Benfield European Quarterly FY 2007 Waiting Game April 2008

Transcription

1 Benfield European Quarterly FY 2007 Waiting Game April 2008

2

3 BENFIELD GROUP LIMITED April 2008 Benfield European Quarterly FY 2007 Waiting Game Lewis Phillips T: +44 (0) F: +44 (0) E: T: +44 (0) F: +44 (0) E: BENFIELD GROUP LIMITED Benfield Group Limited (Benfield) has used due care in the preparation of this document. Our information has been obtained from sources we consider reliable, but its accuracy and/or completeness is not guaranteed. The content of this document is made available on an "as-is" basis and neither Benfield (nor any member of its group of companies) will accept any liability whatsoever to any person for loss or damage caused by or resulting from any reliance placed on that content. Benfield (for itself and on behalf of each member of its group of companies) reserves all rights to the content of this document. Benfield Limited is authorised by the Financial Services Authority under the reference number

4 CONTENTS Chapter Page Waiting Game 3 Premium income 4 Premiums 4 Pricing trends 5 Earnings 6 Major losses 6 Combined ratios 7 Investment income 7 Subprime 8 Earnings 8 Balance Sheet 11 Investments 11 Subprime 12 Technical Reserves 13 Capital 18 Financial strength ratings 19 Appendices 20 Business mix of the European reinsurance groups 20 Reporting dates 22 Exchange rates 22 Bond yields 23 Equity markets 24

5 Benfield European Quarterly FY 2007 Waiting Game PAGE 3 Waiting Game Waiting game Earnings in P&C reinsurance were held back by higher catastrophe losses. In an environment of abundant capacity, this was not sufficient to prevent price erosion during 2007, affecting virtually all classes of business. These trends were reinforced at the subsequent 1 January 2008 renewals. Against this background, and with a continued focus on disciplined underwriting and capital management, cedants and reinsurers alike are playing a waiting game for a turn in the cycle. Topping out Lower premium rates, selective underwriting, higher cedant retentions and adverse exchange rate movements all contributed to an underlying reduction in top lines. Only the effect of acquisitions generated growth. Freewheeling Underwriting results were weaker in 2007, giving higher combined ratios for all except Hannover Re. The dislocation in financial markets had little impact on investment income. Profit growth came largely from other segments, notably Life & Health. Comments from CEOs suggested that they will need to pedal harder in 2008 to sustain earnings growth as the cycle continues downwards. Contagion contained Swiss Re apart, the BEQ group of reinsurers escaped relatively unscathed from the subprime crisis. Exposure on the balance sheet remains extremely small, with no direct involvement in financial guarantee reinsurance, and related losses in D&O and E&O classes expected to be contained within normal IBNR. Swiss Re s CHF1.2bn write-down on its credit default swap book was a oneoff, but the company still has meaningful exposure to subprime related business and to the monoline financial guarantee insurers. Capital commitment Active capital management remained a central theme, and both Munich Re and Swiss Re increased their share repurchase programmes. Nevertheless, strong net income boosted the BEQ group s capitalisation. Cracking the whip Standard & Poor s has sounded a warning note that the reinsurance sector s financial strength ratings could come under pressure if underwriting discipline was not maintained.

