricing 2018 in October 2017 Expectations that market turn will not be limited to US reinsurance (Re-)Insurer View on rates Source Hiscox Group Reinsurance Hannover Re Reinsurance Submitted revised business plan to Lloyds increasing stamp capacity by 450mn (+40%). The increase in capacity is driven by an anticipated improvement in market conditions and a desire to have sufficient capacity available to participate in a widespread market turn. +40 to 50% on loss impacted layers. Seeking +5% across the entire portfolio on all lines Hiscox 2018 Syndicate 33 Business Forecast Published Ulrich Wallin, CEO Hannover Re Investor Day, Frankfurt Munich Re Reinsurance Swiss Re Reinsurance Unsustainable rates of the past five years will not continue. We expect to see positive pricing changes, certainly in the property classes, on a worldwide basis. How would I describe the market? In one word unsustainable! I also believe this year s losses could be sufficiently significant to make the case for a change in market dynamics in Europe Herman Pohlchristoph, CFO Baden-Baden as reported in Jean-Jacques Henchoz, CEO EMEA Insurance Insider Baden-Baden Reporter Day 1 October 23, 2017 Partner Re Reinsurance..expectations are for a pronounced correction in the U.S. and a trajectory back to technically adequate levels in other parts of the world. International diversified capital will have been hit hard this year and we expect the global cat market to react. Emmanuel Clarke, CEO Insurance Insider Baden-Baden Reporter Day 2 October 23, 2017 Chubb Primary Insurance HDI Global Primary Insurance Munich Re Syndicate Ltd Marine "I believe we are at the beginning of a firming price environment, driven by years of soft pricing that has resulted in inadequate rates in many classes. The magnitude of this year's CAT losses, which on a worldwide aggregate basis was between a one-in-five and one-in-10 year industry event, simply adds to the pressure to return to pricing that produces an adequate risk-adjusted return. Seeking 5 to 25% increases on accounts with loss ratios >50% Has entered into the Marine XL Market. This is a dislocated market right now we ve been in the market buying replacement cover and we know its not easy, there s not a lot of capacity right now. Evan Greenberg, CEO Chubb Ltd Earnings press release, October 26, 2017 Interview Christian Hinsch, CEO HDI Global. Herbert Frommes Versicherungsmonitor Domink Hoare, CUO Insurance Insider Baden-Baden Reporter Day 2 October 23, 2017 Source: Various, see corresponding columns and Schroders, October

35 Outlook for Renewal Pricing 2018 in October 2017 Brokers no longer arguing whether rates will increase, but rather by how much Broker View on rates Source Arthur J. Gallagher Primary Insurance Guy Carpenter Reinsurance Willis Re Reinsurance to see something on the order of five to 15 to 20% [rate increases] wouldn t be unreasonable, Each customer should be treated differently there shouldn t be a broad brush approach. We are in a business of relationships. We hope that reinsurers will behave rational at the renewal. We would anticipate that reinsurers would want to spread the burden of rate adjustments at 1 January as far as possible but expect that the impact on rates will be focused on loss affected regions and accounts. A.J. Gallagher 3rd Quarter earnings call as reported in Best s News Service via Bestwire October 27, 2017 James Nash, President International, Guy Carpenter Baden-Baden Reinsurance Symposium as reported in Insurance Insider Baden-Baden Reporter Day 2 October 23, 2017 and in October 23, 2017 Dirk Spenner, Managing Director, Head of EMEA NorthEast, Willis Re as reported in Insurance Insider Baden-Baden Reporter Day 1 October 22, 2017 JLT Re Reinsurance As things currently stand, any rate increase is more likely to resemble 2011/12 than 2005/06 or 2001/02. As a result, pricing increases should take place in loss-affected regions whilst loss-free property-catastrophe programmes in areas outside of hurricane-ravaged regions can expect to see more moderate price rises. The retrocession market is likely to be hit hard as elevated losses and increased demand for cover coalesce to drive rates up. JLT Re Viewpoint Winds of Change Report October Source: Various, see corresponding columns and Schroders, October

36 Why should rates increase? Industry fundamentals were weakening already before the 3rd Qtr. events Industry ROE has been steadily eroding Reported ROE supported by prior year s reserve releases and below average catastrophe losses Accident Year results for Global Reinsurers (excluding prior year releases) generated an underwriting loss in 2016 with an accident year combined ratio of 101.0% (A.M. Best Global Reinsurance Segment Review September 2017) Standard & Poor s cohort of global reinsurers generated an average return on capital for the 1 st Half Year 2017 of 8.2% versus an estimated cost of capital of 7.2%. 36 Source: Special report Global Reinsurance Segment Review September 2017 and sources therein: A.M Best

