Insurance - AM Best · • Need to enhance analytical capabilities Power Imbalance • Big 3 ‒...

InsuranceMarket Briefing ‒ Europe

etc. venues, London

12 November 2019

© AM Best Company, Inc. (AMB) and/or its licensors and affiliates. All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW ANDNONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED,REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANYMEANS WHATSOEVER, BY ANY PERSON WITHOUT AMB’s PRIOR WRITTEN CONSENT. All information contained herein is obtained by AMB from sources believed by it tobe accurate and reliable. AMB does not audit or otherwise independently verify the accuracy or reliability of information received or otherwise used and therefore all informationcontained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall AMB have any liability to any person or entity for (a) any loss or damage in wholeor in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of AMB or any of itsdirectors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any suchinformation, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if AMB is advised inadvance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings, financial reporting analysis, projections, and otherobservations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact orrecommendations to purchase, sell or hold any securities, insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particularfinancial obligation for a specific purpose or purchaser. Credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. Credit ratings donot address any other risk, including but not limited to, liquidity risk, market value risk or price volatility of rated securities. AMB is not an investment advisor and does not offerconsulting or advisory services, nor does the company or its rating analysts offer any form of structuring or financial advice. NO WARRANTY, EXPRESS OR IMPLIED, AS TOTHE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION ORINFORMATION IS GIVEN OR MADE BY AMB IN ANY FORM OR MANNER WHATSOEVER. Each credit rating or other opinion must be weighed solely as one factor in anyinvestment or purchasing decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluationof each security or other financial obligation and of each issuer and guarantor of, and each provider of credit support for, each security or other financial obligation that it mayconsider purchasing, holding or selling.

2

3

US Securities Laws explicitly prohibit the issuance or maintenance of a credit rating where a person involvedin the sales or marketing of a product or service of the CRA also participates in determining or monitoring thecredit rating, or developing or approving procedures or methodologies used for determining the credit rating.

No part of this presentation amounts to sales / marketing activity and AM Best’s Rating Divisionemployees are prohibited from participating in commercial discussions.

Any queries of a commercial nature should be directed to AM Best’s Market Development function.

EMEA Market Overview:Update on Credit Rating Activity and Outlooks

Greg Carter

Managing Director, Analytics ‒ EMEA & Asia Pacific

Join Q&A at slido.com#IMB2019

Agenda

5

Rating Activity

Credit Drivers

Outlook

Rating Actions

6

Rating Units≈300

Upgrades16

Downgrades8

Under Review4

(Positive 2, Developing 2)

Outlook Changes

7

Negative to Stable3

Stable to Positive4

Stable to Negative6

Under Review ‒ Resolutions

8

Positive to Positive Outlook1

Developing to Stable Outlook6

Developing to Negative Outlook1

Negative to Stable Outlook1

Negative to Negative Outlook1

Best’s Credit Rating Methodology (BCRM) –Building Blocks

9

Balance Sheet Strength

Baseline

Balance Sheet

Strength

Baseline

Operating Performance

(+2/-3)

Business Profile

(+2/-2)

Enterprise Risk Management

(+1/-4)

Comprehensive Adjustment (1)

(+1/-1)

Rating Lift/Drag (2)

Issuer Credit Rating

Country Risk

Maximum + 2

Notes:1: A comprehensive adjustment can be applied of + 1 or - 1 for creditworthiness not captured elsewhere2: Applies to assessment of non-lead rating units in relation to the broader organisation leading to lift/drag +4 to -4

Credit Drivers ‒ Causes of Rating Actions

10

Changes in Balance Sheet Strength not a Major Factor

Operating Performance Building Blocks

Upgrades 8, Downgrades 2

No Changes in Business ProfileChanges to Lift/Drag

Upgrades 7, Downgrades 2

Outlook – Future Credit Drivers

11Source: 7th Banana Skins Survey ‒ 2019. 927 respondees from 53 territories.

