Trends in the International Reinsurance Market AIO Reinsurance Forum Tangiers, October 4, 2015
Reinsurers equity grow faster than top line 600 Top 35 Reinsurers in bn USD 250 500 400 300 200 100 200 150 100 50 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Equity Premium 0 But excess capacity is not only driven by the inflow of new and alternative capacity but also by the capital increase of existing traditional reinsurers Source: AM Best 2
The share of alternative capital increases steadily 700 14% 600 12% 500 10% 400 8% 300 6% 200 4% 100 2% 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 HY reinsurer capital in bn $ alternative capital in % 0% Source:The Aon Benfield Aggregate 3
Components of reinsurers equity evolution YE 2008 to YE 2014 Equity evolution year end 2008 until year end 2014 77% 43% 24% 159% 100% equity 31/12/08 net income buybacks & dividends issues unrealized gains + forex equity 31/12/14 Source: AM Best 4
Interest Rates and inflation have been steadily declining % 12 10 8 6 4 10Y rates Inflation 2 01/09/88 01/07/89 01/05/90 01/03/91 01/01/92 01/11/92 01/09/93 01/07/94 01/05/95 01/03/96 01/01/97 01/11/97 01/09/98 01/07/99 01/05/00 01/03/01 01/01/02 01/11/02 01/09/03 01/07/04 01/05/05 01/03/06 01/01/07 01/11/07 01/09/08 01/07/09 01/05/10 01/03/11 01/01/12 01/11/12 01/09/13 01/07/14 01/05/15 0 2 Interest rates have been steadily decreasing leading to lower investment income for reinsurers On a more positive note inflation rates have come down, too 5 Source: Datastream; French market illustrative
A 100% Combined Ratio is not what used to be 110 105 100 95 90 85 80 15,9% 14,3% 106,5 12,7% 100,6 100,1 100,8 102,4 101,2 101,0 10,9% 99,5 97,5 9,6% 96,7 97,2 95,7 7,4% 7,9% 92,7 9,8% 8,8% 4,3% 8,2% 4,7% 6,2% 1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 18% 15% 12% 9% 6% 3% 0% Combined Ratio ROE* While it was possible to generate a RoE of 16% in 1979 with a Combined Ratio of 100% Nowadays the same Combined Ratio only generates a RoE of 8% due to lower investment income Source: III Overview and Outlook for P&C Insurance industry May 2015 Swiss Re 6
Improvement in Combined Ratio in recent years 130% Combined Ratio 120% 110% 100% 90% 80% driven by 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 below average natcat losses and reserve releases, which are in part driven by losses remaining below expected levels due to lower than expected inflation 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Reserve releases in % Combined Ratio 2007 2008 2009 2010 2011 2012 2013 2014 100% 6% 4% 2% 0% Source: S&P, SCOR 7
Combined Ratio and Loss reserve releases 120% 110% 100% 90% 80% 2007 2008 2009 2010 2011 2012 2013 2014 CR Reserve releases Source: S&P, SCOR 8
Reinsurers increase asset risk to alleviate the reduction in investment income 5 4 15 14 7 10 73 72 Other Cash Stock Bonds Source: S&P 2013 2014 Reinsurers invest in more risky asset types, like equities. They also try to develop alternative investments, like infrastructure or renewable energies Nonetheless fixed income assets continue to represent the vast majority of investments 9
Reinsurers reduce credit quality of fixed income assets 40% Share of < BBB+ rated fixed income securities 35% 30% 25% 20% 15% 10% 5% Hannover Re Munich Re Partner Re RGA SCOR Average 0% Q408 Q409 Q410 Q411 Q412 Q4 13 Q4 14 Q2 15 The asset quality within fixed income has lowered. This is in part due to the fact that many sovereign bonds were downgraded, but also to the fact that companies search yield. The credit quality of most reinsurer investment portfolios remains nevertheless in the AA range Source: Reinsurers Annual Rapports and presentations 10