37 Why should rates increase? Past market corrections were driven by a combination of large events and reserve adjustments Sharp correction in Natural Catastrophe rates between was driven more by reserve deficiencies in the reinsurance sector s balance sheet than by large events. The large losses of 2011 did not result in a sharp correction for two reasons: Losses were not in the US Industry had significant reserve redundancies that helped absorb the 2011 event losses In 2017 / 18 the situation is somewhat different: Reserve redundancies are not as abundant as they have been used in the last 5 years to support earnings. While the market may have had excess capital before the events, much has been eliminated through the losses 37 Source: Schroders and JLT Re Viewpoint The Winds of Change Report and references therein, October 2017

38 How did ILS Investors and Managers React? Investor reaction Impact on Cat Bond market was relatively limited. This surprised most investors who expected a higher drawdown after such large storms. What many did not initially appreciate was that most bonds only covered named perils, of which flood was not one. Also territorial scope of most bonds (with the exception of Atlas and Kilimanjaro) excluded US territories and possessions. Most investors were conditioned to expect the need for a top up post event and many did so in anticipation of higher rates at the upcoming renewal Many new investors who had been sitting on the sidelines came into the market in anticipation of a market hardening Manager reaction Initially, a large concern that much 2017 collateral would be trapped and not available for renewal at January Some higher demand for protection was anticipated Clear expectation that rates would be increasing after prolonged softening of pricing, particularly in the retrocessional market Significant fund raising efforts aimed a re-loading existing capacity to cover eroded or trapped collateral Some aggressive fund raising targeting strategies with higher octane returns Source: Secquaero Advisors Ltd 38

39 Renewals - Expectations and Reality

40 January 1 Renewals General Observations Despite what turned out to be among the most expensive catastrophe years in the reinsurance industry (after 2005 and 2011) with insured market loss in excess of USD 125 billion, the renewal was largely orderly with no distressed buyers in the market. The renewal season was very late with many contracts not being firm ordered until the week before Christmas. There were a couple of reasons for this: 1. Uncertainty over loss estimates for Harvey, Irma and Maria. Harvey seems to have remained flat, Irma surprisingly came down and Maria is a potential source for surprises due to the very slow recovery of local infrastructure and associated business interruption claims. 2. Retrocessional programs were only completed relatively late in the renewal season. As a consequence, many reinsurers held back on quoting the primary reinsurance programs. 3. Significant uncertainty as to how much collateral would be trapped and how much new money would be raised by the ILS managers. This was only finalized in mid-to late November. There was a strong reliance on modeled outputs, which we found disappointing seeing as events like the California wildfires are not even captured by some models (RMS does not cover this peril, AIR s model resulted in loss estimates that were well below the actual incurred figures for northern California) Inflows into the cat bond market (following its relatively strong performance through Harvey, Irma and Maria) resulted in Cat Bond pricing for new issuance coming in with risk-adjusted rate increases at the lower end of what was initially anticipated. Source: Swiss Re: Schroders, January

41 January 1 Renewals Increased rates, but below expectations Our projections end of October 2017 Our observations end of December 2017 Type of Business Projected Increase Type of Business Achieved Increase Loss impacted Retro % Loss free Retro % Loss impacted Retro % Loss free Retro +5-15% Florida take-out companies (Loss impact ed layers) % Florida take-out companies (Loss impact ed layers) N/A - June 1 Renewal Florida take-out companies (Loss free layers) % Florida take-out companies (Loss free layers) N/A - June 1 Renewal US Loss impacted ex Florida % US Loss free ex Florida % European Loss Free % Australia / New Zealand % US Loss impacted ex Florida % US Loss free ex Florida +5-10% European Loss Free % Australia / New Zealand % Source: Schroders 41

42 January 1 Renewal What influenced the market? Positives for price dynamics Uncertainty on level of capacity available, particularly in the retrocessional market, led to higher prices being paid for renewals that secured capacity first. In particular for the first part of the renewal California Wildfire losses added pressure on aggregate covers Cedents were essentially primed to anticipate rate increases Generally less competition on more remote attachment points carrying lower coupons / rate on line (i.e. those below 10%) European and international business (ex USA) saw a stop in erosion of pricing Negatives for price dynamics New RMS version 18 model release resulted in lower modeled expected losses for certain US perils offsetting upwards price pressure Harvey and Irma loss estimates for many companies declined during the renewal season. This resulted in less trapped collateral than originally anticipated with reduced squeeze on retrocessional pricing Strong demand chasing yields on the higher yielding transactions (coupons / rates on line in the 12% to 15%+ area) Regional aggregate tornado / hail protection renewals disappointed. Technical pricing offered was weaker than we had expected despite the reinsurance market having been hit relatively hard Capital base of the market has remained solid. ILS market able to re-load. Source: Schroders, January