6 Benfield European Quarterly FY 2007 Waiting Game PAGE 4 Premium income Premium income was constrained by lower rates, higher retentions and adverse exchange rate movements. The biggest year-on-year changes were driven by acquisitions and divestitures, rather than by organic growth. Pricing trends were recently described by company managements in terms of hard market softening 1 echoing the trends seen through Premiums Group non-life reinsurance premiums for Benfield European Quarterly (BEQ) companies are shown in Table 1. The largest variances over the year were the result of changes to company structures rather than organic development. SCOR s 33% increase, for example, could be attributed to the acquisitions of Converium and Revios. Stripping out the contribution from Converium, the growth rate would have been 11% at constant exchange rates. 2 Swiss Re s 5% increase was driven entirely by the Insurance Solutions acquisition, which was included for only just over half of The 20% fall in non-life reinsurance premiums at Hannover Re was due to the sale of former US subsidiary, Praetorian. The company partially offset the effect of the sale at the group level through vigorous growth in life and health reinsurance and through an 11.1 percentage point (pp) increase in the retention rate to 87.4%. 3 Paris Re, in its first annual disclosure, experienced a 9% decline in premiums. 4 The company attributed this fall to a deliberate reduction in catastrophe exposures, increased client retentions, and softening rates. 5 Finally, Munich Re experienced a very moderate decline in non-life reinsurance premiums. Unlike other BEQ group peers, Munich Re s figures are on a like-for-like basis. Adjusted for negative currency effects, Munich Re said premiums would have risen 2.9% over the course of the year. 6 Table 1 Non-life reinsurance premiums Change Hannover Re EUR mn 6,496 5,190-20% Munich Re EUR mn 14,551 14,224-2% Paris Re USD mn 1,550 1,411-9% SCOR EUR mn 1,754 2,329 33% Swiss Re CHF mn 19,152 20,178 5% Non-life premiums written are shown net of retrocessions in Table 2. The effect of higher retention rates at SCOR and Hannover Re is evident. 1 Hannover Re renewals conference call, 5 February SCOR 2007 results presentation, 19 March Hannover Re 2007 annual report 4 Paris Re has provided pro-forma 2006 figures, based on the writings of predecessor AXA Re 5 Paris Re 2007 results presentation, 14 March Munich Re 2007 annual report

7 Benfield European Quarterly FY 2007 Waiting Game PAGE 5 Table 2 Net premiums written Change Hannover Re EUR mn 4,703 4,427-6% Munich Re EUR mn 13,795 13,507-2% Paris Re USD mn 1,254 1,113-11% SCOR EUR mn 2,742 4,356 59% Swiss Re CHF mn 18,173 18,639 3% Pricing trends Comments concerning premiums and reinsurance prices over the course of the year reflected ongoing rate softening which, together with the trend for cedants to move to non-proportional business and higher retentions, was a significant contributor to the reduction in premium income. Nevertheless, companies reported that, with a few exceptions, premium rates for business written remained technically adequate. Hannover Re pointed to US Liability, particularly D&O covers as an example where prices and conditions were no longer deemed appropriate to the risk. It also noted that rates in US Property Catastrophe remained buoyant with reductions through the year only in isolated sub-segments. Munich Re said that prices in the main classes of Fire and Liability remained at a good level, but prices were down in other classes, especially for loss-free accounts. In Germany, where much business is written on a proportional basis, reinsurance prices fell reflecting reductions in original premium rates. Swiss Re observed downward price pressure in Property, Specialty and particularly in Casualty classes, where it noted competition from start-up companies diversifying into this class as well as an increasingly competitive stance from established players. Competition was especially intense in emerging markets and for large treaty business. 7 7 Swiss Re 2007 annual report

8 Benfield European Quarterly FY 2007 Waiting Game PAGE 6 Earnings An increase in natural catastrophe losses in 2007 sent combined ratios higher. Larger asset bases and higher investment yields boosted investment income, and capital gains were mostly also a positive influence on profits. Subprime losses at Swiss Re were an isolated incident. Growth in Life & Health was an important source of profit growth. Major losses Winter storm Kyrill, the largest loss event of 2007, occurred in the first quarter and caused losses of over EUR800mn for BEQ companies. 8 In addition, companies experienced major losses from UK and Australian flooding, Cyclone Gonu in Oman and the United Arab Emirates, Indonesian floods and landslides and Hurricane Dean. Table 3 shows incurred natural catastrophe claims and their corresponding effects on company combined ratios for Swiss Re reported the highest level of expected natural catastrophe claims and the highest catastrophe load on the combined ratio. In addition to the above mentioned large loss events, the company was affected by a broad range of catastrophes. 9 SCOR s catastrophe load was lowest at 4 pp. Hannover Re s EUR285mn natural catastrophe loss load was the second largest in terms of loss ratio percentage points. The group s most significant exposures were Winter Storm Kyrill (EUR116mn), Cyclone Gonu (EUR26mn) and Australian flooding (EUR21mn). 10 Kyrill was also the largest catastrophe loss for Munich Re, costing it a net EUR390mn. In addition to the natural catastrophe losses it also suffered EUR667mn of man-made catastrophes, including three satellite claims totalling EUR105mn. Major losses reported by Paris Re were substantially all for Kyrill, Hurricane Dean and the UK floods. Table 3 Natural catastrophe loss estimates Cat loss mn Combined ratio pp Hannover Re EUR mn Munich Re EUR mn Paris Re USD mn SCOR EUR mn Swiss Re CHF mn 1, Individual company disclosure, including Converium pre-acquisition 9 Swiss Re 2007 presentation, 29 February Hannover Re 2007 presentation, 13 March 2008

