Global Reinsurance Highlights 2018 - S&P Global Ratings

Page created by Harry Morris
Global Reinsurance Highlights 2018 - S&P Global Ratings
Highlights 2018

                  PUBLISHED BY:
Global Reinsurance Highlights 2018 - S&P Global Ratings
Global Reinsurance Highlights 2018 - S&P Global Ratings
Global Reinsurance Highlights
2018 Edition

For further information, please visit our global reinsurance topic page:

                                                                           Global Reinsurance Highlights | 2018   3
Global Reinsurance Highlights 2018 - S&P Global Ratings
Global Reinsurance Highlights 2018 - S&P Global Ratings

For S&P Global Ratings                                                               For Intelligent Insurer
Project leaders                             Editorial Project Coordinator            Publisher
Johannes Bender                             Fleur Hollis                             Graeme Cathie
Taoufik Gharib                                                                       Tel: +44 (0) 203 301 8238
David Masters                               Editorial Team                 
                                            Heather Bayly, London
Contributors                                Jennie Brookman, Frankfurt               Editor
Johannes Bender, Frankfurt                  Jenny Ferguson, Paris
                                                                                     Wyn Jenkins
WenWen Chen, Hong Kong                      Cathy Holcombe, Hong Kong
                                                                                     Tel: +44 (0)203 301 8214
Sebastian Dany, Frankfurt                   Valerie Lord, Toronto
Charles-Marie Delpuech, London              Jo Parker, Toronto             
Taoufik Gharib, New York                    Greg Paula, Centennial
Maren Josefs, London                        Daniela Stauble, Frankfurt               Sub editor
Milan Kakkad, Mumbai                                                                 Ros Bromwich
Ali Karakuyu, London
Saurabh Khasnis, Centennial                                                          Director
Hardeep Manku, Toronto                                                               Nicholas Lipinski
David Masters, London
Aurelie Salmon, London
                                                                                     Design and Production
Eunice Tan, Hong Kong
                                                                                     Garrett Fallon
Simon Virmaux, Paris
                                                                                     Russell Cox
Data Team                                                                            Tina Eldred
Ruchika Agrawal, Mumbai
Yevhen Deriy, New York                                                               Cover image
Patrice Mizeski, New York                                                            istock photo / Pavel1964
Claire Latchford, London
Aurelie Salmon, London
Simon Virmaux, Paris
Antun Zvonar, New York

The views expressed in this publication are not necessarily those shared by          costs or losses caused by negligence) in connection with any use of the Content
the publisher, Newton Media Limited. Although Newton Media has made every            even if advised of the possibility of such damages.
effort to ensure the accuracy of this publication, no responsibility or liability
is accepted by Newton Media for any loss to any person, legal or physical, as        Credit-related and other analyses, including ratings, and statements in the
a result of any statement, fact or figure contained in this publication. This        Content are statements of opinion as of the date they are expressed and
publication is not a substitute for advice on a specific transaction.                not statements of fact. S&P’s opinions, analyses and rating acknowledgment
                                                                                     decisions (described below) are not recommendations to purchase, hold, or
The publication of advertisements does not represent endorsement by Newton           sell any securities or to make any investment decisions, and do not address the
Media or S&P Global Ratings.                                                         suitability of any security.
Newton Media Limited. Kingfisher House, 21-23 Elmfield Road, Bromley, BR1            S&P assumes no obligation to update the Content following publication in any
1LT, United Kingdom                                                                  form or format. The Content should not be relied on and is not a substitute for
Published in part by S&P Global Ratings, a part of S&P Global.                       the skill, judgment and experience of the user, its management, employees,
                                                                                     advisors and/or clients when making investment and other business decisions.
Executive offices: 55 Water Street, New York, NY 10041.                              S&P does not act as a fiduciary or an investment advisor except where
                                                                                     registered as such.
Editorial offices: 55 Water Street, New York, NY 10041.
                                                                                     While S&P has obtained information from sources it believes to be reliable,
Copyright 2018 by Standard & Poor’s Financial Services LLC.                          S&P does not perform an audit and undertakes no duty of due diligence or
Reproduction in whole or in part prohibited except by permission. All rights         independent verification of any information it receives.
reserved.                                                                            To the extent that regulatory authorities allow a rating agency to acknowledge
All advertising content has been sourced and placed by Newton Media. S&P             in one jurisdiction a rating issued in another jurisdiction for certain regulatory
Global Ratings receives no fee for the content of this publication.                  purposes, S&P reserves the right to assign, withdraw or suspend such
                                                                                     acknowledgement at any time and in its sole discretion. S&P Parties disclaim
No content (including ratings, credit-related analyses and data, valuations,         any duty whatsoever arising out of the assignment, withdrawal or suspension
model, software or other application or output therefrom) or any part thereof        of an acknowledgment as well as any liability for any damage alleged to have
(Content) may be modified, reverse engineered, reproduced or distributed in          been suffered on account thereof.
any form by any means, or stored in a database or retrieval system, without
the prior written permission of Standard & Poor’s Financial Services LLC or          S&P keeps certain activities of its business units separate from each other
its affiliates (collectively, S&P). The Content shall not be used for any unlawful   in order to preserve the independence and objectivity of their respective
or unauthorized purposes. S&P and any third-party providers, as well as their        activities. As a result, certain business units of S&P may have information that
directors, officers, shareholders, employees or agents (collectively S&P Parties)    is not available to other S&P business units. S&P has established policies and
do not guarantee the accuracy, completeness, timeliness or availability of the       procedures to maintain the confidentiality of certain non-public information
Content. S&P Parties are not responsible for any errors or omissions (negligent      received in connection with each analytical process.
or otherwise), regardless of the cause, for the results obtained from the use of
the Content, or for the security or maintenance of any data input by the user.       S&P may receive compensation for its ratings and certain analyses, normally
The Content is provided on an “as is” basis.                                         from issuers or underwriters of securities or from obligors. S&P reserves
                                                                                     the right to disseminate its opinions and analyses. S&P’s public ratings and
S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES,                      analyses are made available on its Web sites,
INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY                     (free of charge), and and
OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS,                       (subscription), and may be distributed through other means, including via S&P
SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING                           publications and third-party redistributors. Additional information about our
WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY                      ratings fees is available at
liable to any party for any direct, indirect, incidental, exemplary, compensatory,   S&P GLOBAL, S&P GLOBAL RATINGS, STANDARD & POOR’S, S&P and
punitive, special or consequential damages, costs, expenses, legal fees, or          RATINGSDIRECT are registered trademarks of Standard & Poor’s Financial
losses (including, without limitation, lost income or lost profits and opportunity   Services LLC.

