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Bill Godfrey
State of the Reinsurance Market
Midwest Actuarial Forum
March 22, 2005
Guy Carpenter 2
Security Assessment
Renewals in 2005
Reinsurance Market Review
Guy Carpenter 3
A.M. Best Rating Distribution
0%
10%
20%
30%
40%
A++ A+ A A- B++ B+ B, B- C++,C+
C, C- D E, F
Global Reinsurers U.S. Primary Companies
Source: A.M. Best
Guy Carpenter 4
S&P Rating Migrations Among theTop 150 Reinsurers*
0
5
10
15
20
25
30
35
AAAAA+
AAAA-
A+ A A-
BBB+BBB
BBB-BB
BB- B-NR R
Nu
mb
er o
f R
ein
sure
rs
Rating as at 12/31/01 Rating as at 8/01/02 Rating as at 8/01/03 Rating as at 8/01/04
Source: Standard & Poor’s
Guy Carpenter 5
S&P Outlook on Reinsurance Sector
September 13, 2004 – Revised outlook to stable from negative
Expect downgrades AND upgrades will be limited Potential for more reporting of prior-year reserve
development continues to weigh on ratings of older reinsurers
Concern over Asbestos reserving remains – Reinsurers not recognizing what primary insurers are
Negative on Rating related triggers Diminishing Parental Support Outlook for 2004 and 2005 Strong Profitability
Guy Carpenter 6
Rating Changes Since September 11, 2001 for Top Ten Reinsurers
U – indicates under review
NR3 - indicates rating procedure inapplicable
Standard and Poor's A.M. Best
Reinsurer 9/11/2001 12/2/2003 9/11/2004 9/11/2001 11/6/2003 9/11/2004
Munich Re Group AAA A+ A+ A++ A+ A+
Swiss Re Group AAA AA AA A++ A+ A+
Employers Re Group AAA A+ A+ A++ A A
Berkshire Hathaway Re Group AAA AAA AAA A++ A++ A++
Hannover Re Group AA+ AA- AA- A+ A A
Lloyd's A+ A A A A- A
Allianz Re Group AA+ AA- AA- A++ A+ A+
SCOR Re Group AA- BBB+ BBB+ A+ B++g B++g
Converium Holdings A+ A BBB A A B++g
XL Re Group AA AA AA- A+ A+ A+
Guy Carpenter 7
Combined RatioU.S. P & C vs. Reinsurance Industry
100
110
120
130
140
150
'80
'81
'82
'83
'84
'85
'86
'87
'88
'89
'90
'91
'92
'93
'94
'95
'96
'97
'98
'99
'00
'01
'02
'03
Per
cen
t
P&C Ind Re Ind
Guy Carpenter 8
Global Insured Catastrophe Losses
0
5
10
15
20
25
30
35
40
45
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1980
1992
1994
1996
1998
2000
2002
2004
US
$ B
illi
on
s
Guy Carpenter 9
Reserve Strengthening: 5 Selected Groups
Group Year-End 2003 Gross Loss Reserves
Reserve Deficiency During
2002
Reserve Deficiency
During 2003
AIG 56.1B 4.8B 2.0B
ACE 27.2B 2.9B 0.7B
Chubb 17.9B 1.4B 0.6B
CNA 21.3B 0.2B 6.9B
St. Paul Travelers
60.1B* 5.9B 2.0B
Total
*Estimate
$182.6B $15.2B $12.2B
Source: U.S. SEC Filings
Guy Carpenter 10
Reinsurance Industry Reserve Additions
2003 Examples include:
Additional Development 2003 Combined Ratio
Employers Reinsurance Corp $ 355 million 105.1%American Re-Insurance Co $ 546 million 108.4%General Reinsurance Corp $ 402 million 103.6%Swiss Re America $ 903 million 138.5%Transatlantic Re $ 298 million 96.4%XL Reinsurance America Inc $ 289 million 151.3%
$2,793 million
The impact of U.S. casualty reinsurance business from 1997-2001
Source: U.S. Statutory Filings
Guy Carpenter 11
Reinsurance Industry Reserve Additions
2004 First 9-months updates: Additional Development Combined
Ratio- American Re-Insurance Co $ 201 million 114.3%- Employers Reinsurance Corp $ 473 million 116.2%- General Reinsurance Corp $ 474 million 112.6%- Swiss Re America $ 134 million 108.0%- Transatlantic Re $ 157 million 102.0%- XL Reinsurance America Inc$ 50 million 94.4%
$1,489 million
The impact of U.S. casualty reinsurance business from 1997-2001
Source: U.S. Statutory Filings
Despite these actions, have reinsurers fully accounted for reserve additions taken by primary companies during the last 30 months?