In addition new companies continue to enter the market Demand Driven Supply Driven 1986 1993 2001 2006 2010 2012 2013 2014 2015 In the past new reinsurers were launched following major events and a need for capacity During the last decade reinsurers were launched by investors seeking investments with relatively higher yields and by emerging markets, that want to create their own local capacity Source : SCOR, company websites 11
Non-Life cession rates and premium volumes ceded by major cedants decline 33,0 15,0% 32,0 31,0 30,0 29,0 28,0 14,5% 14,0% 13,5% 13,0% 12,5% 12,0% 27,0 2009 2010 2011 2012 2013 cession in bn USD in % 11,5% Source: SCOR based on annual report data of ACE, Allianz, AIG, AXA, Generali, Zurich 12
Overcapacity leads to price reductions Global Property Cat ROL* Index Andrew WTC Katrina IKE Japan EQ Sandy ROLs of Cat XLs are reducing but variations are lower than in the 90s due to impact of modelisation *ROL = Rate on Line Source: Global Property Cat ROL Index Guy Carpenter; ILS pricing Moody s 13
In view of competitive reinsurance market situation reinsurer search alternative growth strategies 1994 / 1999 2000 / 2005 2006 /2007 2008 /2009 2010 /2011 2012 /2013 2014 /2015 Berkshire General Re Cologne Re Employers Re Frankona Re Aachener Re Eagle Star Re Fairfax CTR Hannover Re Skandia Re Munich Re American Re PartnerRe SAFR Winterthur Re SCOR Allstate Re Swiss Re M&G Re Life Re XL Nac Re Folksamerica Re Risk Capital Re SCOR PartnerRe Life Sorema Swiss Re Lincoln Re Underwriters Re Globale Management GmbH Gerling Global Re VHV Gerling Life Re XL Capital Le Mans Re White Mountains Sirius Source : SCOR Argonaut Group PX Re Ariel Re Atrium Paris Re AXA Re SCOR Revios Converium Swiss Re GE Insurance Solutions Validus Talbot Hannover Re Scottish Re ING portfolio Pacific Life Scottish Re* Partner Re Paris Re RGA ReliaStar SCOR Prévoyance Re XL Re Life America Validus IPC Alterra** Max Harbor Point QBE Secura Pacific Life Manulife liferetro SCOR Transamerica Re *International Segment (European & Asian Activities) **new name of the merged entity Companies in italics: merger not yet finalized Alleghany Transatlantic Goldman Sachs Ariel Re Validus Flagstone Markel Alterra SCOR Generali Life Re USA CPPIB Wilton Re BTG Pactual Ariel Re Grey Swan XL Life Re RenRe Platinum XL Catlin Arch Gulf Re Endurance Montpelier Exor PartnerRe CMI Sirius Legend Buyer Target Mitsui Sumitomo Amlin 14
The value of reinsurance mergers in 2015 ytd already exceeds total value of 2013 and 2014 20 18 16 Value bn $ Nb.of deals 30 25 14 12 20 10 15 8 6 10 4 2 5 0 2013 2014 2015 ytd 0 Value nb.deals Source: Securities Data Company 15
Concentration increases steadily % 5 Estimate 78 5 17 68 9 23 45 46 14 11 41 43 35 17 48 Other Top 5-10 Top 5 20 75 48 12 40 Top 5 Top 10 1980 1990 2000 2010 2014 Life Non-Life Concentration continues to increase The life reinsurance market is much more concentrated than non-life. In life re only 6 truly global reinsurers exist and dominate the market, while in non-life the share of the Top 10 represents a bit more than 50%. Source: SCOR 16
Reinsurers buy back shares when they can t find attractive business opportunities 12 7% in bn $ 10 8 6 4 2 10 7% 8,4 5% 2,2 2% 10,1 6% 4 2% 4,6 3% 5,7 3% 8,3 5% 6% 5% 4% 3% 2% 1% in %equity N-1 0 2007 2008 2009 2010 2011 2012 2013 2014 0% Share buy backs are a common feature since 2007. Following the financial crisis a drop is noted in 2009, but the amounts returned in 2010 largely compensate. Lower buy backs in 2011 due to the earthquakes in Japan and New Zealand In 2013 buy backs continued despite asset depreciation and 2014 shows an acceleration as funds are increasing again. Source: SCOR research 17