                                                                                                                         Global Reinsurance Highlights | 2018        5
Global Reinsurance Highlights 2018 - S&P Global Ratings

8   Soundbites

10 Reinsurance Outlook
    The Top Global Reinsurers Are Breaking Away From The Pack

18 The Cost of Capital
    Global Reinsurers’ Returns Will Barely Cover Capital Costs In 2018
    And 2019

22 Catastrophe Risk
    Are Global Reinsurers Ready For Another Year Of Active Natural

28 Capital Adequacy
    Capitalization Remains A Pillar Of Strength For Global Reinsurers

36 ILS
    How Reinsurers Have Learned To Align Third-Party Capital With
    Their Needs

42 M&A
    Bulking Up: The Global Reinsurance Sector Marches Toward

48 China
    A Decade Since The Sichuan Earthquake, Catastrophe Reinsurance
    Is Gaining Momentum In China

52 Life Re
    Global Life Reinsurers’ Strong Fundamentals Fuel Future Growth

58 Mortgage Reinsurance
    Running At A Steady Pace: U.S. Mortgage Reinsurance Continues To
    Grow Despite The Credit Cycle Passing Its Peak

63 Global Reinsurance Peer Review

70 Top 40 By Company

72 Global Reinsurers By Country

84 Ratings Definitions

86 Addresses

6   Global Reinsurance Highlights | 2018
Global Reinsurance Highlights 2018 - S&P Global Ratings

A Marathon Rather Than A Sprint:
Reinsurers Take A Breather After 2017
Catastrophe Losses
By Johannes Bender, Taoufik Gharib, and David Masters

          iscussions for 2019 renewals in Monte Carlo are                   Global reinsurers are having to review their long-term
          happening after a tough natural catastrophe year in 2017,     relevance in a tough market that features heightened competition,
          which was among the costliest years on record, reminding      limited growth opportunities, and continued pressure on pricing.
the sector of its tail exposure. After years of declining property/     In Bulking Up: The Global Reinsurance Sector Marches Toward
casualty rates, renewals in 2018 brought modest increases and           Consolidation, we discuss merger and acquisition strategies to
a temporary breather for the sector. However, this effect is now        build scale, acquire expertise, and diversify.
fading and the sector continues to face weak business conditions.           In A Decade Since The Sichuan Earthquake, Catastrophe
    In our lead article, The Top Global Reinsurers Are Breaking Away    Reinsurance Is Gaining Momentum In China, we have a closer
From The Pack, we discuss why we still view business conditions         look at how the reinsurance sector participates in the growth of
as weak even after modest price increases in 2018 and a slightly        the Chinese economy and insurance market as well as the risks
upward trend in earnings anticipated for 2018 and 2019. We also         from expanding into the Chinese nonmotor property/casualty
outline that the sector’s strong enterprise risk management and         lines of business.
robust capitalization are the main pillars for our stable outlook           While the global property/casualty reinsurance sector
on the sector and for the majority of the reinsurers we rate. The       suffered heavy losses in 2017, the global life reinsurance sector
article also discusses which players in our view are best placed        remained solid, with stable returns and growth rates. In Global Life
to be winners in the market and addresses the question: What            Reinsurers’ Strong Fundamentals Fuel Future Growth, we explain
would happen to our view on the sector if its return on capital falls   how high barriers to entry and advanced risk management and
sustainably below its cost of capital?                                  underwriting capabilities are ensuring sound business conditions
    The article Global Reinsurers’ Returns Will Barely Cover            for the global life reinsurance industry, allowing it to outperform
Capital Costs In 2018 And 2019 discusses the development                the property/casualty reinsurance sector in 2018–2019.
of the sector’s returns compared with its cost of capital. In               U.S. mortgage reinsurance has been one of the few reinsurance
2017, cost of capital increased again after years of decreases,         business lines that has performed well in recent years, providing
while returns were hit heavily in 2017 following large natural          some relief to reinsurers troubled by the difficult market
catastrophe losses. Although we observed moderate                       environment. In Running At A Steady Pace: U.S. Mortgage
reinsurance rate increases, we believe reinsurers’ profitability        Reinsurance Continues To Grow Despite The Credit Cycle Passing
will barely exceed its cost of capital in 2018-2019 and reinsurers      Its Peak, we discuss reinsurers’ increasing appetite for this type of
continue to compete with alternative capital sources that               risk, profit opportunities, and the main risks in the U.S. mortgage
typically have a lower cost of capital.                                 reinsurance business.
    In Are Global Reinsurers Ready For Another Year Of Active               This year’s Global Reinsurance Highlights again includes a
Natural Catastrophes? we take a closer look at the 2017 natural         peer comparison supplement that exhibits some of the important
catastrophe losses and how they compared with reinsurers’               data points and trends that we’ve identified from our analysis of
exposure and modeling capabilities. Moreover, we discuss the            the sector. This year’s publication captures the key issues facing
sector’s appetite for catastrophe risk after 2017 losses and            reinsurance management, investors, and other stakeholders.
earnings and catastrophe budget buffers for 2018.                       We hope that you will enjoy the 2018 edition and welcome your
    In 2017, the top-20 global reinsurers lost their capital            feedback on possible enhancements for future years. n
redundancy at the ‘AAA’ confidence level for the first time since
the 2008 financial crisis. However, capital remained a strength         Johannes Bender
for the sector. In Capitalization Remains A Pillar Of Strength For      Frankfurt, (49) 69-33-999196
Global Reinsurers, we have a closer look at the development of risk
profiles and capital adequacy of the sector.
    Alternative capital in the form of insurance-linked securities      Taoufik Gharib
has transformed the market, especially in the property catastrophe      New York, (1) 212-438-7253
space, and even the natural catastrophe losses of 2017 have   
not dented investors’ enthusiasm for the asset class. In How
Reinsurers Have Learned To Align Third-Party Capital With Their         David Masters
Needs, we discuss what effect continued growth of alternative           London, (44) 20-7176-7047
capital has on reinsurers’ competitive positions.             

