Fitch Ratings: 2018 Global Reinsurance Outlook Graham Coutts, Director, Insurance, Fitch Ratings Harish Gohil, Managing Director, Insurance, Fitch Ratings 26 September 2017
Agenda Operating Environment Focus on European Market Focus on Bermuda Market Alternative Capital Sector and Rating Outlooks 26 September 2017
Key Themes Operating Profits Under Pressure Rate Declines Continue Alternative Capital Capacity Growing Market Conditions Remain Conducive to M&A Activity
Hurricane Harvey, Irma & Maria Types of Losses Main Exposures Factors Affecting Potential Losses Early Indications Impact on Pricing 26 September 2017 4
Natural Catastrophe Losses Annual Catastrophe Losses (USDbn) Natural disasters Man-made disasters Average loss 140 120 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Swiss Re Sigma Half Year Catastrophe Losses (USDbn) Natural disasters Man-made disasters Average loss 40 30 20 10 0 Source: Swiss Re Sigma 1H16 1H17
Rate Reductions Continue Renewal Season January 2017 U.S. property loss affected Premium rate development Renewal Season April 2017 U.S. property loss affected Premium rate development Renewal Season June/July 2017 U.S. property loss affected Premium rate development U.S. property non-loss affected Non-loss affected U.S. property non-loss affected European property catastrophe Japan property non-loss affected Florida property non-loss affected U.S. casualty non-loss affected Source: Company and broker reports -10-5 0 5 10 (%) Japan casualty no loss emergence Source: Company and broker reports -10-5 0 5 10 (%) Casualty excess of loss no loss emergence Source: Company and broker reports -15-10 -5 0 5 10 (%)
Investment Returns Remain Low (%) UK USA Germany 6 5 4 3 2 1 0-1 Jan 07 Jun 07 Nov 07 Apr 08 Sep 08 Feb 09 Jul 09 Dec 09 May 10 Oct 10 Mar 11 Aug 11 Jan 12 Jun 12 Nov 12 Apr 13 Sep 13 Feb 14 Jul 14 Dec 14 May 15 Oct 15 Mar 16 Aug 16 Jan 17 Jun 17 Low Yields Maintain Earnings Pressure/Attract External Capital Source: 10 year government bond yields
Focus on European Market 26 September 2017
European Reinsurers: 1H17 Reinsurance Premium Written Gross Written Premium P&C Reinsurance Gross Written Premium Life Reinsurance (EURbn) 1H16 1H17 (EURbn) 1H16 12 128 1H17 10 7 10 6 8 8 5 6 64 4 3 4 2 2 2 1 0 Munich Re Swiss Re Hannnover Re Re SCOR 0 Munich Re Swiss Re Hannnover Re SCOR Re Source: Company reports, Fitch Fitch Source: Company reports, reports, Fitch Fitch Fitch
Rate Declines Continue to Moderate Overall Portfolio Price Movements Softening trend continues but viewed as manageable (%) 3 2 1 0-1 -2-3 -4-5 2013 2014 2015 2016 2017-6 Hannover Re Munich Re SCOR Swiss Re Source: Company disclosure
Normalised Combined Ratios Major European Reinsurers Reported vs. normalised combined ratio (%) 110 Average reported Average normalised 100 94.3 95.2 96.6 98.5 99.5 99.5 90 80 90.4 91.1 90.6 90.2 94.0 95.7 70 2012 2013 2014 2015 2016 1H17 Note: Average for Hannover Re, Munich Re, SCOR and Swiss Re Source: Company reports, Fitch ʻNormalisedʼ for variances from reinsurers budgeted totals, for both major losses and prior-year reserve development
Individual Reinsurers Major European Reinsurers Reported vs. Fitch normalised P&C combined ratio (%) Reported Normalised 110 100 94 99 99 100 101 94 94 100 100 100 99 99 100 104 103 94 94 96 94 95 90 80 96 96 97 97 92 93 94 95 95 94 94 94 90 91 91 93 94 86 83 84 2013 2014 2015 2016 1H17 2013 2014 2015 2016 1H17 2013 2014 2015 2016 1H17 2013 2014 2015 2016 1H17 Munich Re Swiss Re Hannover Re SCOR Source: Company reports, Fitch
Reinsurers Remain Well Capitalised Regulatory Solvency Ratio (%) 2015 2016 Target range 350 300 302 267 250 223 223 230 221 211 225 200 150 100 50 0 Munich Re Swiss Reª Hannover Re SCOR a 223% represents coverage under Swiss Solvency Test, the regime that Swiss Re operates under Source: Fitch, Companies annual reports