9 Benfield European Quarterly FY 2007 Waiting Game PAGE 7 Combined ratios Table 4 shows full year combined ratios for BEQ companies P&C reinsurance segments. 11 After an exceptionally quiet 2006 in terms of insured natural catastrophe claims, loss ratios reverted closer to the mean in 2007 for most companies. In line with its proportionately greater catastrophe losses, Hannover Re reported the highest combined ratio in the period, while Swiss Re and Paris Re reported the lowest ratios. Hannover Re s combined ratio was highest, and although it was the only company to have a combined ratio over 100% in both years it was the only one to show an improvement year-on-year. Table 4 Combined ratios Combined ratio 2006 Combined ratio 2007 Loss ratio 2007 Expense ratio 2007 Hannover Re 101.5% 100.6% 74.7% 25.9% Munich Re 92.6% 96.4% 67.9% 28.5% Paris Re 76.0% 90.8% 61.4% 29.4% SCOR 97.0% 98.7% 67.9% 30.8% Swiss Re 92.3% 92.3% 63.5% 28.8% Reserve development was not a significant feature in 2007 results. It was a modest positive influence on Paris Re s results, with a 0.7pp reduction in the loss ratio. Swiss Re reported a neutral impact as CHF205mn of positive development in the underwriting years on Property, Motor and Credit compensated for adverse development on US Asbestos and Environmental, Workers Compensation and other Casualty business from years. Investment income Table 5 shows investment income, excluding capital gains. Higher returns on invested assets reflected generally higher yields available in capital markets during 2007 as compared to Returns on invested assets increased accordingly for all companies except Hannover Re. Structural changes were an influence: ex-converium is included in SCOR and Swiss Re includes a full year of GE Insurance Solutions which was in for only half of Table 5 Current investment income Investment income Return on avge inv assets Hannover Re EUR mn 1,189 1, % 3.9% Munich Re EUR mn 7,155 7, % 4.2% Paris Re USD mn n.a. 4.5% SCOR EUR mn % 3.5% Swiss Re CHF mn 7,991 10, % 4.5% 11 For consistency, Benfield calculates combined ratios as the sum of net claims incurred and expenses to net premiums earned, all as recorded in the technical accounts. In some cases, the resulting ratios differ from those published by companies, where different calculation bases have been used or adjustments have been made to the figures shown in the income statements.