                                                                                                       Global Reinsurance Highlights | 2018   7
Global Reinsurance Highlights 2018 - S&P Global Ratings

                          Reinsurance Outlook
                         By Taoufik Gharib, Johannes Bender, David Masters, and Hardeep Manku
                       • Robust capitalization, strong enterprise risk management, and still-rational underwriting continue to support
                         our stable outlook on the global reinsurance sector.
                       • The sector is facing weak business conditions, as the influx of alternative capital continues to challenge
                         reinsurers’ business models.
                       • We’ve revised our 2018–2019 earnings forecast slightly upward following modest reinsurance price increases,
                         with an expected combined ratio of 96%–99% and a return on equity of 7%–9%.
                       • We could revise our outlook on the global reinsurance sector to negative if reinsurers’ return on capital falls
                         sustainably below their cost of capital.

                          The Cost Of Capital
                         David Masters and Taoufik Gharib
                       • The cost of capital has consistently fallen in recent years, but appears to have reached a floor at end-2016,
                         rising through 2017 due to rising interest rates and the volatility caused by heavy catastrophe losses.
                       • We think reinsurers’ profitability is likely to barely exceed their cost of capital in 2018 and 2019.
                       • The tide of cheaper alternative capital continues to compete with traditional players, who typically have a
                         higher cost of capital.
                       • Despite these challenges to industry fundamentals, market valuations for listed reinsurers remain at decade-
                         long highs.

                          Catastrophe Risk
                         By Charles-Marie Delpuech, Johannes Bender, and Taoufik Gharib
                       • Our relative natural catastrophe benchmark has performed well against 2017 experience, with losses
                         relatively in line with our expectations.
                       • Events in 2017 highlighted disparities in reinsurers’ exposure and modeling with return periods ranging from
                         below 1-in-10 years to 1-in-60 years for the annual aggregate loss.
                       • On average, reinsurers’ property catastrophe risk appetite at a 1-in-250-year return period rose only slightly, to
                         31% of shareholder equity, but we have seen increases or reductions by up to 10 percentage points for some
                       • The top-20 reinsurers in aggregate expect a catastrophe budget of about $11 billion or 8% of the combined
                         ratio for 2018. If not exceeded, this should enable the sector to report pretax profits of about $21 billion in
                         2018, reflecting a consolidated buffer of about $32 billion before capital would be hit in a natural catastrophe
                         stress scenario.

                          Capital Adequacy
                         By Taoufik Gharib, Charles-Marie Delpuech, Johannes Bender, Aurelie Salmon, and Simon Virmaux
                       • In 2017, the top-20 global reinsurers lost their capital redundancy at the ‘AAA’ confidence level for the first
                         time since the 2008 financial crisis.
                       • Although lower than in previous years, capital adequacy remained a strength in 2017, and was redundant by
                         7% at the ‘AA’ confidence level.
                       • Reinsurers have gradually shifted their underwriting appetite to primary and proportional reinsurance
                       • Liability risks continue to dominate the top-20 global reinsurers’ capital consumption.
                       • Catastrophe losses in 2017 weighed on reserve risk, while investment risk has been fairly stable.
                       • If 2018 ends up being an average catastrophe year, it is not implausible to assume that the top-20 global
                         reinsurers could regain their ‘AAA’ capitalization.

8   Global Reinsurance Highlights | 2018
Global Reinsurance Highlights 2018 - S&P Global Ratings

  By Maren Josefs, David Masters, Taoufik Gharib, and Johannes Bender
• Even after severe natural catastrophe events in 2017 there was more than enough inflow of alternative capital
  to renew coverage for cedants. This had the effect of limiting extreme price hikes. ILS funds now manage just
  under $100 billion of capital.
• Reinsurers have embraced third-party capital through instruments like sidecars, collateralized reinsurance,
  and catastrophe bonds. Increasingly, the retrocession market depends on this convergence capital.
• Overall, the use of alternative capital has helped the reinsurance industry to increase its premiums while
  maintaining its net exposures.
• Having demonstrated its capabilities in property catastrophe business, we continue to see alternative capital
  testing products in new areas, such as casualty or life reinsurance. The increased complexity and longer tail of
  products in these sectors have yet to strike a chord with investors, however.

    By Hardeep Manku, Ali Karakuyu, Taoufik Gharib, and David Masters
•   Scale, diversification, and value-added services will become increasingly important if reinsurers are to meet
    cedants’ changing expectations and remain relevant.
•   Reinsurers view mergers and acquisitions as a viable option that will keep their activity levels up, though it is
    no panacea for the sector’s woes.
•   Deals have leaned toward broadening of product suites and convergence of primary insurance and
•   Overall, we continue to have a neutral view on M&A, with a slight negative bias because of the industry’s
    mediocre track record.

  By WenWen Chen and Eunice Tan
• China’s property casualty reinsurers have a mission to increase catastrophe and related coverage, because of
  the country’s geographic vulnerability to natural disasters, including major quakes.
• The ongoing expansion into nonmotor business offers new growth avenues but will expose reinsurers to
  potential volatility.
• We expect reinsurance cession rates to stabilize at around 9% by 2020.
• In our view, market participants will take on more investment risk, through allocations to high-risk
  investments, to offset pressuring on underwriting margins.

    Life Re
  By Sebastian Dany, Johannes Bender, Milan Kakkad, Taoufik Gharib, and WenWen Chen
• Operating performance should stay sound in the global life reinsurance sector over the next two to three
  years, with premium growth of about 3% and a return on equity at about 10% over 2018–2020.
• Despite some recent M&A activity and, the emergence of alternative capital in some markets, we expect the
  fundamental strengths of the global life re industry will remain intact.
• The industry’s advanced risk-management and underwriting capabilities should continue to protect it against
  volatility it faces from changes in key actuarial assumptions for calculating premiums, regulatory risks, and
  data restrictions.