43 June 1 Renewal (Florida Market) Essentially Flat despite some surprises Strong bond market in late 1st quarter signaled capacity overhang. Spreads on new issuance largely came inside of initial guidance, despite some losses emerging in the bond market (Caelus, Residential Re, Citrus) Set the stage for challenging renewal of June 1 Florida covers For many Florida writers 2017 was the first time that their programs experienced a significant loss. For older Florida companies first major loss since Cedents and brokers successfully used the bank argument to avoid material repricing, ignoring the capital relief provided by reinsurance market over the last 10 years. Some reinsurance panels were changed. Terms generally set early and cover bound before latest news on loss development emerged. Loss Adjustment Expenses and Closed File reopening leading to further adverse development has been largely discounted in the renewal negotiations. JLT Re Risk-Adjusted Florida Property-Catastrophe ROL Index 1992 to JLT Re Florida Index +1.2% in 2018 versus 2017 Source: Secquaero Advisors Ltd, Chart: JLT Re 43

44 ILS Market ILS still fairly priced? Attractiveness depends upon peril and region Spreads have recently improved, but careful risk selection and portfolio construction is still required to offer investors fairly priced risks Price increase range has been function of region and peril, anywhere between 0%- 35%. Peak risks (US wind and earthquake) still offer attractive margins Only 20 30% of the times are hard markets peaks last even shorter steady state is a soft market Guy Carpenter Property Catastrophe Rate-on-Line Indices** Period over which cat bond market data is available Source: Guy Carpenter (2018), Schroders (2018) * Preliminary. **Rate-on-Line is the re-insurance premium paid in percentage of insurance coverage amount 44

45 Has ILS and Alternative Capital killed the Cycle? Jury is still out on this question 2017 was more of an earnings event than a capital event for the global reinsurance market. Also true for a good portion of ILS market, although there are a few outliers. Lloyds clearly challenged by the 2017 results. Alternative capital market is clearly a factor, but not the sole culprit responsible for current market conditions. Frequency, rather than severity was the problem for Had Irma moved along the earlier forecast track, then the impact on traditional as well as collateralized alternative reinsurance markets would have been more profound, particularly with respect towards trapped collateral. Ultimate cost of 2017 events particularly with respect to Irma and Maria will only be known later this year. Loss creep or adverse development is beginning to show up in the results of certain ILS managers and could also be a factor for the 2 nd quarter results for reinsurers with significant Florida books. Investors may not be as accommodating with regards towards reloading should 2018 hurricane experience prove to be a repeat of Investors were conditioned to expect to reload but also bought into the concept of payback post event. Actual pricing experience could lead to some skepticism about whether the market can actually deliver on this. Swings in the price cycle are not simply a function of a large loss losses (with the exception perhaps of the northern California wildfires) were all within modeled expectations. Overall health of the industry s balance sheet at the time of the event and the degree to which the trigger event catches the industry off guard are important components to a shift in the market s psychology. Source: Secquaero Advisors Ltd 45

46 46 Outlook Prospects for Growth

47 Can Alternative Capital provide solutions to new emerging risks? The Alternative Capital market is often cited as the potential solution to capacity constrained markets. Our view: Risks entertained by capital market investors must have the following characteristics: The risk entertained should not correlate with financial markets for other assets (i.e. it must remain a diversifying asset) There must be a clear description of the risk being entertained. What are we insuring against? There must be sufficient data (exposure information, claims information) available to properly price the risk. Whether a covered event has occurred and the quantum of loss recoverable for an insured event must be quantifiable within a reasonably short time frame One must remember that Alternative Capital / Specialist ILS managers generally do not have permanent capital. Our capital can usually redeem within specified time frames, which constrains our ability to assume certain risks. Collateralized nature of the coverage provided also is a constraint 47 Source: Secquaero Advisors Ltd

48 Some emerging risks Do they meet the criteria for Alternative Capital? Risk Non-correlating to Market risk and valuation of other financial assets? Clarity on what is covered? Sufficient data to assess and price the risk? Is the occurrence of an event and its amount quantifiable within a reasonable time frame? Terror No Maybe No Yes, for property damage. No for other lines of insurance. Political Risk Depends Not always Not for all exposures No Cyber No No No No Supply Chain Depends, probably low correlation to individual names but not broad market risk Not always. Question of product design and willingness of insured to assume basis risk Limited for all risk indemnity. Possible for parametric coverage against catastrophe events Weather Yes Possible Yes, in most cases Yes Bank Operational Risk No Not entirely No No Indemnity trigger no Parametric trigger - yes Mortgage Indemnity No Yes Yes, for US market Depends upon the structure Source: Secquaero Advisors Ltd 48

