Seminar on ReinsuranceSeminar on Reinsurance
Stefan HolzbergerStefan HolzbergerManaging Sr. Financial AnalystManaging Sr. Financial Analyst
A. M. Best CompanyA. M. Best CompanyJune 2, 2003June 2, 2003
22
Objective of Best’s RatingObjective of Best’s Rating
Financial Strength RatingFinancial Strength Rating Opinion as to (Re)insurer’s Ability to Meet Opinion as to (Re)insurer’s Ability to Meet
Obligations to Cedants / PolicyholdersObligations to Cedants / Policyholders
Debt RatingDebt Rating Opinion as to (Re)insurer’s Ability to Service Opinion as to (Re)insurer’s Ability to Service
Debt and Meet Obligations to Security Debt and Meet Obligations to Security HoldersHolders
33
Counterparty Rating Counterparty Rating ApproachApproach
Counterparty Rating
Financial Strength of Insurance Operations
Debt Ratings
Financial StrengthRatings
Holding Company
Non-InsuranceBusinesses
44
Financial Strength RatingFinancial Strength RatingKey ComponentsKey Components
Balance Sheet Strength
Operating Performance
BusinessProfile
Best’s Rating
55
Best’s Rating EvaluationBest’s Rating EvaluationBalance Sheet StrengthBalance Sheet Strength
Capitalization / LeverageCapitalization / Leverage
Capital Structure / Holding CompanyCapital Structure / Holding Company
Quality / Soundness of ReinsuranceQuality / Soundness of Reinsurance
Adequacy of Loss ReservesAdequacy of Loss Reserves
Quality / Diversification of AssetsQuality / Diversification of Assets
LiquidityLiquidity
66
Best Rating EvaluationBest Rating EvaluationOperating PerformanceOperating Performance
ProfitabilityProfitability
Revenue CompositionRevenue Composition
Management Experience & StrategyManagement Experience & Strategy Ability to Meet PlanAbility to Meet Plan
SustainabilitySustainability
77
Rating Evaluation Rating Evaluation Business ProfileBusiness Profile
Market RiskMarket Risk
Competitive Market PositionCompetitive Market Position
Spread of RiskSpread of Risk ProductProduct GeographicGeographic
Event RiskEvent Risk
Regulatory RiskRegulatory Risk
Sustainable Competitive AdvantageSustainable Competitive Advantage
88
Why Business Profile and Why Business Profile and Operating Performance?Operating Performance?
Leading Indicators of the Future Balance Sheet
Finan
cial
Str
ength
Strong Business Profile and Operating Performance
Weak Business Profile and Operating Performance
Last Balance
Sheet
Today Time
99
Rating ConsiderationsRating Considerations
SecureA++ B+
VulnerableB D
Balance SheetStrength
OperatingPerformance
BusinessProfile
Outstanding
Very Stable/Strong
Strong /Sustainable AdvantagesWell-Diversified
Weak
Volatile/Poor
Questionable ViabilityCompetitive Disadvantages
Concentrated Risk
1010
Best’s Rating PerspectiveBest’s Rating Perspective
Capital Strength is KeyCapital Strength is Key
Sustainable, Stable Operating ProfitabilitySustainable, Stable Operating Profitability
Diversified / Strong Profile = StabilityDiversified / Strong Profile = Stability
1212
Reinsurance Rating TrendsReinsurance Rating Trends
Downgrades Outpace UpgradesDowngrades Outpace Upgrades
Superior Rated Companies DeclineSuperior Rated Companies Decline
Negative Rating Outlooks on the RiseNegative Rating Outlooks on the Rise
Ratings Move to Vulnerable CategoryRatings Move to Vulnerable Category
European Reinsurers Leave U.S. Market European Reinsurers Leave U.S. Market
1313
High Profile Rating ChangesHigh Profile Rating Changes
FromFrom ToTo
American ReAmerican Re A++A++ A+A+
Employers’ ReEmployers’ Re A++A++ A+A+
St Paul Re (now Platinum) St Paul Re (now Platinum) A+A+ AA
AXA Corp. Solutions Re (US)AXA Corp. Solutions Re (US) A+A+ BB
SCOR (US)SCOR (US) A+A+ A-A-
Gerling Re (US)Gerling Re (US) A-A- B-B-
1414
Effects of Hard Market Effects of Hard Market Tempered in 2002 Tempered in 2002
Significant Reserve ShortfallsSignificant Reserve Shortfalls
Underlying Loss Cost TrendsUnderlying Loss Cost Trends
Underpricing More Severe Than AnticipatedUnderpricing More Severe Than Anticipated
Underestimated WTC LossesUnderestimated WTC Losses
Asbestos Losses Asbestos Losses
Credit Losses Credit Losses
1515
TerrorismTerrorismPrimary Companies Mandated to Offer Primary Companies Mandated to Offer Terrorism CoverTerrorism CoverTRIA (US Terrorism Risk Insurance Act)TRIA (US Terrorism Risk Insurance Act) Excludes Reinsurers from Mandatory CoverageExcludes Reinsurers from Mandatory Coverage
Clash Potential Remains a ConcernClash Potential Remains a ConcernReinsurers Offer CoverReinsurers Offer Cover Cost is ProhibitiveCost is Prohibitive In an Event – Will Rates be High Enough?In an Event – Will Rates be High Enough?