Centre for the Study of Financial Innovation2019 Rank Risk 2017 Rank

1 Technology 32 Cyber Risk 23 Change Management 14 Regulation 65 Investment Performance 56 Climate Change -7 Competition 88 Human Talent 99 Macro-Economy 7

10 Interest Rates 4

Possible Impact on Ratings

12

RiskBalance Sheet

StrengthOperating

PerformanceBusiness

ProfileEnterprise Risk

Management

1 Technology L M H H

2 Cyber Risk M H L H

3 Change Management M L M H

4 Regulation M L L M

5 Investment Performance M H L L

6 Climate Change M M L L

7 Competition M H H L

8 Human Talent L L M H

9 Macro-Economy M H L L

10 Interest Rates M M L L

13

Q&AGreg Carter

Managing Director, Analytics ‒ EMEA & Asia Pacific


Thematic Session: Distribution in the London Market - Trend Review

Catherine Thomas

Senior Director, Analytics


Expense Reduction Essential

15Source: AM Best data and research* The composition of AM Best's Reinsurance Composite changes over time as companies enter and exit the market or rating process

• Expense ratios ‒ compare unfavourably vs peers

• Inefficiencies associated with placing business

• High reliance ‒ broker distribution

• Growth of coverholder business ‒ driving higher acquisition costs

• Risk exchange to reduce costs associated with low complexity business

• Complex risk platform to increase efficiency of placement and improve data quality, capture and accessibility

Five-Year Average 2017 2018

Global Reinsurance Market

34.0 33.6 34.0

Lloyd's 39.7 39.5 39.2US & Bermuda Market 33.0 31.7 33.0European Big Four Market

32.0 32.2 32.4

Global Reinsurance Expense Ratios

Lloyd’s Expense Ratio

2016 2017 2018Acquisition expense ratio 26.6 27.0 27.3Admin expense ratio 14.0 12.5 11.9Total expense ratio 40.6 39.5 39.2

16

Realising Expense Efficiencies

• Market participants need to ensure own systems are appropriate and compatible

• Execution risk – high level of investment and cultural change required

• Structured data capture, standardisation and sharing to play increasingly important role in placement of risk

Data Analytics

• Participants able to turn data into useful information will profit

• Risk carriers using data analysis to support decisions on individual risks, portfolio steering and capital allocation

• Brokers using data to gain a better understanding of clients and to add value to offerings

• Using analytics to match capital to risk

Making Better Use of Technology and Data

Demonstrating Value Through the Chain

17

• Each party compensated for their contribution to the process

• Pressure to realise efficiencies growing

• All parties need to demonstrate the value they add

• Roles blurring

• Potential for participants to fall out of the value chain

• Insurtech and alternative capital touch various points along the chain

Insured Retail broker MGA

Wholesale brokerInsurerReinsurance

broker

Reinsurer Retro broker Retrocessionaire

Consolidation Increasing Broker Power

18

M&A Drivers

• Private equity appetite

• Availability of relatively cheap debt

• Lower capital/regulatory burden relative to risk carriers

• Revenue growth

• Economies of scale

• Need to enhance analytical capabilities

Power Imbalance

• Big 3 ‒ Place 41% of Lloyd’s premiums

• Generate 14% of revenues from Lloyd’s

• Power imbalance greater at the individual company level

• Larger brokers have capabilities and resources to invest in technology and analytics

• Smaller brokers need to be innovative and flexible

Growth of MGA Model

19

Underwriting Teams

• Teams available due to M&A disruption

• Underwriters have more control and independence

• Flexible capital support

Risk Carriers

• Can extend distribution

• Speeds up entry into new lines of business

• Means to access niche and emerging risks

Brokers

• Investment in MGAs increasing

• Provide another distribution channel

• More innovative and agile product development

• Increased use of third-party capital

Efficiently Connecting Risk with Capital

20

• All market participants under pressure to demonstrate benefits they provide to the end customer• Insurers viewed as pure capacity

providers will struggle to attract business

• Brokers that cannot offer services beyond the placement of risk likely to be disintermediated

• Expect further blurring of roles between risk carriers and intermediaries:

• As they make better use of data through enhanced analytics; and

• Capital structures evolve• Successful market participants will

need to be flexible and innovative in the way they source risk and use available capital

• Embracing new technology will be key to reducing operating costs and improving service standards

