BEST S SPECIAL REPORT

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1 BEST S SPECIAL REPORT Our Insight, Your Advantage. Trend Review April 14, 2015 Pricing pressures from catastrophe business challenge reinsurers shares in Expected To Remain Challenging For Reinsurance For publicly traded reinsurance companies (including the four large Europeans Munich Re, Swiss Re, Hannover Re, SCOR) stock prices ended 2014 below the overall market, driven by the increase volatility in the stock market during the summer and fall, augmented by continued concerns over the decline in pricing for reinsurance risk. Of the 19 publicly traded worldwide reinsurers charted in Exhibit 1 (including the four top European players), only four performed better than the overall market in 2014 and four actually experienced negative returns in In fact, the average share price increase of all publicly followed company return s in 2014 increased 6.5%, as compared with the market s total return of 11.4% for the same time period. Regardless of the low level of losses and continued favorable reserve releases from prior years, the pricing pressures for cat business were well evident for all of During 2014 reinsurance companies have seen CAT price declines of 20% in some cases (more pronounced in the US). January renewals once again reported a decline in reinsurance price between 5-15% depending on risk and loss experience. The dramatic price declines in 2014 and for January 1 continued to be attributed to the lack of market-changing losses as well as increased retentions carried by ceding companies and the abundance of capital in the market. Despite these pressures management teams indicated that they remain disciplined and will continue to reduce their books of business as necessary. For many, 4Q14 and January 1 renewals lead to reductions in their reinsurance books of business once again particularly for property CAT. For the most part companies agree that 2015 will remain challenging and will lead to an even more careful approach to risk selection. For global companies the orderly approach to risk selection appears to be working and most are expected to remain cautious on the business they elect to write as capacity remains high and the market becomes increasingly more competitive. Portfolios continue to be more weighted toward primary business given that pricing continues to be relatively more attractive and access to the business easier than on Exhibit Stock Price Change % Analytical Contact Mariza Costa, Oldwick, +1 (908) Ext Mariza.Costa@ambest.com SR ACGL AHL AXS AWH ENH GLRE HNR1 MHLD MRH Note: See Exhibit 5 for a full list of companies and ticker symbols. Source: Bloomberg, company websites MUV2 PRE RE RNR SCOR SREN YTD Price Change Avg Reinsurer Avg S&P 500 VR XL WTM Y Copyright 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED. No part of this report or document may be distributed in any electronic form or by any means, or stored in a database or retrieval system, without the prior written permission of the A.M. Best Company. For additional details, refer to our Terms of Use available at the A.M. Best Company website:

2 the reinsurance side. M&A activity took center stage in 4Q14 and during the first few weeks of 2015 with some significant merger deals announced. XL Group signed a definitive agreement to buy Catlin, RenRe to buy Platinum Underwriters and Partner Re and Axis signed an agreement to combine into a single company through a merger of equals. M&A activity is expected to continue as the need for scale, global presence and diversified books of business continues to place pressure on companies. Stocks for publicly traded reinsurance companies (including the four large Europeans) performed below the overall market in 2014 in part due to the price decline from Arch, Greenlight, RenRe, and SCOR compared with their peers. P/BV Remains Below Average As of December 31, 2014 the global reinsurance industry (including Bermuda and the European big four) current average Price/Book Value was approximately 104% which is still lower than the industry s historical average of about 117% (exhibit 2). Of all 18 companies included in the composite only 2 reinsurers (Arch and Hannover Re) are trading above 1.17x book value while all the others are trading between 0.97x and 1.12x book. Expectations are for reinsurers to continue to maintain a strong level of capital in Companies continue to execute on their share repurchase plans as capital positions remain very strong. Most companies remain selective in underwriting given the lack of attractive pricing in some lines of business particularly for US property CAT, however it is expected that 2015 will remain challenging for reinsurers given the lack of any price increases and in some cases continued price declines. Exhibit 2 Price/Book Value Excluding accumulated other comprehensive income. Price/Book Value Current P/BV: 1.04x Average Present: 1.17x 1.0x P/BV Peak reached February 2002 (1.83x BV) Average 60 Low Reached March 2009 (0.75x BV) Years Source: Company reports, Bloomberg, A.M. Best research Companies included in composite are ACGL, AHL, AWH, AXS, ENH, MHLD, MRH, PRE, RE, RNR, VR, WTM, Y, XL, Swiss Re, Hannover Re, SCOR and Munich Re Reported EPS versus Consensus Estimates During 4Q14 most companies beat consensus estimates in part due to lower cat losses and continued reserve releases (exhibit 3). The market is becoming increasingly more challenging and returns are starting to show signs of stress. Reinsurers for the most part however remain disciplined and some will continue to benefit from global diversification. Of 2