49 Where do we see additional growth opportunities? Alternative capital will continue to gain market share, but probably not at the same rate as in recent years In developed markets, aggregate demand for catastrophe coverage continues to grow by 3 5% p.a. Growth drivers are: Solvency II requirements and rating agency model changes further increase demand for capital optimization Closing gap between insured and uninsured losses: Currently estimated by Swiss Re at $153bn largest contributors being US, Japan and China Government and multinational disaster relief efforts parametric re-/insurance Economic and population growth in risk-prone areas Potential growth segments: Life insurance Marine & Energy Motor Balance sheet driven protections (Exposure is not to a single occurrence of (natural) catastrophes but more aligned to an (unlikely) extreme shift of an expected result of a subject portfolio over a certain time horizon, typically one year, e.g. Casualty risk or Reserve risk) Source: Secquaero Advisors Ltd 49

50 2018 Reinsurance Market Briefing - Zurich Methodology Update Presentation: An update on Best's Credit Rating Methodology (BCRM) for (Re)Insurance Companies Overview of outcomes for Global Reinsurance segment Mathilde Jakobsen Director, Analytics 2018 Reinsurance Market Briefing - Zurich 6 June

51 Agenda Update on Best's Credit Rating Methodology Focus on reinsurers 2018 Reinsurance Market Briefing - Zurich 6 June

52 Building Block Approach Maximum Balance Sheet Strength Baseline Operating Performance Business Profile Enterprise Risk Management Comprehensive Adjustment 1 Rating Lift/Drag 2 Issuer Credit Rating Country Risk Notes: 1: A comprehensive adjustment can be applied of + 1 or - 1 for creditworthiness not captured elsewhere 2: Applies to assessment of non-lead rating units in relation to the broader organisation leading to lift/drag +4 to Reinsurance Market Briefing - Zurich 6 June

53 A.M. Best s Rating Translation Table ICR a- bbb+ bbb FSR A++ A+ A A- B++ B+ ICR = Issuer Credit Rating FSR = Financial Strength Rating Note: Scales E to NR not shown The rating symbols A++, A+, A, A-, B++, B+ are registered certification marks of A.M. Best Rating Services, Inc. ICR bb+ bb b+ b ccc+ ccc ccccc FSR 2018 Reinsurance Market Briefing - Zurich 6 June bbb- aaa aa+ aa aaa+ a bbb- c B B- C++ C+ C C- D

54 Balance Sheet Strength Risk-Adjusted Capitalisation as measured by Best s Capital Adequacy Ratio (BCAR) level, trend, volatility, slope Balance Sheet Strength Rating Drivers Qualitative and Quantitative Analytical Factors Stress test; quality and fungibility of capital; ALM; quality of assets; reserving; quality, dependence and appropriateness of reinsurance Holding Company Consolidated risk-adjusted capitalisation, financial flexibility, leverage & coverage, etc. Country Risk 2018 Reinsurance Market Briefing - Zurich 6 June

55 Application of BCAR Model Best s Capital Adequacy Ratio (BCAR) Comprehensive quantitative tool that evaluates many of the risks to the balance sheet simultaneously BCAR model calculates four scores corresponding to a 95%, 99%, 99.5% and 99.6% confidence level Generates an overall estimate of the required level of capital to support those risks and compares it with available capital 2018 Reinsurance Market Briefing - Zurich 6 June

56 BCAR Scores - Example Reinsurer ABC is a fictional company. The graph shows its BCAR scores on a standard and catstressed basis (after a large loss) 80 Reinsurer ABC's BCAR scores VAR 95.0 VAR 99.0 VAR 99.5 VAR 99.6 Standard Cat stressed 2018 Reinsurance Market Briefing - Zurich 6 June

57 Applying BCAR scores BCAR is the starting point in the assessment of balance sheet strength VaR Confidence Level (%) BCAR BCAR Assessment 99.6 > 25 at 99.6 Strongest 99.6 > 10 at 99.6 & 25 at 99.6 Very Strong 99.5 > 0 at 99.5 & 10 at 99.6 Strong 99 > 0 at 99 & 0 at 99.5 Adequate 95 > 0 at 95 & 0 at 99 Weak 95 0 at 95 Very Weak * Companies with < 20 million USD in capital & surplus cannot score in strongest category 2018 Reinsurance Market Briefing - Zurich 6 June