    Mortgage Re
  By Hardeep Manku, Saurabh Khasnis, and Taoufik Gharib
• U.S. mortgage reinsurance has been one of the few reinsurance business lines that has performed well in
  recent years, providing some succor to re/insurers beset with the difficult market environment.
• This business should retain its appeal despite modest rate increases on certain other reinsurance business
  lines following the 2017 catastrophe losses.
• The appetite for mortgage risk is expanding as new players enter the market, although the underwriting cycle
  is past its peak; however, some re/insurers are becoming cautious.

                                                                                 Global Reinsurance Highlights | 2018   9
Global Reinsurance Highlights 2018 - S&P Global Ratings
Reinsurance Outlook

The Top Global Reinsurers Are
Breaking Away From The Pack
By Taoufik Gharib, Johannes Bender, David Masters, and Hardeep Manku

For the past several years, the global reinsurance sector has weathered unfavorable and
continuously changing business conditions. The challenges have included a prolonged soft
reinsurance pricing cycle, heightened competition, limited organic growth opportunities, a record
influx of alternative capital, low interest rates, mergers and acquisitions, and large catastrophe
losses. Against this backdrop, reinsurers are trying to pull whatever levers they can not only to
remain relevant but also to sustain profitability.

         eak market conditions have         and proportional reinsurance and away      reinsurers it rates (Charts 1 and 2). This
         driven reinsurers to rethink       from nonproportional reinsurance, and      is mostly because of reinsurers’ still-
         their short- and long-term         they’re actively managing their capital    robust capital adequacy and because
strategies. This has led many to pursue     structures through share buybacks,         underwriting has remained relatively
mergers and acquisitions (M&A), divest      special dividends, and refinancing their   disciplined, at least so far, supported
nonperforming businesses, diversify into    maturing securities with more cost-        by overall strong enterprise risk
less-commoditized lines of business, and    effective ones.                            management (ERM). At the same time, we
embrace third-party capital. They’ve also      S&P Global Ratings is maintaining its   continue to believe the global reinsurance
adjusted risk exposures while shifting      stable outlook on the global reinsurance   sector is facing weak business conditions
their underwriting appetite to primary      sector and on the majority of the          because the fundamental challenges of

                                                                                                                                    istock photo / Pavel1964

10   Global Reinsurance Highlights | 2018
Reinsurance Outlook

the sector have not abated, even after             Robust Capitalization And Strong                  insurance—as well as life reinsurance.
2017’s heavy natural catastrophe losses.           ERM Keep Reinsurers In Good Stead                 In addition, it reflects the sector’s sound
   The cost of capital has consistently            Global reinsurers continue to enjoy robust        ERM capabilities, which help them
fallen in recent years but appears to              capitalization despite severe catastrophes,       maintain catastrophe losses generally in
have reached a floor at year-end 2016,             which racked up more than $138 billion            line with risk appetites and leverage the
increasing through 2017 due to rising              in insured losses globally in 2017. These         retrocession market through alternative
interest rates and the volatility stemming         catastrophe losses wiped out 2017                 capital while ceding some of the tail risks.
from heavy catastrophe losses. Operating           earnings for a number of reinsurers and               Therefore, the 2017 hit to capital was
conditions for global reinsurance remain           became a capital event for a few outliers.        not severe enough to cause industrywide
difficult despite modest 2018 renewal              The sector demonstrated its resilience,           panic or major declines in risk-adjusted
rate increases. We believe reinsurers’             managing the record catastrophe year with         capitalization. But in addition, the losses
returns will be close to their cost of             just a relatively small net loss, though the      were not severe enough to lead to sustained
capital in 2018 and 2019. If the industry’s        specific impact varied widely by reinsurer.       industrywide price hardening. When overall
return on capital declines sustainably                 This reflects the sector’s                    industry capitalization deteriorated, we
below its costs, which causes market               diversification benefits from writing             viewed it as manageable, with most of
growth prospects to suffer, we could               other noncatastrophe-exposed lines of             the affected companies positioned to
reassess our view of the sector.                   business—such as casualty and primary             replenish their lost capital with a year or
                                                                                                     two of normalized earnings. As a result, the
                                                                                                     2017 catastrophe losses resulted in only a
Table 1: Credit Conditions For Global Reinsurers 2018–2019
                                                                                                     handful of negative rating actions.
                 Business conditions Business outlook                  Sector outlook                    Three-quarters of our financial
                 (current)           (12 months)                       (12 months)                   strength ratings on the top 40 rated
Global           Weak                         Somewhat stronger       Stable                         global reinsurers are in the ‘A’ category,
reinsurers                                                                                           while the remaining quarter is in the ‘AA’

Table 2: Drivers Of Business Conditions For Global Reinsurers
Potential driver        Trend for                Observations
Pricing                 Neutral to positive      Reinsurance pricing declines have modestly reversed in 2018, with average price increases
                                                 of 0%–5% expected for 2018 but with wide variations among lines and regions. However,
                                                 momentum is fading heading into 2019.
Loosening of terms Neutral to negative           Large reinsurers appear to have been able to push back on cedants demanding wider terms
and conditions                                   and conditions. They didn’t slip further, while ceding commissions slightly improved (200
                                                 bps–300 bps) but remained high.
Organic growth          Neutral to negative      Opportunities for organic growth (outside large/tailored transactions for a select few
                                                 reinsurers) are limited. There are pockets of growth, but companies pursue them quickly.
Cedant demand           Neutral to positive      There is some evidence of greater arbitrage (cheaper to front business then reinsure it on the
                                                 back-end) as rates continue to remain low, together with large/tailored one-off transactions.

M&A activity            Neutral                  After a brief lull following a hectic 2015, M&A within the sector has resumed in 2018. We do
                                                 not expect transactions to have a material impact on industry capital. Future deals will be
                                                 partially inhibited because of high market valuations.
Alternative capital     Neutral to negative      The influx of alternative capital continued in 2017 and through the first quarter of 2018 despite
                                                 the temporary uncertainties caused by 2017 hurricanes, limiting reinsurance price increases.