10 Benfield European Quarterly FY 2007 Waiting Game PAGE 8 Realised capital gains made a significant contribution to earnings over the period. EUR1.2bn of Munich Re s EUR2.8bn gains occurred in the primary life insurance segment where substantially all are attributable to policyholders with little effect on group earnings. Most of the remaining EUR1.6bn came from property sales in the first half of the year. 12 Hannover Re and SCOR took advantage of buoyant equity markets in the first half of the year to realise gains, although these were tempered by losses in the latter half of the year. Swiss Re stood out with a CHF739mn realised loss, as realised equity gains of CHF1.3bn only partly offset fixed income losses of CHF2.3bn. The latter included CHF1.3bn asset impairments relating to two credit default swap transactions. Other positive elements included the unquantified gain on the sale of the London headquarters at 30 St. Mary Axe. Table 6 Contribution from realised capital gains Hannover Re EUR mn Munich Re EUR mn 2,559 2,803 Paris Re USD mn 6 7 SCOR EUR mn Swiss Re CHF mn 2, Subprime Subprime write-downs were negligible for all except Swiss Re. Table 7 shows subprime writedowns which flowed through income statements in 2007, and their corresponding effect on capitalisation. Table 7 Subprime write-downs Write-downs % 2006 SHF Hannover Re EUR mn % Munich Re EUR mn % Paris Re USD mn 0 n.a. SCOR EUR mn 0 n.a. Swiss Re CHF mn 1, % Earnings Chart 1 shows the divisional contribution to pre-tax profits, with positive developments in Life & Health businesses for the four companies active in this segment. SCOR reported a 41% rise in pre-tax profits, principally reflecting the Converium acquisition. The 16% increase at Hannover Re came mainly from the Life & Health segments as profits in P&C were flat. Despite its high profile subprime related losses, Swiss Re s profits were down only 11%, thanks also to a strong performance in Life & Health. Both primary and reinsurance results in this class were higher at Munich Re, but not sufficiently to compensate for lower profits from P&C reinsurance caused by the weaker technical result. Paris Re s profits fell 58% on higher claims, adverse exchange rate 12 Munich Re 2007 annual report

11 Benfield European Quarterly FY 2007 Waiting Game PAGE 9 movements and a halving of income from its AXA Space affiliate. In 2006, SCOR benefited from a non-recurring EUR62mn badwill credit associated with the Revios acquisition, which boosted earnings in that year. Chart 1 Divisional contribution to pre-tax profits 1, Hannover Re ,000 5,000 4,000 Munich Re 5,477 5,078 EURmn P&C Life & Health Other Total pre-tax profit EURmn 3,000 2,000 1, , P&C Reinsurance Life & Health Reins Primary Ins and other Finance etc Total pre-tax profit Paris Re SCOR USDmn EURmn P&C RI Total pre-tax profit Non-life reinsurance Finance / other Life reinsurance Total pre-tax profit CHFmn 20,000 15,000 10,000 5, ,000-10,000-15,000 Swiss Re 5, P&C Life & Health Fin Services Centre/other Total pre-tax profit 5,187

12 Benfield European Quarterly FY 2007 Waiting Game PAGE 10 With the exception of Swiss Re, tax rates were substantially lower in Hannover Re and Munich Re benefited, in the latter instance by EUR400mn, from the reform of corporate taxation in Germany. Without the 2006 badwill credit, SCOR s net income would have grown 62%. In 2007, Paris Re was able to deploy USD47mn of credits so its effective tax rate was under 1%, but it continued to report a high goodwill amortisation charge, thus generating, by far, the largest drop in net income among this group. Table 8 Net income Change Hannover Re EUR mn % Munich Re EUR mn 3,425 3,854 13% Paris Re USD mn % SCOR EUR mn % Swiss Re CHF mn 4,560 4,162-9%

13 Benfield European Quarterly FY 2007 Waiting Game PAGE 11 Balance Sheet The sector s capitalisation continued to rise during Retained earnings were the principal driver, notwithstanding substantial capital repatriation. Paris Re and SCOR both raised capital, while Munich Re and Swiss Re repurchased shares. With the exception of Swiss Re, balance sheet exposures to subprime assets were modest. Investments There was a mixed picture of investment growth, with invested assets little changed at Hannover Re and Munich Re. Growth at Paris Re reflected net positive cash flow, while that at Swiss Re was largely explained by business acquired in its Admin Re life insurance segment, as well as a rise in trading assets. The jump at SCOR was explained by the Converium acquisition. Table 9 Period end invested assets Change Hannover Re EUR mn 28,538 29,042 2% Munich Re EUR mn 177, ,481 0% Paris Re USD mn 5,196 5,612 8% SCOR EUR mn 13,167 19,093 45% Swiss Re CHF mn 234, ,687 9% Bonds were the dominant asset class, representing as much as 62% of Swiss Re s investments. Funds withheld were 52% of Paris Re s investments, relating to business taken over from AXA Re. Chart 2 Investment allocations by asset class 100% 80% 60% 40% 20% 0% Hannover Re Munich Re Paris Re SCOR Swiss Re Bonds Equities Cash Funds withheld Other