58 Balance Sheet Strength Risk-Adjusted Capitalisation as measured by Best s Capital Adequacy Ratio (BCAR) level, trend, volatility, slope Balance Sheet Strength Rating Drivers Qualitative and Quantitative Analytical Factors Stress test; quality and fungibility of capital; ALM; quality of assets; reserving; quality, dependence and appropriateness of reinsurance Holding Company Consolidated risk-adjusted capitalisation, financial flexibility, leverage & coverage, etc. Country Risk 2018 Reinsurance Market Briefing - Zurich 6 June

59 Balance Sheet Strength 2018 Reinsurance Market Briefing - Zurich 6 June

60 Balance Sheet Strength Combined Balance Sheet Assessment (Rating Unit / Holding Company) Overall Balance Sheet Strength Assessment Country Risk Tier CRT-1 CRT-2 CRT-3 CRT-4 CRT-5 Strongest a+/a a+/a a/a- a-/bbb+ bbb+/bbb Very Strong a/a- a/a- a-/bbb+ bbb+/bbb bbb/bbb- Strong a-/bbb+ a-/bbb+ bbb+/bbb/bbb- bbb/bbb-/bb+ bbb-/bb+/bb Adequate bbb+/bbb/bbb- bbb+/bbb/bbb- bbb-/bb+/bb bb+/bb/bb- bb-/b+/b Weak bb+/bb/bb- bb+/bb/bb- bb-/b+/b b+/b/b- b/b-/ccc+ Very Weak b+ and below b+ and below b- and below ccc+ and below ccc and below 2018 Reinsurance Market Briefing - Zurich 6 June

61 Balance Sheet Strength 100 Global Reinsurers Balance Sheet Strength by Long-Term Issuer Credit Rating A.M. Best-rated Global Reinsurers Balance Sheet Strength Distribution 4.2% % 86% 80% 60% 75% 29.2% Strongest Very Strong % 20% 40% 25% aa aa- a+ a a- Strongest Very Strong Strong 66.7% Strong Source: A.M. Best Special Report, Global Reinsurers Building Block Approach Confirms the Strength of the Market, Despite Challenging Conditions 2018 Reinsurance Market Briefing - Zurich 6 June

62 Balance Sheet Strength - Example Reinsurer ABC is a fictional company with a balance sheet strength assessment of very strong and a baseline starting point of ICR a Strongest BCAR Standard and Cat stressed Balance Sheet Strength Rating Drivers Moderate Dependence on Retrocession Quality of assets, ALM, reserving raise no concerns Ability to raise equity and access debt markets Country Risk CRT Reinsurance Market Briefing - Zurich 6 June

63 Operating Performance Assessment Profitable insurance operations are essential for a rating unit to operate as a going concern. A.M. Best analysis focuses on: Stability Diversity Sustainability The interplay between earnings and liabilities retained by the rating unit In general, more diversity in earnings streams leads to greater stability in operating performance Analysis reflects a variety of quantitative and qualitative measures to evaluate operating performance 2018 Reinsurance Market Briefing - Zurich 6 June

64 Operating Performance Assessment Operating performance assessed against appropriate benchmarks Underwriting Performance Total Operating Earnings Operating Performance Rating Drivers Investment Performance Financial Performance Other Considerations Earnings Volatility 2018 Reinsurance Market Briefing - Zurich 6 June

65 Operating Performance Assessment Assessment Notches Key Characteristics Very Strong +2 Historical operating performance is exceptionally strong and consistent. Trends are positive and prospective operating performance is expected to be exceptionally strong. Volatility of key metrics is low. Strong +1 Historical operating performance is strong and consistent. Trends are neutral/slightly positive and prospective operating performance is expected to be strong. Volatility of key metrics is low to moderate. Adequate 0 Historical operating performance and trends are neutral. Prospective operating performance is expected to be neutral. Volatility of key metrics is moderate. Marginal -1 Historical operating trends have been inconsistent. Trends are neutral/slightly negative with some uncertainty in prospective operating performance. Volatility of key metrics is moderate to high. Weak -2 Historical operating performance is poor. Trends are slightly negative and prospective operating performance is expected to be poor. Volatility of key metrics is high. Very Weak -3 Historical operating performance is very poor. Trends are negative and prospective operating performance is expected to be very poor. Volatility of key metrics is very high Reinsurance Market Briefing - Zurich 66 June