1717
Reinsurance Financial TrendsReinsurance Financial Trends
Composite of US Based Reinsurers
2001 2002 2003PChange in NPW (%)Change in Surplus (%)
3.4(19.9)
17.8 5.2
22.010.9
Combined Ratio 142.4 117.5 109.2Change in Net Inv. Income (%)Investment Yield
(2.3)4.1
0.1 4.0
2.23.8
After-tax Return on Surplus (%)NPW/PHS (Reported)
(7.2) 0.5
(4.2) 0.6
3.2 0.6
1818
Reshaping the MarketReshaping the Market
Continued Rate Increases For Second Continued Rate Increases For Second Consecutive Year Consecutive Year
Tighter Terms & ConditionsTighter Terms & Conditions
Limited Capacity for Certain RisksLimited Capacity for Certain Risks
Shift from Customer Focus to U/W FocusShift from Customer Focus to U/W Focus
Flight to QualityFlight to Quality
Withdrawal of CapacityWithdrawal of Capacity
Entry of New CapitalEntry of New Capital
1919
New Capital – BermudaNew Capital – Bermuda
CompanyCompany SponsorSponsor
Initial Initial CapitalCapitalRaisedRaised
Axis Specialty LimtedAxis Specialty Limted Marsh & McLennanMarsh & McLennan $1.7 billion$1.7 billion
Allied World AssuranceAllied World Assurance AIG/Chubb/Goldman SachsAIG/Chubb/Goldman Sachs $1.5 billion$1.5 billion
Endurance Specialty Endurance Specialty AONAON $1.2 billion$1.2 billion
Montpelier ReMontpelier Re White Mtns./Beinfield GreigWhite Mtns./Beinfield Greig $1.1 million$1.1 million
Arch Reinsurance Ltd.Arch Reinsurance Ltd. Arch Capital/Warburg/HellmanArch Capital/Warburg/Hellman $1.0 billion$1.0 billion
Platinum U/W Holdings LtdPlatinum U/W Holdings Ltd St. Paul Spin OffSt. Paul Spin Off $1.0 billion$1.0 billion
Olympus Reinsurance LtdOlympus Reinsurance Ltd White MountainsWhite Mountains $500 million$500 million
Expectations & Rating OutlookExpectations & Rating Outlookfor thefor the
Reinsurance SectorReinsurance Sector
2121
Future ExpectationsFuture ExpectationsInvestor Expectations Remain HighInvestor Expectations Remain High So Far Have Been UnrewardedSo Far Have Been Unrewarded
Earnings Must Come From UnderwritingEarnings Must Come From Underwriting
Adherence to Operating FundamentalsAdherence to Operating Fundamentals
Pricing Models Reestablished Pricing Models Reestablished
Rates Continue to Rise Although SlowerRates Continue to Rise Although Slower
Program Structures AmendedProgram Structures Amended
Focus on Capital / Risk ManagementFocus on Capital / Risk Management
2222
Reinsurance Rating OutlookReinsurance Rating Outlook
Leaders Maintain Superior Financial StrengthLeaders Maintain Superior Financial Strength
Additional Reserve StrengtheningAdditional Reserve Strengthening
Weaker Players Continue to be ChallengedWeaker Players Continue to be Challenged
Favorable Market Sustained for Near-TermFavorable Market Sustained for Near-Term In Most Lines of BusinessIn Most Lines of Business