Low investment          Neutral to negative      Investment returns remain low, but it seems that we have seen the bottom in 2017. As
returns                                          interest rates are rising—at least in the U.S.—we expect slight improvements in net
                                                 investment returns as new money is invested in higher-yielding securities. However,
                                                 reinsurers’ total returns could be affected by unrealized capital losses.
Reserves                Neutral                  Overall, the reinsurance sector’s reserves have been stable, averaging 6.3% of favorable
                                                 development impact on the combined ratio during the past five years. In addition, 2017 was
                                                 the 12th consecutive year in which the U.S. primary property/casualty industry generated
                                                 favorable reserve developments. However, in 2017, the re/insurance industry incurred
                                                 unfavorable developments in U.K. motor. Furthermore, the following U.S. lines of business
                                                 continue to be challenging: commercial auto liability, other liability-occurrence, excess
                                                 casualty, and private passenger auto liability. Lastly, if inflation unexpectedly increases
                                                 materially, reserve adequacy would be adversely affected.

                                                                                                            Global Reinsurance Highlights | 2018 11
Reinsurance Outlook

                                          Chart 1: Rating Distribution Of S&P Global Ratings’
                                          Top 40 Global Reinsurers
                                    16                                                                                             Equally important to the 2017
                                          Chart 1: Rating Distribution Of S&P Global Ratings’
                                    14    Top 40 Global Reinsurers                                                             losses has been the trend in underlying
                    of reinsurers

                                    12                                                                                         underwriting performance. When we strip
                                    10                                                                                         out the effects of catastrophe losses and
            of reinsurers

                                    8                                                                                          reserve releases, accident-year combined
                                    10                                                                                         ratios have worsened during the past five

                                     48                                                                                        years, reflecting pricing pressure. The 2018
                                                                                                                               renewals brought modest reinsurance
                                                                                                                               price increases, though the momentum
                                                                                                                               seems to be fading into 2019. We forecast
                                               AA+            AA               AA-        A+               A            A-
                                                                                                                               a slight improvement in profitability in
                                     0        Financial strength rating on core operating subsidiaries as of Aug. 15, 2018
                                                AA+           AA             AA-          A+              A               A-
                                                                                                                               2018–2019, with an estimated combined
                                          Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
                                                                                                                               ratio of 96%–99% and an ROE of 7%–9%
                                               Financial strength rating on core operating subsidiaries as of Aug. 15, 2018
                                                                                                                               (Table 3). As interest rates are rising,
                                          Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
                                                                                                                               at least in the U.S., we expect slight
                                                                                                                               improvements in net investment returns
                                          Chart 2: Outlook Distribution Of S&P Global Ratings’                                 as new money is invested in higher-
                                          Top 40 Global Reinsurers*
                                                                                                                               yielding securities. In addition, reinsurers
                                          Chart 2: Outlook Distribution
                                                             Positive   Of S&P Global Ratings’
                                                                                  Negative                                     writing life reinsurance should benefit
                                          Top 40 Global Reinsurers*
                                                             (10%)                (10%)
                                                                                                                               from higher margins, as this line of
                                                                    Positive                    Negative
                                                                                                                               business is expected to generate an ROE
                                                                    (10%)                       (10%)
                                                                                                                               of just above 10% in 2018–2019.
                                                                                                                                   Although we are slightly increasing
                                                                                                                               our projected earnings for the sector,
                                                                                                                               the increase is lower than that following
                                                          Stable                                                               similar large losses (such as in 2005). The
                                                                                                                               industry benefited from the hardening
                                                           Stable                                                              market after such events, which hasn’t
                                                                                                                               been the case to the same extent this time,
                                          *As Of Aug. 15, 2018.                                                                indicating that pricing cycles are becoming
                                          Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
                                                                                                                               less pronounced. Therefore, we don’t
                                          *As Of Aug. 15, 2018.
                                                                                                                               expect material price increases to persist
                                          Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
category. In addition, 80% of reinsurers           year in 2018, it is reasonable to assume                                    into 2019. Similarly, we don’t foresee a
have stable outlooks, with the rest evenly         that the top 20 global reinsurers could                                     significant positive long-term shift in the
split between positive and negative                recover their ‘AAA’ capitalization (see                                     sector’s operating performance.
outlooks (Charts 1 and 2).                         “Capitalization Remains A Pillar Of
                                                   Strength For Global Reinsurers”).                                           Reinsurers’ ERM Is A
Capitalization Remains A Strength,                     The global reinsurance sector’s                                         Differentiating Factor
Supported By A Slight Expected                     operating performance has deteriorated                                      More than 80% of the top 40 global rated
Improvement In Earnings                            during the past five years, mainly                                          reinsurers carry an ERM score higher
         Chart 3: ERM
Global reinsurers’          Assessment
                        robust              Distribution
                                 capitalization            Of S&P
                                                   reflecting        Global
                                                                the soft         Ratings’
                                                                            global   P/C reinsurance                           than adequate (Chart 3), highlighting the
remainsTop    40 Global
          a pillar  of the Reinsurers*
                             industry. Indeed, pricing. As a result, the top 20 global                                         industry’s increased focus on ERM. Once
S&P GlobalChart   3: ERM
             Ratings         Assessment
                         continues   to viewDistribution
                                             the reinsurers’Of S&P
                                                                                     to 9.5% in 2016                           again, the 2017 natural catastrophe
reinsurance    40 Global      Reinsurers*
                          capital  adequacy as from 13.9% in 2013       Very strong
                                                                              (Table 3). During this                           losses tested reinsurers’ ERM programs.
                          (18%)                                         (15%)
a strength. The top 20 global reinsurers’ period, benign natural catastrophe losses                                            Given the strength of their ERM practices,
capital adequacy hasAdequate remained robust hampered the combined       Very strong ratio by only 2                           the losses were typically contained within
                           (18%)                                         (15%)
and redundant: 7% at the ‘AA’ confidence to 5 percentage points (ppts), which is                                               their risk limits, with only a few outliers.
level in 2017 relative to 15% in 2016. In below the budgeted catastrophe load,                                                 Overall, 2017 catastrophe loss reserves
2017, this group        of global reinsurers and strong reserve releases improved it
              Adequate with
                                                                                                                               have been stable so far and mostly
lost its capital   redundancy
              strong  risk controls at the ‘AAA’   by 6 to 8 ppts. Strong
                                                                       In 2017, the industry had                               contained within the booked reserves.
              (35%)                                                    (33%)
confidence level     for the
               Adequate    withfirst time since    a wake-up call, as it suffered significant                                     However, Everest Re Group Ltd.
the 2008 financial
               strongcrisis,  with a deficiency catastrophe losses
                       risk controls                                         that hurt its combined
                                                                        Strong                                                 experienced unfavorable reserve
               (35%)                                                    (33%)
of 5% compared with a redundancy of ratio by 21.5 ppts. These losses wiped out                                                 developments in the first and second
         *As Of We
2% in 2016.     Aug. believe
                     15, 2018. if the industry     slightly more than a full year of earnings,                                 quarters of 2018 from the 2017 catastrophe
         Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
experiences an average catastrophe resulting in an ROE of negative 1%.                                                         events, which could call into question
                                        *As Of Aug. 15, 2018.
                                        Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
12                                  Global Reinsurance Highlights | 2018
Reinsurance Outlook