66 Operating Performance Global Reinsurers - Operating Performance Notch by Long-Term Issuer Credit Rating 100% 57% 43% 40% 60% 80% 20% 50% 50% aa aa- a+ a a- Strong (+1) Adequate (0) Marginal (-1) Global Reinsurers - Operating Performance Notch Distribution 8.3% 50.0% 41.7% Strong (+1) Adequate (0) Marginal (-1) Source: A.M. Best Special Report, Global Reinsurers Building Block Approach Confirms the Strength of the Market, Despite Challenging Conditions 2018 Reinsurance Market Briefing - Zurich 6 June

67 Operating Performance - Example Reinsurer ABC is a fictional company with an operating performance assessment of adequate (0) Five-Year Average Combined Ratio = 95% Five-Year Average Return on Equity = 10% Operating Performance Rating Drivers Five-Year Investment Return =2% Performance Forecast to Deteriorate Earnings Volatility due to Catastrophe Exposure 2018 Reinsurance Market Briefing - Zurich 6 June

68 Business Profile Assessment Business profile is a qualitative component that directly affects the quantitative measures Product/Geographic Concentration Market Position Business Profile Rating Drivers Product Risk Degree of Competition Pricing Sophistication and Data Quality Management Quality Regulatory, Event and Market Risks Distribution Channels 2018 Reinsurance Market Briefing - Zurich 6 June

69 Business Profile Assessment Assessment Adjustment (Notches) Key Business Profile Characteristics Very Favorable +2 The company's market leadership position is unquestionable, demonstrated, and defensible with high brand recognition. Distribution is seen as a competitive advantage; business lines are non-correlated and generally lower risk. Its management capabilities and data management are very strong. Favorable +1 The company is a market leader with strong business trends and good control over distribution. It has diversified operations in key markets that have high to moderate barriers to entry with low competition. It has a strong management team that is able to meet projections and utilize data effectively. Neutral 0 The company is not a market leader, but is viewed as competitive in chosen markets. It has some concentration and/or limited control of distribution. It has moderate product risk but limited severity and frequency of loss. Its use of technology is evolving and its business spread of risk is adequate. Limited -1 The company has a lack of diversification in geographic and/or product lines; its control over distribution is limited and undifferentiated. It faces high/increasing competition with low barriers to entry and elevated product risk. Management is unable to utilize data effectively or consistently in business decisions. Very Limited -2 The company faces high competition and low barriers to entry. It has high concentration in commodity or higher-risk products with very limited geographic diversity. It has weak data management. Country risk may factor into its elevated business profile risks. The key characteristics described for each assessment category are ideal scenarios and are not intended to be prescriptive Reinsurance Market Briefing - Zurich 66 June

70 Business Profile 100% 75% 50% 25% 0% 100% Global Reinsurers Business Profile Notch by Long-Term Issuer Credit Rating 14% 43% 43% 40% 40% 20% 100% 100% aa aa- a+ a a- Very Favorable (+2) Favorable (+1) Neutral (0) Global Reinsurers - Business Profile Notch Distribution 50.0% 29.2% 20.8% Very Favorable (+2) Favorable (+1) Neutral (0) Source: A.M. Best Special Report, Global Reinsurers Building Block Approach Confirms the Strength of the Market, Despite Challenging Conditions 2018 Reinsurance Market Briefing - Zurich 6 June

71 Business Profile Assessment - Example Reinsurer ABC is a fictional company with a business profile assessment of neutral (0) Concentration to US Catastrophe Property (50% of portfolio) Top 10 in Selected Markets; Outside Top 50 Global Reinsurers Business Profile Rating Drivers High Product Risk (property catastrophe and casualty reinsurance) High Competition Good Underwriting and Data Expertise Experienced Management Stable Regulatory Regime Broker Distribution 2018 Reinsurance Market Briefing - Zurich 6 June

72 Enterprise Risk Management (ERM) Assessment Evaluate ERM through an ORSA-type lens Holistic assessment of the risk management framework and evaluation of risks relative to capabilities Risk Impact Worksheet (RIW) Part I: Framework Evaluation Part II: Risk Evaluation Part III: Overall ERM Assessment 2018 Reinsurance Market Briefing - Zurich 66 June

73 ERM Assessment ERM assessment considers: risk management framework, risk management capabilities in light of risk profile and overall ERM Assessment of Capabilities Relative to Profile Framework Assessment Components Risk Identification and Reporting Risk Appetite and Tolerances Stress Testing Risk Management and Controls Governance and Risk Culture Product and Underwriting Risk Reserving Risk Concentration Risk Reinsurance Risk Investment Risk Legislative/Regulatory/Judicial/Economic Risk Operational Risk Liquidity and Capital Management Risk 2018 Reinsurance Market Briefing - Zurich 6 June