21

Q&ACatherine Thomas

Senior Director, Analytics


Thematic Session: Global Reinsurance Market Highlights

Stefan Holzberger

Senior Managing Director & Chief Rating Officer


56.2% 56.2% 60.6% 76.5% 68.2% 63.5%

33.5% 34.2% 34.7%33.6% 34.0% 34.0%

0%

5%

10%

15%

20%

25%

30%

0%

20%

40%

60%

80%

100%

120%

2014 2015 2016 2017 2018 5yr Avg

ExpenseRatio

Loss Ratio

LossReserveDevelopment

Global Reinsurance Sector – Combined Ratio

89.7% 90.4%95.2%

110.1%102.2%

97.5%

Global Reinsurance Market Trends

23Source: AM Best data and research

11.6%9.5%

8.3%

-0.3%1.0%

2014 2015 2016 2017 2018

Five Year Average 6.0%

Global Reinsurance Market Performance


Return on Equity

Global Reinsurance Market Performance


11%

7%8%

5%6%

3%

Five-Year Average Return on Equity Five-Year Average Return on Equity (Excluding Loss Reserve Development)

Year-End 2016Year-End 2017Year-End 2018

Global Reinsurance Market

Global Reinsurance Market Capital

26Sources: Estimates by Guy Carpenter and AM Best

Estimate - Total Dedicated Reinsurance Capital (USD billions)

292 320 340 332 345 345 341 346

19 48 60 68 75 87 95 92 311

368 400 400 420 432 436 438

2012 2013 2014 2015 2016 2017 2018 2019E

Third-Party –Trapped Portion(High Estimate)

Third-Party –Trapped Portion(Low Estimate)

Third-Party

Traditional

Global Reinsurance Market - Price/Book Value

27

Notes and Sources: 1996 to Present. Excludes accumulated other comprehensive income.

AM Best data and research, Bloomberg, company reports and accounts

40

60

80

100

120

140

160

180

200

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Pric

e/B

ook

Valu

e

Average

Current P/BV: 1.18x Average 1994-Present: 1.17x

Low Reached March 2009 (0.75x BV)

Peak reached February 2002 (1.83x BV)

1.0x P/BV

Announced Acquirer Acquiree Price (USD mm)

Price to Tangible BV

9-Jan-15 XL Group Catlin Group Limited 4,100 1.27x

3-Aug-15 EXOR PartnerRe 6,900 1.19x

5-Oct-16 Sompo Endurance 6,304 1.36x

6-Jul-17 AXIS Novae 604 1.50x

Announced Acquirer Acquiree Price (USD mm)

Price to Tangible BV

22-Jan-18 AIG Validus 5,560 1.53x

4-Mar-18 AXA XL Group 15,300 1.96x

28-Aug-18 Apollo Aspen 2,600 1.08x

30-Oct-18 RenRe Tokio Millennium 1,469 1.02x

Global Reinsurance Market Capital

28Sources: AM Best data and research

174 205 216 223 229

209 203

74% 71% 70% 73% 72% 72% 81%

2013 2014 2015 2016 2017 2018 2019ECapital Depletion Needed to Reach 10% @ 99.6 Capital Utilisation

Excess Capital and Capital Utilisation (USD billions)

Global Reinsurance Market Outlook

29

Headwinds TailwindsIntense competition Alignment between traditional and third-

party capitalExcess capacity limits the potential forimprovement

Improving pricing discipline for property cat and retro in particular

Increased loss cost inflation Accelerating pricing momentum at the primary insurance level

Less cushion in carried reserves US economic growth slows, but continues

Continued interest from third-party capital (beyond property cat)

Use of third-party capital in retrocession programs reducing earnings volatility

December 2018 – AM Best revised the outlook on the Global Reinsurance sector to Stable

30

Q&AStefan Holzberger

Senior Managing Director & Chief Rating Officer


Thematic Session:Investments and Illiquid

Assets Classes Anthony Silverman

Associate Director, Analytics


Where we Start

32

• Illiquid asset developments – a defining trend?• Now circa 15% of insurance funds,

7% for non-life• Mounting evidence of a pivotal

change in insurers’ commitment to these assets

• Illiquid asset categories• Typically assets are - infrastructure

and property equity and debt, other direct lending, equity release mortgages, private equity and other assets