Guy Carpenter 12
S&P Global Reinsurance Industry Combined Ratio Versus Return on Revenue
80
90
100
110
120
130
140
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
-10
-5
0
5
10
15
Combined Ratio (left scale) Return on Revenue (right scale)
Guy Carpenter 13
US Reinsurance CompositeReturn on Equity (Surplus)
-20
-15
-10
-5
0
5
10
15
20
25
'83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03
Per
cen
t
Fortune 500 Median U.S. P&C U.S. Reins
Guy Carpenter 14
U.S. Reinsurance CompositeRBC Composite Weighted Average
0
100
200
300
400
500
600
'94 '95 '96 '97 '98 '99 '00 '01 '02 '03
Guy Carpenter 15
U.S. Reinsurance RBCComposite Companies - 2003
0
2
4
6
8
10
12
14
16
18
20
22
24
Guy Carpenter 16
US Reinsurance Recoverables from Unaffiliated Reinsurers
Reinsurance Recoverables on:
2003 2002
Paid Losses $17,931 M $16,833 M
Unpaid Losses 79,945 M 77,490 M
IBNR Losses 79,090 M 78,146 M
Sub-total 176,966 M 172,469 M
Funds Withheld -20,706 M -18,920 M
Total Recoverable $156,260 M $153,549 M
Source: A.M. Best
Guy Carpenter 17
2003 US Reinsurance Recoverables
Reinsurance Recoverables $156 B
Admitted Assets $1,174 B
Reins. Recov. / Adm. Assets 13%
Industry Surplus $354 B
Reins. Recov. / Surplus 44%
Source: A.M. Best
Guy Carpenter 18
0
10
20
30
40
50
60
70
1997 1998 1999 2000 2001 2002
Secured Unsecured
Source: Standard & Poor’s
Dependence of U.S. Insurers on Reinsurance(recoverables as percentage of surplus)
U.S. Reinsurance Recoverables
Guy Carpenter 19
An Unprecedented Convergence
Adverse loss development in commercial lines for the last 10 accident years
Adverse loss development for asbestos and pollution Increased severity and frequency in short tail lines September 11, 2001 - correlated losses from one event Increase in reinsurance recoverables Reserve gap (primary & reinsurers) Low interest rates and lack of investment income Drop in asset values due to equity market volatility Regulatory and rating agency scrutiny following a climate of corporate
scandals Prolonged soft market in insurance and reinsurance
A perfect storm?
Guy Carpenter 20
Reasons to be optimistic...
In the end, the insurance and reinsurance mechanism has effectively done what it is supposed to do– The industry has absorbed the losses from
WTC / 9-11 asbestos pollution and many other systemic threatening situations
Corrective measures are in place– An increased focus on underwriting disciplines – Adequate pricing – New risk management techniques
Guy Carpenter 21
New Capital2001 - 2003 Start-Ups
Name YearInitial Capital
(US$ billions)Allied World Assurance Co. 2001 1.5
Arch Re 2001 1.0
AXIS 2001 1.7
Catlin Insurance Co. 2002 0.4
DaVinci Re 2001 0.4
Endurance 2001 1.2
Montpelier Re 2001 0.9
Olympus Re 2001 0.5
Platinum Underwriters 2002 1.0
Quanta 2003 0.6
Wellington Re (now Aspen) 2002 0.3
Total 9.5
Guy Carpenter 22
Agencies issue ratings to start up companies
Reinsurer
Allied World Assurance
Arch Re
Aspen Re
AXIS
Catlin Insurance Co.
DaVinci Re
Endurance
Montpelier Re
Olympus Re
Platinum Underwriters
AM Best & Co.
A+
A-
A
A
A
A
A
A
A-
A
Start Up Credit Ratings
Standard & Poor's
NR
NR
A
A
NR
A
A-
A-
NR
NR
Guy Carpenter 23
Exited 2001 - 2004
Name Reason Net Premiums Year(US$ millions) exited
AXA Corporate Solutions Re Strategic 2,572 2003Atlantic Mutual (Atlantic Re) Strategic 553* 2003Auto-Owners Insurance Co. Strategic 2,797* 2003Centre Re Financial Difficulty 610 2002CNA Re Strategic 605 2003Commercial Risk Partners Financial Difficulty 642 2001Copenhagen Re Financial Difficulty 271 2001Erie Insurance Group Strategic 3,563* 2003Europa Re Strategic 145* 2001Farm Family Casualty Insurance Co. Strategic 338 2003Fortress Re Financial Difficulty 2003Gerling Global Re Financial Difficulty 4,463 2002Hartford Re Strategic 703 2002Overseas Partners Re Financial Difficulty 601 2001PMA Re Financial Difficulty 384 2002Scandinavian Re Financial Difficulty 2003SCPIE Indemnity Financial Difficulty 253* 2002St. Paul Re Strategic 751 2002SPS Re Strategic 170 2002Lloyd's Syndicate 102 (Goshawk) Financial Difficulty 114 2002Lloyd's Syndicate 839 (Trenwick) Financial Difficulty 201 2002
* Figures include primary and reinsurance business.