14 Benfield European Quarterly FY 2007 Waiting Game PAGE 12 As shown in Chart 3, fixed income portfolios were of high credit quality, with an average rating in the AA class, although Hannover Re and Swiss Re were at the lower end of this rating band. Swiss Re has an appreciable allocation (10%) to sub-investment grade bonds (i.e. below BBB), as it significantly increased its allocation to these categories over the year. Chart 3 Fixed income portfolio by rating category 100% 80% 60% 40% 20% 0% Hannover Re Munich Re Paris Re SCOR Swiss Re Government/AAA AA A BBB BB or Lower Unrated Subprime Since late July 2007, financial markets have been turbulent as they reacted to an alarmingly high level of debt defaults in the US subprime mortgage sector. Reinsurance companies initially appeared immune to the turmoil, with company bond portfolios almost exclusively allocated to investment grade securities. On 19 November 2007, Swiss Re reported a CHF1.2bn pre-tax mark to market loss arising from its exposure to two credit default swaps which had been structured to provide protection for portfolios comprised of residential and commercial mortgage-backed securities. Swiss Re said unprecedented ratings downgrades in October, and the lack of any truly liquid market for these securities precipitated the write-down. Like all BEQ group companies, Swiss Re had previously reported negligible direct subprime exposure of 0.3% of total investments, underscoring the difficulty in assessing indirect exposure through structured transactions. Table 10 lists companies reported subprime exposure both on the asset and on the liability side of the balance sheet. Asset side exposure is comprised mainly of investments in US subprime residential securities, or additionally in the case of Swiss Re, through structured credit default swaps. On the liability side, companies were primarily exposed through E&O and D&O lines, and in Swiss Re s case, through financial guaranty reinsurance. Table 10 Balance sheet subprime exposure Asset side % investments % 2007 SHF Liability side % Tech reserves Total Hannover Re % 1.8% % 79 Munich Re % 1.3% n.a. n.a. n.a. Paris Re 9 0.2% 0.5% n.a. n.a. n.a. SCOR % 1.4% 0.0 n.a. 52 Swiss Re 1, % 9.7% % 1,940

15 Benfield European Quarterly FY 2007 Waiting Game PAGE 13 Technical Reserves Other than at SCOR, where the year-on-year comparison was influenced by the Converium acquisition, net non-life reinsurance technical reserves were little changed. Although not quantified by the companies, those reporting in European currencies will have been negatively impacted by the weakening of the US dollar over Table 11 Net technical reserves Change Hannover Re EUR mn 15,033 14,039-7% Munich Re EUR mn 37,943 36,861-3% Paris Re USD mn 3,576 3,855 8% SCOR EUR mn 5,430 9,783 80% Swiss Re CHF mn 77,788 72,734-6% Loss reserve development The European reinsurance groups disclose only limited information on loss reserve development in the form of consolidated loss reserve and paid loss development triangles. With the exception of Munich Re and Paris Re, these are presented on a calendar year basis, showing the claims reserves established on the balance sheet at the end of each year, and the subsequent development of those reserves. This differs significantly from the more familiar disclosure in Schedule P of the US statutory statements, which presents data on an accident year basis. The European analysis suffers from a number of limitations, including: Aggregation of all business lines, worldwide, precluding any analysis of individual lines by either business or geography; Currency translation movements in exchange rates have the effect of changing the reserve in the reporting currency even if the amount is unchanged in original currency. Corresponding changes in the value of matching investments are not recorded; Premium development additional premiums earned after inception are not recognised as they are released from unearned premium reserves; and, Commutation payments and M&A activity can materially distort the development. 13 The companies have provided certain additional information to the loss development in order to provide greater insights, such as showing the aggregate effects of currency movements or, in the case of SCOR, of premium development. The results are presented in the following charts. Reference to paid loss development also permits analysis of paid/incurred losses and the overall payment patterns, which provide a qualitative indication of reserving. However, changes in the payment pattern can be a reflection of changes in business mix as much as any indication about reserve adequacy. 13 This is true in all unadjusted triangulations on any basis of preparation