• AM Best surveyed European clients Responses mostly in Q2 2019 Referenced circa EUR 3 trillion of

investment assets, real estate and loans excluding unit linked assets

Questions answered using insurer’s own definition of illiquid assets

Focused on changes envisaged over coming five years, and rationales for those changes

• Special Report published

“Of the maxims of orthodox finance, none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of ‘liquid’ securities.” (1936)

Illiquids Have a Natural Place on the Agenda

33

• Insurers need ability to realise investments• But:

• Liquid markets appeal to a wide universe of investors, most of whom need liquidity more than insurers do

• Do liquid markets benefit issuers at least as much as insurance sector investors?

• Illiquids, at some level, are an established part of the asset mixLongstanding question, in some quarters, whether more should be heldJohn Maynard Keynes -

Holdings have been increasing

Reasons include• Low rates, search for

yield• But also:

• Payment for illiquidity, bank bail-ins over 2006-8

• Assets move to private sphere, distortions in listed markets

• Monetising skills

34

Increase illiquid assets

Experience over 2006-

2008

Squeeze on underwriting

Illiquidity reward, financial reporting

Low interest rates

Enhancing franchise, optimisingskill sets

Stewardship concerns,

listed markets

Migration of assets, public

to private

Survey … Experience Has Been Supportive

• Existing allocations have performed

• Absence of negative experience to date is remarkable

• Future is more… uncertain


0%

20%

40%

60%

80%

100%

Exceededexpectations

Fallen short ofexpectations

Very closely matchedforecast returns

Over the past 12 months, returns on illiquid assets have...

Unweighted Weighted

It’s going up

• Clear balance in favour of increase

• Weighted responses show overwhelming intent to increase


Anticipated change in allocation to illiquid assets over next five years

Unweighted Weighted

0%

20%

40%

60%

80%

100%

Increase Decrease No change

It Will be a Material Change

• Survey tells us increased allocations will be highly visible

• Questions arise including:

• Risk

• Implementation

• Rationales


0%

10%

20%

30%

40%

50%

60%

70%

<2% 2% - 5% 5% - 15% >15%

Anticipated change in illiquid assets over five years(% of total fund value excluding UL)

Unweighted Weighted

Drivers of Change Going Forwards

• Risk/return dominates

• A diversification for most insurers, at this stage

• Responses on regulation may surprise some

• Environmental, Social and Governance (ESG) benefit


Main drivers of change in allocation to illiquid assets

Positive Negative

0%

20%

40%

60%

80%

100%

Return / risk Productpricing

Diversification Matchingliabilities

Social /community

impact

Regulatoryconsiderations

Larger Insurers go Direct

• It may be an existing skill – but mostly for larger insurers

• For smaller insurers it’s:

• More of a challenge• Skill set is managing

allocations, setting targets

• Potentially a competitive disadvantage


How will majority of Illiquid Assets be Sourced?

Direct investment Third-party asset manager

0%

20%

40%

60%

80%

100%

Unweighted Weighted

But Third-Party Expertise is Key for Certain Assets

Notes:Percentage of respondents.Source: AM Best data and research

Implementation by Category (%)• Most insurers go indirect

– except in commercial property equity

• But larger insurers go direct across all infrastructure, property categories

• Third-party expertise widely used in private market debt, equity release mortgages, private equity including by larger insurers

DirectIndirect

n/a, not invested

DirectIndirect

n/a, not invested

0% 20% 40% 60% 80% 100%

UnweightedWeighted

Infrastructure Equity

Infrastructure Debt

Commercial Property Equity

DirectIndirect

n/a, not invested

DirectIndirect

n/a, not invested

Commercial Property

Debt

DirectIndirect

n/a, not invested

Private MarketDebt

EquityRelease

Mortgages

DirectIndirect

n/a, not invested

Private Equity& Other

DirectIndirect

n/a, not invested

Rationales Vary in Emphasis

• Rank four only rationales and scored, weighted by investment assets

• Equity categories emphasiserisk/return

• Commercial property and private market debt also are returns based, and provide diversification plus some matching