Guy Carpenter 24
Major Reinsurance Centers:Financial State in 2004
Bermuda– Profitable– Hurricanes impact reduced by FHCF– Exposed to new Florida “take-outs”
US– Profitable
UK– Profitable– Lloyd’s reducing capacity in 2005
Guy Carpenter 25
Security Assessment
Renewals in 2005
Reinsurance Market Review
Guy Carpenter 26
2005 Renewals
Property
Casualty
Guy Carpenter 27
U.S. – Cat Property Rate On Line Index*
0
100
200
300
89 90 91 92 93 94 95 96 97 98 99 0 01 02 03 04
RO
L
* 1989=100. Index constructed by Guy Carpenter & Company, Inc.
Guy Carpenter 28
Insured Losses from 2004 Hurricanes$ billions
Charley Frances Ivan Jeanne
U.S. $6.8 $4.4 $6.0 $3.2
Caribbean $0.1 $0.5 $1.5 N/A
Total $6.9 $4.9 $7.5 $3.2
US data for Charley, Frances, Ivan and Jeanne from PCS. Other figures from model estimates.
Guy Carpenter 29
Price– Nationals pricing about flat.– Average ROL down marginally for about 3% for regionals– Florida exposure a concern (developing issue)– Market most competitive at upper layers
Retentions and limits stable Horizontal exposures a concern (active 2004 hurricane and typhoon seasons)
– Pricing high Terms and Conditions
– Some extension from 72 hours to 96 hours– Terrorism - following TRIA.
Personal lines get full cover Commercial lines get cover for “domestic” terror.
– Brushfire defined by location, not ignition source Capacity
– Generally available. Decrease in oversubscriptions from 2004
U.S. Property Catastrophe 2005 Renewals
Guy Carpenter 30
U.S. Property Renewals, 2005 (Excluding Catastrophe)
US Property:
– Per risk Pricing flat or down SPI growth implies significant drop in contract rates Reinsurers concerned over softness in primary
property market
– Margins in pro rata renewing at expiring Florida exposure a concern. Aggregate caps
imposed.
– Capacity adequate
Guy Carpenter 31
2005 U.S. Casualty Renewals
Workers Compensation
Medical Malpractice
Directors & Officers
Errors & Omissions
Employment Practices
Umbrella and Excess
Guy Carpenter 32
2005 U.S. Casualty Renewals Workers Comp
Primary pricing strong
– Abundant capacity in catastrophe layers
– Market improved , but still firm for single claimant exposures
Terror issue:
– In-depth evaluation of exposure
– Non-certified free (ex NBC)
Security concerns
Guy Carpenter 33
2005 U.S. Casualty RenewalsMedical Malpractice
Primary market recovering, but 20 states in crisis
Pricing main issue, not capacity (new Bermuda capacity)
Reinsurance rate stable (unless unfavorable loss history)
Problem areas:
– Start-ups
– Pro rata medical professional liability
– Tort terrors Cook County IL, South Florida
Guy Carpenter 34
2005 U.S. Casualty Renewals Directors & Officers
Imbalance between soft primary market and firm reinsurance market
Rates declining on primary business
Reinsurance firm because:– Exits from the line, notably Converium– Security issue reduces potential reinsurance panel– Heightened concerns on Financial Institutions – Rising settlement values
Ceding commissions under fire as underlying premium viewed as inadequate
Return of loss ratio caps and loss corridors
Guy Carpenter 35
2005 U.S. Casualty Renewals Errors & Omissions
– Primary market expected to soften in 2005– A diverse line, with varying market conditions– At January 1, 2005, ceding commissions and terms
dependent on type of business, loss experience and portfolio size
– Difficult lines include: Large Accountants Large Lawyers Project Architects & Engineers Large Technology E&O Start-ups pushed to Quota Share
Guy Carpenter 36
2005 U.S. Casualty Renewals Employment Practices
– Mild softening of of the primary market in 2004 and continuing into 2005
– Reinsurance renewals tend to be at expiring
– Increasing concerns by reinsurers on third party EPLI claims
Guy Carpenter 37
2005 U.S. Casualty RenewalsUmbrella and Excess
Primary market
– Flat to single digit increases in rates in early 2004
– Single digit decreases to flat later in 2004
– Some classes saw 10-15% decreases
– Decreases in single digit range anticipated in 2005
Reinsurance market
– Reinsurers do not view original rates as redundant
– Reinsure pricing also reflecting fear of inadequacy, and possible recurrence of poor 1997-2001 years
– Quota share: Increased pressure for ceding commissions on a cost plus basis. Pressure to minimize override in ceding commission
– Pressure from reinsurers for mold, asbestos, silica, tobacco and terror exclusions
Guy Carpenter 38
Summary
Finances of reinsurers improved
New non-legacy capital expanding in capacity and scope
Moderate softening at reinsurance renewals in January, 2005
TRIA and market security over-riding concerns
Bill Godfrey
State of the Reinsurance Market
Midwest Actuarial Forum
March 22, 2005