16 Benfield European Quarterly FY 2007 Waiting Game PAGE 14 Hannover Re s loss reserve development is shown in Chart 4. Before the effects of exchange rate movements, there was negative development in 1999 and 2000, and positive run-off in every other year under review. However, adjusted for currency movements, there has also been negative development in the years 1998, 2001 and Chart 4 Hannover Re loss reserve development 20% 15% 10% 5% 0% -5% -10% -15% -20% Surplus/(deficiency) Surplus/(deficiency) at constant FX Chart 5 shows the development of paid losses as a proportion of the most recent estimate of incurred claims. The first year payments have ranged between 20% and 34% of most recent estimate, with an average of 24%. The most recent years show a slower payment pattern, with 2006 starting at 22% of incurred. This pattern would be consistent with Hannover Re s conservative reserving policy. Chart 5 Hannover Re paid loss development 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1 year 2 years 3 years 4 years 5 years 6 years 7 years 8 years 9 years 10 years

17 Benfield European Quarterly FY 2007 Waiting Game PAGE 15 Munich Re s non-life loss reserve development is derived from a more useful accident year presentation, at constant currency exchange rates. The data include both primary and reinsurance business, although reinsurance comprised 90% of net claims reserves at the end of The columns in Chart 6 show the net run-off for each accident year as at 31 December 2007, expressed as a proportion of the initial accident year reserves. There has been negative run-off up to the 2001 accident year, but positive run-off subsequently. Across all accident years, Munich Re has experienced an aggregate EUR5.0bn of adverse development, with EUR389mn occurring in the 2007 calendar year. Chart 6 Munich Re loss reserve development 15% 10% 5% 0% -5% -10% -15% -20% -25% Chart 7 shows the development of paid losses as a proportion of the current estimate of ultimate losses for each accident year. The payment pattern appears to be reasonably consistent, with an acceleration of payment in more recent years. Chart 7 Munich Re paid loss development 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Yr

18 Benfield European Quarterly FY 2007 Waiting Game PAGE 16 Paris Re has provided information on an underwriting year basis, but the disclosure is more limited, without a paid loss triangle. Chart 8 shows mostly positive development, with a 1% negative development in the 2004 year. Chart 8 Paris Re loss reserve development Benfield Research 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% SCOR s loss reserve development for the years is shown in Chart 9. SCOR s presentation has adjusted for the effects of premium development but not for exchange rate movements. There has been negative run-off in every year before premium development but small positive development for 2005 and 2006 after premium development. Chart 9 SCOR loss reserve development 5% 0% -5% -10% -15% -20% -25% -30% -35% -40% Surplus/(deficiency) Surplus/(deficiency) after premium development SCOR also appears to have accelerated payment of recent years, as indicated in Chart 10. This would be consistent with the group s strategic repositioning and reduction in long-tail business.

19 Benfield European Quarterly FY 2007 Waiting Game PAGE 17 Chart 10 SCOR paid loss development 80% 70% 60% 50% 40% 30% 20% 10% 0% 1 yr 2 yrs 3 yrs 4 yrs 5 yrs 6 yrs Chart 11 shows Swiss Re s loss reserve development, which indicates positive development before exchange rate movements in , 2005 and However, after adjustment for currency movements, there appears to be negative development in 1999 and subsequent years, other than the immature 2005 and Chart 11 Swiss Re loss reserve development 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% Surplus/(deficiency) Surplus/(deficiency) at constant FX Swiss Re s paid loss development is shown in Chart 12. This indicates a tight and consistent payment pattern, although, again, there appears to be some slowing of initial payments in recent years.