74 ERM Assessment Assessment Notches Key Characteristics Very Strong +1 The insurer s ERM framework is sophisticated, time/stress-tested and embedded across the enterprise. Risk management capabilities are superior and are suitable for the risk profile of the company. Appropriate 0 The insurer s ERM framework is well-developed and/or adequate given the size and complexity of its operations. Risk management capabilities are very good and are well aligned with the risk profile of the company. Marginal -1 The insurer s ERM framework is developing; however, certain key elements of the framework are not yet in place or have proven inadequate given the complexity of its operations. Some risk management capabilities are not aligned with the risk profile of the company. Weak -2 The insurer s ERM framework is emerging and management is exploring the development of formal risk protocols. Risk management capabilities are insufficient given the risk profile of the company. Very Weak -3/4 There is limited evidence of a formal ERM framework in place. Severe deficiencies in risk management capabilities relative to the risk profile of the company are evident Reinsurance Market Briefing - Zurich 6 June

75 ERM Assessment Global Reinsurers Enterprise Risk Management Notch Distribution 4.2% 25.0% 70.8% Very Strong +1 Appropriate 0 Marginal -1 Source: A.M. Best Special Report, Global Reinsurers Building Block Approach Confirms the Strength of the Market, Despite Challenging Conditions 2018 Reinsurance Market Briefing - Zurich 66 June

76 ERM - Example Reinsurer ABC is a fictional company with an ERM assessment of appropriate (0) Framework Assessment Components Framework is developed and is appropriate for the size and complexity of the organisation Assessment of Capabilities Relative to Profile Risk capabilities are aligned with the organisation s moderate risk profile across all categories 2018 Reinsurance Market Briefing - Zurich 6 June

77 Building Block Approach Maximum Balance Sheet Strength Baseline Operating Performance Business Profile Enterprise Risk Management Comprehensive Adjustment 1 Rating Lift/Drag 2 Issuer Credit Rating Country Risk Notes: 1: A comprehensive adjustment can be applied of + 1 or - 1 for creditworthiness not captured elsewhere 2: Applies to assessment of non-lead rating units in relation to the broader organisation leading to lift/drag +4 to Reinsurance Market Briefing - Zurich 6 June

78 Building Blocks - Example ABC is a fictional reinsurer rated a Strongest BCAR; Moderate reinsurance dependence 5-yr avg. ROE of 10%, combined ratio of 95%, but not sustainable Mid-sized reinsurer; Some concentration; High product risk; High competition Developed framework; Risk capabilities aligned with risk profile 2018 Reinsurance Market Briefing - Zurich 6 June

79 Building Blocks - Example DEF group is a fictional reinsurance group rated aa Strongest BCAR; Low reinsurance dependence; Strong financial flexibility 5-yr avg. ROE of 10%, combined ratio of 96%; Results are sustainable Global reinsurer; Diversified geographically and by product; High product risk Embedded framework; Risk capabilities aligned with risk profile 2018 Reinsurance Market Briefing - Zurich 6 June

80 2018 Reinsurance Market Briefing - Zurich European Primary Insurance trends including Market Outlooks and impact on reinsurance sector Catherine Thomas Senior Director, Analytics 2018 Reinsurance Market Briefing - Zurich 6 June

81 Market Segment Outlooks Examine the current trends in particular segments of the insurance industry over the next 12 months Typical factors considered include current and forecast economic conditions; the regulatory environment and potential changes; emerging product developments; and competitive issues that could impact the success of the companies operating in the segment A Best s Market Segment Outlook, like a Best s Credit Rating Outlook for a company, can be positive, negative, or stable Many segments covered internationally 2018 Reinsurance Market Briefing - Zurich 6 June

82 European Overview Operating environment challenging with limited growth prospects and low investment returns Strong balance sheets maintained, supported by resilient operating performance and appropriate enterprise risk management (ERM) Persisting headwinds Regulatory risks Political risks Low interest rates but encouraging signs: Improving economic outlook Indications of modest interest rate rises 2018 Reinsurance Market Briefing - Zurich 6 June

83 A Context of Economic Recovery Period of economic recovery, expected to moderate GDP Growth Italy 4% 3% 2% UK Spain 1% France 0% -1% -2% e 2017e 2018p 2019p Germany Eurozone -3% e = estimate p = projection Source: International Monetary Fund 2018 Reinsurance Market Briefing - Zurich 6 June

84 Challenging Interest Rate Environment Low interest rate environment persists 8 European Union - Yields of Government Bonds With Maturities Close to 10 Years ( ) Interest Rate (%) Note: Data from January, 2010 to April, Source: European Central Bank Italy UK Spain France Germany 2018 Reinsurance Market Briefing - Zurich 6 June