3 Exhibit 3 Operating Earnings Per Share vs. Consensus, 4QTR 2014 ) Ticker Consensus Actual Variance ACGL AHL AXS AWH ENH GLRE MHLD MRH PRE RE RNR VR XL WTM Y Note: See Exhibit 5 for a full list of companies and ticker symbols. Source: Bloomberg the 15 reinsurers that have announced year end results and are followed by analysts, 10 (67%) met or exceeded consensus estimates of operating earnings per share (EPS). The best performers in the quarter compared with consensus included AWH and RNR, which exceeded estimates by 115.7% and 59.5% respectively, likely due to higher than expected favorable reserve releases and also possibly lower than expected cat losses versus consensus estimates. Common Share Repurchase Activity In 2014 management teams continue to execute on their share buyback programs as most maintained very strong balance sheets and a significant amount of excess capital given the benign loss environment over the past few years (exhibits 4 and 5). Reinsurers we are following repurchased a combined $6.6 billion of their own shares during In addition reinsurance returned approximately $6.5 billion to shareholders in the form of common and preferred share dividends bringing the total returned capital to about $13.1 billion Valuations remain below the industry s all time average of about 1.17x, interest rates remain at historical low levels and reserve releases are expected to start to diminish. During 4Q14 an early 2015 Aspen, AXIS, Everest and Validus all announced new or increases to their share buyback plans. As capital continues to be abundant and companies maintain very strong balance sheets, it is expected that share buybacks, absent any significant CAT event, will continue to be part of companies capital management strategy for the near term. Exhibit Share Repurchases & Dividends Paid 3,500 3,000 2,500 Dividends Share Repurchases USD Millions 2,000 1,500 1, ACGL AHL AXS AWH ENH GLRE HNR1 MHLD MRH MUV2 PRE RE RNR SREN VR XL WTM Y Note: See Exhibit 5 for a full list of companies and ticker symbols. Source: Company reports 3

4 Exhibit Share Repurchase Activity Company Ticker Share Repurchase Activity Arch Capital ACGL Repurchased $454 million in shares in At December 31, 2014, $887.1 million of repurchases were available under the share repurchase program Aspen AHL Repurchased $181 million in shares in February 5, 2015, Aspen announced that its Board of Directors has replaced its existing share repurchase authorization with a new authorization of $500 million. AXIS AXS Repurchased $543 million in shares in Effective January 1, 2015, the share repurchase authorization program was increased to $750 million of the Company s common shares effective through December 31, 2016; Allied World AWH Repurchased $176 million in shares in Endurance ENH Repurchased no shares in Greenlight GLRE As of December 31, 2014, approximately 2 million of Class A ordinary shares remained under the current plan. No shares were repurchased in 2014 Hannover Re HNR1 No shares repurchased YTD. Maiden Holdings MHLD No shares repurchased YTD in 2014 Montpelier Re MRH Repurchased $186 million in shares in Munich Re MUV2 Repurchased approximately $1.6B in shares YTD. PartnerRe PRE Repurchased $551 million in shares in Everest Re RE Repurchased $400 million in shares in In November 2014 the Company announced that its Board of Directors authorized an increase to the Company s existing share repurchase program of 5 million shares, bringing the Company s authorization for share repurchases up to approximately 6.8 million shares Renaissance Re RNR Repurchased $514 million in shares in At December 31, 2014, about $300 million remained available for repurchase under the authorized share repurchase program. SwissRe SREN Repurchased $197 million in shares in Source: Cash flow statement. Validus VR Repurchased $511 million in shares in February 3, 2015 management announced a new common share repurchase program in the amount of $750 million XL Group XL Repurchased $802 million in shares in In February 2014, the Company increased the share buyback program to $1.0 billion. At December 31, 2014, $2681 million remained available for purchase under share buyback program. White Mountain WTM Repurchased $101 million in shares YTD in Alleghany Y Repurchased $300 million in shares in Source: Company reports What is Ahead For 2015? Pricing in 2014 experienced declines in the double digits for certain lines of business for each of the renewal seasons. January 1, 2015 renewal pricing was once again a decline of 5-15% depending on the risk, geography and loss experience. The expectation is for reinsurance pricing overall to remain under pressure in 2015 given continued pressures from alternative capital and the lack of any price changing event over the past few years. Third party capital is expected to continue to enter the market in upcoming years as large pension funds and hedge funds search for ways to diversify their portfolios while chasing higher returns. In 2014 $8.8 billion have been issued in CAT bonds alone, representing a 15% growth from Thus far in 2015 $1.2 billion in cat bonds have been issued compared with $770 million during the same time last year. Given the current market environment reinsurance and retro pricing in the US is expected to remain under pressure going forward. Although property Cat is seeing the largest price declines, the softness is also seen in US motor, Engineering, global trade credit and personal accident to name a few. The intensified competition in property reinsurance and cat continues to spill over to other lines of reinsurance as companies attempt to expand their product offerings and global presence. This, in turn, continues to put upward pressure on ceding commissions on quota share placements and leading to more multiyear contracts, broader contract terms and increased signings on aggregate covers. Current market conditions are starting to drive M&A upward. M&A deals announced over the past five months seem to address the need for greater global scale and diversified product lines and distribution. Cedents want companies that have a wide product offering and a strong market presence replacing the days of specialty focused reinsurance companies. Reinsures need to be able to maneuver through market cycles by having the ability to move in and out of 4