                                               Chart 1: Rating Distribution Of S&P Global Ratings’
Table 3: Top 20 Global Reinsurers’ Combined Ratio  40 ROE
                                                  And Global Reinsurers
                                                                         14                2014            2015           2016           2017          2018f       2019f

                                                  Number of reinsurers
Combined ratio %                                                         1284.6             84.6            87.5           91.9          111.8          96-99      96-99
(Favorable)/unfavorable reserve development %                             (5.7)             (6.8)           (7.5)          (7.1)           (4.4)         (5.0)       (5.0)
Natural catastrophe losses %                                                  4.4             2.5            2.3             5.2           21.5             8.0       8.0
Accident-year combined ratio excluding                                    486.0             88.8            92.7           93.9            94.7         93-96      93-96
catastrophe losses and reserve releases %                                 2
ROE %                                                                     013.9             13.4            11.0             9.5           (1.0)            7-9       7-9
                                                                                    AA+             AA          AA-           A+              A              A-
The Top 20 global reinsurers are Allied World, Arch, Aspen, AXIS, Everest Re, Hannover Re, Hiscox, Lancashire, Lloyd’s, MS Amlin, Munich Re,
PartnerRe, Qatar, RenRe, SCOR, Sirius, Swiss Re, TransRe, Validus,  andstrength
                                                              Financial XL. f: Forecast.
                                                                                rating on core operating subsidiaries as of Aug. 15, 2018
                                                                              Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.

the conservatism built into its original                                                                                      We expect both China Re and GIC Re to
loss estimate. So far, these adverse                              “Cedants’ expectations          grow at healthy rates given their domestic
developments have been largely unique to                          have evolved:
                                                                    Chart         They
                                                                          2: Outlook     now Of S&P
                                                                                     Distribution markets’  forecast
                                                                                                       Global        strong GDP growth and
Everest, but we will continue to monitor how                     look for
                                                                    Top 40not  only
                                                                           Global   capacity
                                                                                  Reinsurers*     increasing insurance penetration (Table
losses play out for the rest of the industry.                                                     5). Furthermore,   many global reinsurers
                                                                 providers but also for    risk
                                                                                       Positive           Negative
                                                                                       (10%)      have recently
                                                                                                          (10%) established their presence in
The Leaders In The Reinsurance                                           partners.”               China and India to capitalize on the growth.
Race Are Looking To Separate                                                                       However, these markets’ risk profiles are
Themselves From The Pack                                                                           volatile due to increasing catastrophe
The top 10 global reinsurers (Table 4)          business—at both the subsidiary and the exposures, dwindling underwriting margins,
based on net reinsurance premiums               corporate levels. As a result, we assume soft pricing, aggressive competition,
written (NRPW) continued to write the           the leaders are well-placed to defend their insufficient underwriting expertise and
lion’s share of business. Their market          positions and will continue
                                                                        (80%) to gain market       experience, and rising regulatory costs.
share increased by 140 basis points (bps)       share in a consolidating market.                       We believe that the top five global
to 73.7% of NRPW in 2017 from 72.3% in              In 2017, two new entrants— China reinsurers will likely continue defending
2008. However, within the same timeframe        Re (seventh)    and15,India-based
                                                         *As Of Aug.   2018.          GIC Re their dominant market position given
their NRPW jumped a whopping 60% to             (10th)—joined      the
                                                         Copyright ©    top
                                                                     2018     10 relative
                                                                          by Standard        toFinancial
                                                                                      & Poor's     theirServices
                                                                                                                 relationships       with cedants
                                                                                                                    All rights reserved.
$171.1 billion from $106.8 billion.             2008, reflecting the growing demand for and access to business. However, we
    The top five global reinsurers continue     reinsurance in Asia. China Re continues to believe the rest of the pack can also
to lead the reinsurance sector and have         be predominately focused on its domestic score some wins and narrow the gap by
defended their competitive positons well        market, generating less than 10% of its focusing on cedants’ needs, becoming
in the past decade. In our view, their client   2017 gross premiums written overseas. more like risk partners, and proposing
relationship management differentiates          On the other hand, although GIC Re wrote innovative solutions rather than just
them from the rest of the pack. Cedants’        less than 25% of its gross premiums providing reinsurance capacity that can
expectations have evolved: They now             internationally in 2017, it plans to increase easily and less expensively be replicated
look for not only capacity providers but        its overseas business significantly.               through the capital markets.
also for risk partners. Reinsurers that
                                                                              Chart 3: ERM Assessment Distribution Of S&P Global Ratings’
can provide a plethora of value-added
                                                                              Top 40 Global Reinsurers*
services, assist in evaluating risk, provide
customized solutions, and implement
                                                                                               Adequate                                       Very strong
risk and capital management solutions                                                          (18%)                                          (15%)
are reaping the benefits.
    Moreover, cedants—especially large
multinational insurers—have been
consolidating their reinsurance panels.
Multinational insurers prefer dealing with                                          Adequate with
                                                                                    strong risk controls                                     Strong
fewer reinsurers that are well-capitalized                                          (35%)                                                    (33%)
with strong financial strength, good
product expertise, and broad product
offerings. These cedants want to trade                                        *As Of Aug. 15, 2018.
with global reinsurers in all lines of                                        Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.