Focus on Bermuda Market 26 September 2017
Bermuda Performance Bermuda (Re)insurers Financial Performance ROE (RHS) CY combined ratio (LHS) AY combined ratio (LHS) AY combined ratio ex. cats (LHS) (%) (%) 105 14 100 12 95 10 8 90 6 85 4 80 2012 2013 2014 2015 2016 1H17 2 Source: SNL Financial, company reports
Bermuda Performance Bermuda (Re)insurers Growth in Net Premiums Written Reins. NPW % of total NPW (RHS) Total NPW growth (LHS) Reinsurance NPW (non-life) growth (LHS) (%) (%) 15 60 10 5 55 0 50-5 -10 2012 2013 2014 2015 2016 1H17 45 Source: SNL Financial, company reports
Bermuda Market Long-Run Performance AY Combined Ratio ex. Cats 102 98 94 95 98 Reinsurance Insurance Total CR SD Total 90.2 2.2 101 Reins. 83.6 3.1 100 100 Ins. 98.1 1.8 99 98 98 97 97 93 93 90 86 85 89 89 89 91 90 90 91 85 89 89 82 83 82 82 82 82 81 79 78 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Note: GAAP. Aggregate results for 15 Bermuda-based (re)insurers Source: Company reports, Fitch
Bermuda Market Long-Run Performance Operating Ratio 102 97 92 Operating ratio AY operating ratio excluding cats OR SD Oper. ratio 78.6 10.1 AY OR x cats 78.4 5.6 87 85 82 77 78 78 80 82 85 72 75 74 75 67 67 62 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Note: GAAP. Aggregate results for 15 Bermuda-based (re)insurers Source: Company reports, Fitch
Alternative Capital Update 26 September 2017
Alternative Capital Deployment Source: Aon Benfield Analytics
Catastrophe Bond Issuance Record Issuance Catastrophe bonds & ILS risk capital (USDbn) 30 Outstanding Issued 25 22.9 22.5 22.8 24.7 20 18.7 15 14.1 11.8 12.3 12.4 12.7 15.2 10 5 0 8.4 8.0 8.0 7.2 7.1 5.9 6.2 6.1 5.0 4.6 4.8 3.7 4.3 3.4 2.1 2.7 1.1 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1H17 Source: Artemis catastrophe bond & ILS market dashboard
Sector and Rating Outlooks 26 September 2017
Sector Outlook Negative Operating Profits Under Pressure 1. ROE falling 2. Normalised combined ratios deteriorating Rate Declines Continue 1. Pricing declines appear to be slowing 2. Pricing floor does not appear to have been reached Alternative Capital Capacity Growing 1. Record catastrophe bond issuance 2. Increasing use of collateralised reinsurance solutions Market Conditions Remain Conducive to M&A Activity 1. M&A likely to resume in the near term as companies consider strategic options to combat market stress
Rating Outlooks Stable Rating Outlooks Positive Watch Stable Negative/RWN 100% 80% 60% Current Lloyd s of London Mapfre SA MutRe QBE Reinsurance Source: Fitch, Ratings as at 16 August 2017 Rating Outlook/Watch Negative Outlook Positive Outlook Positive Watch Positive Outlook 40% 2016 Rating Outlook/Watch 20% Amlin AG Arch Capital Group Ltd. W.R. Berkley Corporation Negative Outlook Negative Watch Negative Watch 0% Source: Fitch 2016 (%) Current (%) Source: Fitch, Ratings as at 23 November 2016
What Could Change The Rating Outlook 1. Deterioration in Sector Profitability, Even If Capital Remains Strong Medium-term calendar year combined ratios or operating ratios exceed 100% and 90%, respectively (2018 forecast is 96.9% and 89.9%) 2. Catastrophic Loss With Interest Rate Spike Catastrophic loss in excess of USD70bn coupled with significant unrealised investment losses from an abrupt jump in interest rates, of 300bp or more leaving balance sheets temporarily more exposed to adverse events Where are Negative Rating Actions Most Likely? Individual negative rating actions are possible if a raised calendar-year combined ratio or operating ratio indicated a significant impairment in a company s financial condition