20 Benfield European Quarterly FY 2007 Waiting Game PAGE 18 Chart 12 Swiss Re paid loss development 80% 70% 60% 50% 40% 30% 20% 10% 0% 1 year 2 years 3 years 4 years 5 years 6 years 7 years 8 years 9 years 10 years Capital Table 12 shows the development of shareholders funds during the year. Paris Re raised some USD100mn with its initial public offering and SCOR issued new shares in exchange for Converium shares. Munich Re and Swiss Re were both active in repurchasing their own shares as well as paying substantial dividends to shareholders, in both cases equal to 3.8% of opening shareholders funds. Hannover Re returned 6.7% of opening shareholders funds by way of dividend. Table 12 Changes in shareholders' funds mn Hannover Re EUR Munich Re EUR Paris Re USD SCOR EUR Swiss Re CHF 31 December ,898 26,320 2,091 2,253 30,884 Capital increase 0-2, , Net profit 589 3, ,992 Dividends paid ,162 FX changes ,025 Change in unrealised gains 34-1, Other Total changes 315-1, ,351 1, December ,213 24,857 2,474 3,604 32,369 % Change 11% -6% 18% 60% 5% Capital management remains a crucial issue for company managements. Munich Re increased its share repurchase programme, saying it intends to buy back another EUR3bn by 2010 in addition to the EUR3bn completed to March Swiss Re also increased its share repurchase programme from CHF6bn to CHF7.75bn with the capital released from its P&C reinsurance operations by a 20% quota share treaty from 1 January 2008 with Berkshire Hathaway. 14 Munich Re annual report 2007

21 Benfield European Quarterly FY 2007 Waiting Game PAGE 19 Financial strength ratings A.M. Best affirmed Swiss Re s A+ financial strength rating, but assigned a negative outlook to its issuer credit ratings. With the rating agencies focus of attention elsewhere in recent months, it has been a quiet period for the European reinsurers, from a ratings perspective, with no changes since the publication of the last issue of BEQ in November In March 2008, A.M. Best affirmed its A+ financial strength rating of Swiss Re and its subsidiaries and removed them from negative outlook, where they were placed November 2007, following the announcement of the mark-to-market loss on the credit default swap book. The agency commented that it had completed an evaluation of Swiss Re s enterprise risk management and had concluded that there were no similar exposures in the investment and trading portfolios. It noted the strengthened procedures put in place by Swiss Re, but nevertheless assigned a negative outlook to its issuer credit ratings, reflecting concerns over the long term effectiveness of these processes. 15 Table 13 shows the financial strength ratings of the principal operating entities of the BEQ group as at 28 April Table 13 Financial strength ratings Standard & Poor's, A.M. Best, Fitch Ratings, Moody s Standard & A.M. Best Fitch Moody s Poor s FSR Outlook FSR Outlook FSR Outlook Hannover Re AA- Stable A Stable A+ Stable A3 Munich Re AA- Stable A+ Stable AA- Stable Aa3 Paris Re A- Stable A- Stable NR NR NR SCOR A- Stable A- Stable A- Stable A3 Swiss Re AA- Stable A+ Negative AA- Stable Aa2 Standard & Poor s commented recently that the reinsurance pricing cycle had reached a critical point. While acknowledging that pricing was still technically adequate for most lines of business, across most geographies, S&P said many segments appear to have reached the point at which further price reductions would signal the transition from a softening market into a soft market. S&P expressed confidence that companies were better able to manage the downturn in the pricing cycle given the industry s enhanced risk management capabilities. It cautioned, however, that improved underwriting discipline was not an optional extra [but] a necessity if the sector intends to protect its strong overall ratings A.M. Best, press release, 20 March Standard & Poor s, 2008 Reinsurance Renewals: Underwriting Discipline Takes Center Stage As Price Adequacy Declines Further, 27 March 2008

22 Benfield European Quarterly FY 2007 Waiting Game PAGE 20 Appendices Business mix of the European reinsurance groups Chart 13 Hannover Re Company information 2007 GPW: EUR8.3bn P&C Reinsurance 2007 GPW: EUR 5.3bn Life & Health 37% Credit & Surety 7% Marine/ Aviation 13% Other 3% Property 34% Non-life 63% Casualty 43% Chart 14 Munich Re Company information L&H RI 18% 2007 GPW: EUR37.3bn P&C Primary 15% P&C RI 36% Engineering 9% P&C Reinsurance 2007 GPW: EUR14.2bn Other 17% Motor 19% MAS 12% L&H Primary 31% Fire 27% Liability 16%