                                                                                                                                   Global Reinsurance Highlights | 2018 13
Reinsurance Outlook

Table 4: Top 10 Global Reinsurers—2017 Versus 2008

                                    2017                                                                          2008
Rank Rating*              Reinsurer                                  Net          Rank Rating** Reinsurer                                    Net
                                                            reinsurance                                                             reinsurance
                                                              premiums                                                                premiums
                                                          written (Bil. $)                                                        written (Bil. $)
     1      AA-           Munich Re                                36.45            1        AA-       Munich Re                           29.08
     2      AA-           Swiss Re                                 32.32            2         A+       Swiss Re                            24.30

     3      AA+           Berkshire Hathaway Re                    24.21            3        AAA       Berkshire Hathaway Re               12.12

     4      AA-           Hannover Re                              19.32            4        AA-       Hannover Re                         10.20

     5      AA-           SCOR                                     16.16            5          A       SCOR                                  7.50

     6      A+            Lloyd’s                                  10.75            6         A+       Lloyd’s                               6.70

     7      A             China Re                                   9.97           7        AA-       Reinsurance Group of                  5.35
     8      AA-           Reinsurance Group of                       9.84           8         A+       TransRe                               4.11
     9      A+            Everest Re                                 6.24           9        AA-       PartnerRe                             3.99

  10        Not rated     General Ins. Corp. of India                5.80          10         A+       Everest Re                            3.51
                          (GIC Re)
Top 10                                                            171.07         Top 10                                                   106.85

Top 40                                                            231.98         Top 40                                                   147.71

* Financial strength rating on core operating subsidiaries as of Aug. 15, 2018. ** As of Aug. 15, 2009

The Cost Of Capital—A Marathon                          We expect the sector’s profitability to be      investors had yet to see major losses on
Not A Sprint                                            about the same as the cost of capital over      their investments, their reaction to a loss
When it comes to analyzing the                          the next two years. For this reason, we         from a peak peril that affected numerous
reinsurance sector’s profitability, we                  are not revising our outlook on the sector      investments simultaneously could lead
consider this to be more akin to an                     to negative. However, we would likely do        to unexpected flight of capital. However,
endurance race than a 100-metre sprint.                 so if the sector’s profitability remains        the 2017 hurricanes demonstrated that
We focus on the longer-term view of                     below its cost of capital.                      despite the reported negative investment
profitability relative to cost of capital                                                               returns, investors stood firm.
rather than a snapshot at a single point in             Alternative Capital Is Still An                    For many years, alternative capital has
time. This is consistent with our view last             Achilles Heel, But Reinsurers Are               been viewed as something of an Achilles
year, when we stated that “if reinsurers’               Learning To Live With The Pain                  heel for the reinsurance sector—a source
profitability falls sustainably below their             Alternative capital continues to erode          of vulnerability for reinsurers given the
cost of capital, we will likely revise our              traditional reinsurers’ margins and is          near-constant supply of new capital
outlook on the sector to negative”. The key             constituting a growing portion of global        into the sector. This has exacerbated the
word there is “sustainably.” In this context,           reinsurance capacity. Indeed, it accounted      softening market conditions, particularly
we believe the weighted average cost of                 for about 16% of the $610 billion global        within property catastrophe lines. More
capital (WACC) will remain at 7% to 8% for              reinsurance capital as of the end of first-     recently, however, reinsurers have been
the foreseeable future (2018 and 2019).                 quarter 2018, according to Aon (Chart 4).       dealing with alternative capital in much
   While reinsurers clearly tripped                     Nevertheless, reinsurers have embraced          the same way athletes train at altitude.
up in 2017 when thinking about their                    third-party capital through instruments         For an athlete, altitude training hurts,
profitability relative to their cost of                 like sidecars, collateralized reinsurance,      but come race day, all those oxygen-
capital, the longer-term track record has               and catastrophe bonds. Increasingly,            deprived training sessions lead to better
been stronger. The sector’s profitability               the retrocession market depends on this         performance. Similarly, while reinsurers
has, on average, exceeded its cost                      convergence capital.                            have suffered from the presence of
of capital by approximately 100 bps                          The convergence markets’ response          alternative capital in terms of pricing,
annually over the past five years, despite              to the 2017 events should dispel any            by increasingly using alternative
the negative spread in 2017. However, the               remaining questions over the permanence         capital for retrocession purposes (and
performance gap has been narrowing.                     of its capital. Some had argued that because    competing against it on the inwards

14       Global Reinsurance Highlights | 2018
Reinsurance Outlook

      AD PROOF

      Table 5: Real GDP Growth Of Select Countries And The Eurozone

      Country or             Sovereign foreign-currency                                 2016                       2017   2018f                2019f              2020f     2021f
      region                 rating as of Aug. 15, 2018                                  %                          %       %                    %                  %         %
      U.S.                   AA+/Stable/A-1+                                                  1.5                   2.3    3.0                   2.5               1.8        2.3

      China                  A+/Stable/A-1                                                    6.7                   6.9    6.5                   6.3               6.1        6.0

      India                  BBB-/Stable/A-3                                                  7.1                   6.6    7.5                   7.8               7.9        8.1

      Eurozone                      N.A.                                                      1.8                   2.6    2.1                   1.7               1.6        1.4

      Germany                AAA/Stable/A-1+                                                  1.9                   2.5    2.0                   1.8               1.5        1.3

      France                 AA/Stable/A-1+                                                   1.1                   2.3    1.7                   1.6               1.7        1.6

      U.K.                   AA/Negative/A-1+                                                 1.9                   1.8    1.2                   1.4               1.6        1.3

      f: Forecast. N/A: Not applicable. Source: S&P Global Ratings.