• Slightly weaker risk/return plus strong emphasis on matching and/or diversification for other categories

41

0.0

1.0

2.0

3.0

4.0

5.0

Rationale scores

Risk/return Product pricing DiversificationMatching Social/community Regulation

Source: AM Best data and research

Infrastructure (Equity)

Infrastructure (Debt)

Commercial Property (Debt)

Commercial Property (Equity)

Private MarketDebt

EquityRelease

Mortgages

PrivateEquity

and Other

Allocations to Illiquid Asset Categories

• A number of insurers are not invested, most are well diversified

• Larger insurers more likely to be invested across all categories

• Particularly so for Commercial property debt and equity, infrastructure equity

• Commercial property equity and private market debt show significant weighted responses for >20%

Notes:Percentage of respondents.Source: AM Best data and research

Unweighted

Weighted

n/a, not invested<20%>20%

0% 20% 40% 60% 80% 100%Allocation to Category







Infrastructure Equity

Infrastructure Debt

Commercial Property Equity

Commercial Property

Debt

Private MarketDebt

EquityRelease

Mortgages

Private Equity& Other

Rating Considerations

• Assessed with regard to Quality and diversification of assets Uncertainty of realised value Asset/liability management Duration management Wider investment management capabilities

• A directionally appropriate and mostly positive stepin the current environment

• It’s an innovation consideration• But illiquids are a major challenge to risk management

43

Illiquid assets are evolving into a pivotal development for the industry. AM Best will continue to engage with clients on the subject

44

Q&AAnthony Silverman

Associate Director, Analytics


Evaluating Innovation:AM Best's New Draft Criteria

Carlos Wong-Fupuy

Senior Director


Innovation – Why Now?


• Given the pace and magnitude of technological and societal changes, innovation is becoming increasingly critical for the insurance industry

• Insurance industry agrees, innovation is critical for future financial success

How Critical Is Innovation to the Success of Your

Organisation?

1%

12%

30%

42%

15%

Not critical

Somewhatcritical

Moderatelycritical

Very critical

Extremelycritical

What is AM Best’s Innovation Initiative?

47

Summer 2018• Survey of

Industry

Autumn 2018• Special

Report on Innovation

March 2019• Initial

Comment Period

Autumn 2019• Second

Comment Period + BCRM Revision

2020• Anticipated

Live Date of Innovation Criteria

Two Prongs of Innovation Initiative

48

All rated companies will be scored and then given an

innovation ability assessment

An absolute assessment of a

company’s level of innovativeness

As part of its business profile building block, AM Best will

consider whether a company’s innovation efforts have had a demonstrable impact on its

financial strength

Considers a company’s

innovativeness relative to its particular circumstances

Innovation – AM Best Definition

49

Step1

Step2

Step3

• A multi-stage process…

• … that transforms ideas into new or significantly improved:

• Products• Processes• Services• Business Models

• … that have measurable positive impact over time and enable an organisation to stay relevant and successful …

• … and can be created organically or adopted from external sources

Innovation Score

50

AM Best scoring:Innovation Input Score

+ Innovation Output Score

= Innovation Score

Innovation Input Score (1 to 4 for Each Component)

51

Leadership Culture

Resources Processes and Structure

Input = Leadership + Culture + Resources + Processes and Structure

Innovation Output Score (1 to 4 for Each Component)

52

Results Level of Transformation

Output Score = 2 × (Results + Level of Transformation)

Innovation Assessment

53

• Companies will receive an innovation score which is bucketed into 5 groupingsMinimal

Score of less than

12

Moderate

Score between 12 and 17

Significant


Prominent


Leader

Score of28

or higher

• These are equal to the assessments of insurer’s innovation ability

54

PanelInnovation and Technology in

(Re)Insurance

Senior Director,AM Best

Carlos Wong-Fupuy

Head of Innovation,Brit Insurance

James BirchActing Managing Editor,The Insurance Insider

Catrin Shi

Head of AXA Next Labs, EuropeParul Kaul-Green

Head of Innovation,Tokio Marine Kiln

Tom Hoad


InsuranceMarket Briefing ‒ Europe

etc. venues, London

12 November 2019

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