23 Benfield European Quarterly FY 2007 Waiting Game PAGE 21 Chart 15 Paris Re Company information 2007 GPW: USD1.4bn 2007 GPW: USD1.4bn Other 14% MAS 8% A&H 6% Canada 8% Asia 9% Europe 41% Credit & Surety 10% Casualty 16% Property 37% US 28% Fac 23% SCOR Chart 16 Company information 2007 GPW: EUR4.8bn Non-life Reinsurance 2007 GPW: EUR2.3bn JVs 8% Life 51% Non-life 49% Specialty 22% Treaties 54% Business Solutions 16%

24 Benfield European Quarterly FY 2007 Waiting Game PAGE 22 Chart 17 Swiss Re Company information 2007 GPW: CHF34.4bn Non-life 2007 NPE CHF19.0bn Nontrad'l 3% Property 34% Life & Health 41% Non-life 59% Specialty 24% Casualty 39% Reporting dates Upcoming reporting dates are shown in the following table. Table 14 Reporting dates Company information Company 1Q H 2008 Hannover Re 6 May August 2008 Munich Re 8 May August 2008 Paris Re 14 May August 2008 SCOR 7 July August 2008 Swiss Re 6 May August 2008 Exchange rates Chart 18 shows the evolution of the US dollar/euro exchange rate over the period 2004 to The daily average rate (used for the translation of income statement items) for 2007 was 0.731, 8.3% lower than the average rate for The dollar weakened appreciably against the euro throughout the year, ending down 9.5%. Nominal growth rates for those companies reporting in European currencies with significant US dollar denominated business were therefore depressed.

25 Benfield European Quarterly FY 2007 Waiting Game PAGE 23 Chart 18 USD/EUR exchange rate Bloomberg Dec 03 Jun 04 Dec 04 Jun 05 Dec 05 Jun 06 Dec 06 Jun 07 Dec 07 Bond yields Chart 19 shows the yield on selected 5-year government bonds. In 2007, yields in Europe and the UK firmed during the first half, but were broadly stable in the USA. From mid-year, yields fell with a particularly sharp drop in the US, in response to the subprime crisis and credit crunch. The yield on US bonds peaked at 5.09% in mid-year, but ended the year down 1.20pp at 4.69%. In the Eurozone, yields peaked at 4.63% before falling back, but still ended the year up overall by 0.54pp. In the UK, yields peaked at 5.76% then declined, ending the year down 0.59pp at 4.46%. Average yields were higher by 0.50pp in the UK and 0.54pp, but fell 0.32pp in the US. Chart 19 5-year government bond yields Bloomberg 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 UK Eurozone USA Falling bond yields have mixed implications for reinsurers. While they benefit from the higher market value of bond holdings with a beneficial effect on capitalisation and solvency, there is a reduction in income on reinvestment and new cash flow.

26 Benfield European Quarterly FY 2007 Waiting Game PAGE 24 Equity markets Chart 20 shows movements in major equity market indices, rebased to January 2001 = 100. Markets rose strongly during the first half of 2007, despite a correction in March. Weakness in late July was short-lived with a rally in September, but the year ended on a weaker note. European markets, measured by the FTSE 100 and the Eurotop 100, ended the year up 4.1% and 2.4%, respectively. The US market, measured by the S&P 500 index was up 4.2%. Chart 20 Equity markets Bloomberg Jan 2001 = Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 S&P 500 FTSE 100 Eurotop 100

27 publications are available at If you wish to subscribe to a free service please contact benfieldresearch@benfieldgroup.com. Recent titles are listed below. Benfield Bermuda Quarterly March 2008 FY 2007 Balancing Act Global Reinsurance Market Review January 2008 Changing the Game Benfield European Quarterly November M 2007 Out with the Old Benfield Bermuda Quarterly November M 2007 Return of Capital Lloyd s Update November 2007 With Reserve Benfield Bermuda Quarterly September H 2007 Happy Days Benfield European Quarterly September H 2007 Plus Ça Change Maiden Innings August 2007 Bermuda Class of 2005