5 various business classes and geographies as market conditions dictate. Companies with welldiversified businesses and a global reach will likely see the majority of the deals in the market while players with limited books of business or limited geographic reach may not have the luxury of walking away from unattractive business. M&A is expected to continue in 2015 as companies continue to look for a larger piece of a shrinking pie and the ability to be or remain relevant on a global scale. For 2015 returns are expected to get increasingly more challenging if capital continues to enter the market at such high rate, reserve releases decline and pricing continues to soften in the double digits. The scenario for lower ROEs and an uptick in combined ratios as commission expenses continue to increase and premiums continue to declines is possible in

6 Fundamental Analysis Exhibit Equity Performance Analysis Operating EPS ) Price/Earnings Company Ticker 12/31/14 Price ) Chg (%) QTR E Arch Capital Group ACGL x 12.9x Allied World Assurance AWH x 5.6x Aspen Insurance Holdings AHL x 8.8x AXIS Capital AXS x 9.6x Endurance Specialty ENH x 8.8x Everest Re RE x 6.9x Greenlight Re* GLRE x 11.5x Maiden Holdings MHLD x 8.4x Montpelier Re Holdings MRH x 8.1x Partner Re PRE x 7.7x Renaissance Re RNR x 8.4x Validus Holdings VR x 8.1x XL Group XL x 9.2x White Mountain Re* WTM x 12.3x Alleghany Y x 14.0x Reinsurer Averages x 9.4x * EPS and ROE are from net income Excluding Accumulated Other Comprehensive Income. Source: Company reports, Bloomberg YTD 2014 CAT Losses and Reserve Development Exhibit 7 Catastrophe Losses & Favorable Reserve Development 1QTR.14 2QTR.14 Catastrophe Losses 3QTR.14 4QTR.14 Cat Losses 1QTR.14 2QTR.14 CR 3QTR.14 CR 4QTR.14 CR Ticker CR % of Equity ACGL AHL AXS AWH ENH GLRE MRH PRE RE RNR VR XL WTM NA NA NA NA Y Note: See Exhibit 5 for a full list of companies and ticker symbols. Source: Company reports 6

7 Combined Ratio Current P/B 4QTR.13 4QTR.14 Annual Dividend ) Div. Yield Shares Outstanding ( Market Cap. Annualized Operating ROE Debt/ Equity , , , , , , NA NA ,237.4 NA , , , , , NA NA ,887.8 NA , Reserve Releases/Adverse Development 1QTR.14 1QTR.14 CR 2QTR.14 2QTR.14 CR 3QTR.14 3QTR.14 CR 4QTR.14 4QTR.14 CR Total NA 4.5 NA

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