Thus pricing impact on diversified reinsurers less pronounced 0,0% Portfolio Price evolution ytd -0,5% -1,0% -1,5% -2,0% -2,5% -3,0% 2014 2015 Peer 1 SCOR Peer 2 Well diversified reinsurers show much lower impact of price reductions in their renewals due to the possibility to shift their capacity away from the lines suffering most from competition to the lines offering better profitability Source: Global Property Cat ROL Index Guy Carpenter; ILS pricing Moody s 18
An excellent Rating is necessary to be fully considered a Tier 1 reinsurer 1 Munich Re 2 Swiss Re 3 Hannover Re 4 Berkshire AA+ n 5 SCOR 6 RGA AA- AA- AA- AA- AA- Source: S&P 19
But not all lines are impacted to the same extent SCOR Global P&C Treaty portfolio: SCOR s view of the market Western Europe 1) Germany UK Northern Europe 2) France Middle East Eastern Europe Africa Russia & CIS USA Canada Latin America Caribbean Japan China Australia India South East Asia 3) South Korea Northern Asia 4) Property P NP CAT Casualty Motor P NP P NP P NP CAT Proportional Non-proportional Natural Catastrophe Very attractive Monte Carlo 2015 January 2015 Monte Carlo 2014 3% 4% 8% Business attractiveness 5) Attractive Adequate 21% 24% 25% 49% 46% 40% Inadequate 9% 6% 6% Not material 19% 19% 21% premium amount 1) Western Europe: Austria, Cyprus, Greece, Italy, Malta, Portugal, Spain, Switzerland 2) Northern Europe: Belgium, Luxembourg, The Netherlands, Scandinavia 3) South East Asia: Indonesia, Malaysia, Singapore, Thailand, Philippines, Vietnam Source: Global P&C IR Day 2015 4) Northern Asia: Hong Kong, Taiwan, Macau 5) Percentages are based on the number of segments in each category, not taking into account the respective segments premium volume
Exposure grows faster than insurance % of GDP 0,3% 0,2% Economic losses Insured losses 0,1% 0,0% 75-'84 85-'94 95-'04 05-'14 decade The impact of natural catastrophes on GDP has tripled in last 40 years More than two thirds of the economic impact of natural catastrophes still is not insured. Source: Sigma 21
Regulatory & Legislative changes flourish worldwide U.S. S2 India C-ROSS Brazil Twin Peaks Regulators and legislators in many areas of the world are constantly changing the rules, forcing reinsurers to adapt Furthermore there is a trend to oblige reinsurers to hold more capital locally reducing capital fungibility 22
Climate Change Source:keepbanderabeautiful.org 23
Cat losses 1970 2015 (HY) 140 Insured cat losses in USD/bn 120 100 80 60 40 20 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 natcat manmade HY Source: Sigma 2015 24
Largest Natcat losses largest insured losses* in bn USD 80 42 38 37 28 23 23 17 17 16 Hurricane Terrorism Earthquake Flood => Cat events are not evenly spread over time but can accumulate in a short time span (e.g. Atlantic Hurricane events 2004/2005, Earthquakes 2010/2011) *indexed to 2014 costs Source: III, Swiss Re 25
Reinsurers share in cat losses 95% 73% 57% 60% 60% 41% 45% 44% 40% 25% 30% 20% 30% Lothar Martin Andrew 1992 Hugo 1989 Sept.11 2001 2004 2005 Sandy Hurricanes* 2012 Chile EQ 2010 Australia floods Japan EQ 2011 NZ EQ 2011 Thai floods * Excluding losses paid by Florida Hurricane Cat Fund USD 3.9 bn in 2004 and USD 4.5 bn in 2005 Source: Lothar & Martin: Benfield étude tempête 2003; Insurance Information Institute 26