85 European Segment Outlooks 2018 Reinsurance Market Briefing - Zurich 6 June

86 European Segment Outlooks France Non-Life Stable Outlook Spain Non-Life Stable Outlook UK Non-Life Negative Outlook Italy Non-Life Stable Outlook Germany Non-Life Stable Outlook 2018 Reinsurance Market Briefing - Zurich 6 June

87 France Non-Life Outlook 106% Non-Life Combined Ratio A.M. Best Has A Stable Outlook 104% 102% 100% 98% 96% 94% 92% 99% 98% Non-life market Property - Individual Property - Commercial Motor Resilient performance driven by generally good diversification of business profiles in the face of intense competition and challenging market conditions 90% Headwinds Tailwinds Ongoing intense competition Weak technical equilibrium Inflationary claims trends in motor Favourable pricing indicators Business mix generally well balanced Source: FFA; Les Echos 2018 Reinsurance Market Briefing - Zurich 6 June

88 Germany Non-Life Outlook 120% Non-Life Combined Ratio A.M. Best Has A Stable Outlook 115% 110% 105% 100% 95% 97% 95% Non-life market Property Motor Liablity Sector has very strong balance sheets and solid technical profitability, underpinned by good underwriting discipline and sustainable rate adjustments 90% Headwinds Tailwinds 2015 SCR 287% Increasingly competitive market conditions Solid technical profitability, with good underwriting discipline % Protectionist tendencies could adversely impact Germany s export driven economy Solid economic fundamentals Sustainable rate increases Source: Best s Statement File Global, A.M. Best data and research; GDV Reinsurance Market Briefing - Zurich 6 June

89 Italy Non-Life Outlook Selected Countries Non-Life Combined Ratio A.M. Best Has A Stable Outlook 104% 102% 100% 98% 96% 94% 92% 90% 25,000 20,000 15,000 10,000 5,000-96% Motor Gross Written Premium ( m) and Combined Ratio 20,224 18,676 17,598 16,674 94% 16, Motor GWP Motor Combined Ratio Source: A.M. Best calculations on ANIA data; ANIA; GDV, FFA; DGSFP France Spain Italy Germany 99% 97% 95% 93% 91% 89% 87% 85% The stable outlook reflects the sector s ability to maintain strong technical profitability in spite of competitive pressures and political uncertainty Headwinds Strong competition putting pressure on rates for motor (50% of non-life market) Political instability Economic fundamentals Tailwinds Strong technical profitability Underwriting discipline supported by increased use of telematics 2018 Reinsurance Market Briefing - Zurich 6 June

90 Spain Non-Life Outlook Selected Countries Non-Life Combined Ratio A.M. Best Has A Stable Outlook 104% 102% France Insurers demonstrate solid technical fundamentals, with 100% 98% 96% 94% 92% 90% 94% % Spain Italy Germany good performance and strong balance sheets, although sustained political instability could test the sector Headwinds Tailwinds Political instability following Catalonia independence referendum Adapting to regulatory reforms (including Baremo) Sustained strong technical performance Economic recovery to support premium growth Strengthened ERM Source: El Mundo; FFA; GDV; A.M. Best calculations on ANIA data; ANIA; DGSFP 2018 Reinsurance Market Briefing - Zurich 6 June

91 UK Non-Life Outlook 135% Accident Year Combined Ratio (Selected Lines) A.M. Best Has A Negative Outlook 125% Competitive conditions, legislative uncertainty and the 115% 105% 95% 113% 110% 102% 112% 104% 98% potential impact of Brexit on the UK economy weigh on the segment Property Motor Liability Note: Accident Year Combined Ratios Source: Best s Statement File Global, A.M. Best Data and Research; Insurance Times Headwinds Economic uncertainty Intense competition; weak technical margins Volatility in prior year reserve development Legislative uncertainty Tailwinds Implementation of Civil Liability Bill, with potential whiplash and personal injury claims reform 2018 Reinsurance Market Briefing - Zurich 6 June

92 Looking Forward 2018 Reinsurance Market Briefing - Zurich 6 June

93 Key things to watch Competition continues to put technical margins under pressure Ongoing focus on cost management, as insurers aim to preserve profitability in a highly competitive market and low investment return environment Economic environment to present some opportunities for insurers, although dramatic growth not expected 2018 Reinsurance Market Briefing - Zurich 6 June

94 Key things to watch Increasing focus on, and investment in, innovation and customer experience 2018 Reinsurance Market Briefing - Zurich 6 June