      reinsurance side), sophisticated                                 during Jan. 1 renewals, is fading. With                       price hikes that would sufficiently
      traditional reinsurers’ business models                          that, any hope for a permanent reset of                       compensate for the loss. That wasn’t the
      are becoming more efficient.                                     rates has largely vanished. Reinsurers                        case, and pricing at mid-year renewals
                                                                       are particularly chafing from the                             was nothing to write home about.
      Reinsurance Pricing Momentum Is                                  experience during mid-year renewals,                             Global reinsurance pricing was up
      Running Out Of Steam                                             which is dominated by Florida renewals.                       slightly (0%–5%, in aggregate) during
      What are a few large natural catastrophes                        Reinsurers had already tempered their                         the year-to-date renewals. Specific
      to a sector beset with pricing malaise?                          expectations, but considering the hit from                    increases varied by line of business,
      Not much, apparently, as the rate of price                       Hurricane Irma in September 2017, there                       region, and whether reinsurance
      increases, which peaked earlier this year                        was still an expectation for reasonable                       contracts had experienced any losses.
              publi_MapfreRe_210x130-ENG_05-18.pdf          7      1/6/18     14:29

                                                                                          Paris         Brussels
                                                            Toronto                                        Milan
                                            New Jersey                                              Madrid                          Beijing               Tokyo


                                              Mexico City
MY                                                                                                                                            Singapore


 K                                                              São Paulo
                                        Santiago de Chile
                                                                      Buenos Aires

                                         Beijing [China] | Bogota [Colombia] | Brussels [Belgium] | Buenos Aires [Argentina]
                              Labuan [Malaysia] | Lisbon [Portugal] | London [United Kingdom] | Madrid [Spain] | Manila [Philippines]
                        Mexico City [Mexico] | Milan [Italy] | Munich [Germany] | New Jersey [USA] | Paris [France] | Santiago de Chile [Chile]
                                                  São Paulo [Brazil] | Singapore | Tokyo [Japan] | Toronto [Canada]

                                                                                                                                                Global Reinsurance Highlights | 2018 15
       12                                                                                                                                           Global Reinsurance Highlights 2018
Adequate with
                     strong risk controls                                      Strong
                     (35%)                                                     (33%)

Reinsurance Outlook
                *As Of Aug. 15, 2018.
                Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.

                Chart 4: Global Reinsurance Capital—Breakdown Between                                            their ability to continue as independent
                Traditional And Alternative Capital                                                              reinsurers and compete effectively.
                  Alternative capital           Traditional capital                                              Furthermore, cedants’ expectations have
                                                                                                                 changed as they look for risk partners
                                                                                                                 rather than just capacity providers.
           90                                                                                                    Evolving market expectations and tough
           80                                                                                                    operating conditions are increasingly
                                                                                                                 challenging current business models
                                                                                                                 and forcing reinsurers to review their
                                                                                                                 relevance in the long run. Reinsurers

           50                                                                                                    are looking to bulk-up, as those that
           40                                                                                                    have scale, a broad product suite, and
                                                                                                                 strong underwriting capabilities and that
                                                                                                                 can add value to the reinsurer/cedant
                                                                                                                 relationship are the ones that will thrive.
           10                                                                                                        Therefore, we anticipate M&A
            0                                                                                                    activity to continue over next few years,
                2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017                       Q1             leading to sector consolidation that
                                                                                                 2018            will increasingly differentiate larger,
                Sources: Company financial statements, Aon Benfield Analytics, and Aon Securities Inc.           more diversified, stronger players from
                Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
                                                                                                                 others. We also expect a continuation
                                                                                                                 of trends of attaining economies of
Caribbean business—including Puerto years. More importantly, terms and                                           scale, broadening of product suites, and
Rico—had double-digit rate increases conditions didn’t slip further, while                                       convergence of primary insurance and
(10%–40%). During the Florida June ceding commissions slightly improved. In                                      reinsurance. There is some potential for
1 renewals, the largest property addition, reinsurers will get a pick-up in                                      large deals, but we foresee more activity
catastrophe market in the world, rates from proportional business, as they                                       in small bolt-on transactions, especially
reinsurance rates increased by low single have shifted their underwriting appetite                               considering the current valuations.
digits on average but were below industry to this type of business. As a result,                                 Small-to-midsize specialty carriers that
expectations. Loss-affected layers had they’re benefiting from some of the rate                                  have good underwriting track record
risk-adjusted rate increases in the mid to increases on the primary insurance                                    and profitable books of business remain
            Chart 5: Top Challenges And Opportunities
high single digits, and nonloss-affected side in reaction to the 2017 catastrophe                                appealing targets.
layers of loss-affected
                    Challengesaccounts had Opportunities
                                                 flat losses and the recent heightened loss                          We maintain an overall neutral view
to low-single-digit increases. Pricing in experience in certain lines. Furthermore,                              on M&A, with a slight negative bias
                                             Economic conditions
nonloss-affected accounts was largely                     thererisk
                                              and geopolitical    could be some gains in renewing                because of the industry’s mediocre track
flat. If this was the experience        in a region
                                  Disruptors      16      portions     of multi-year
                                                                  U.S. tax reform           deals for loss-      record. While M&A is not a panacea for
that just suffered heavy catastrophe              14      affected accounts.                                     weak market conditions, a well-executed
                              Others                                          M&A and sector
losses, it seems likely that the next rate        12          The situation,         though not ideal, is        strategic deal that has a sound rationale
cycle won’t be any better.                        10      providing opportunities for reinsurers to              can improve prospects for the combined
           Cyber threat and                         8                                Reinsurance pricing
    Reinsurance       pricing pressures—while optimize their portfolio
                data privacy                                                              and increase their
                                                                                     adequacy                    entity through a stronger competitive
varying—exist across business lines 4a participation on better-performing deals.                                 position. This could help maintain—
resultReserve    adequacyreinsurance capacity
         of abundant                                      Nevertheless, underlying    Investment   returns
                                                                                              market    forces   or potentially even strengthen—the
and U.S. property catastrophe business              0     remain at work and competition is high,                consolidated entity’s creditworthiness.
subsidizing      other lines and other regions which could result in Meeting
  Expense management/
to a certaincostextent    in recent benign years. losing its steam heading
                    control                                                                 into 2019.
                                                                                       expectations              Sector Issues Are At The Top Of
Nevertheless, the sector has had a bit of                                                                        Reinsurers’ Minds
                  Growth and                                                        Technology investments
relief. Property     catastrophe pricing is up, M&A Could Position Some
                                                                                                                 In a recent survey on the sector’s key
if only slightly. And with the margins from Reinsurers To Be More Competitive                                    opportunities and challenges over next
                Talent management                                           Uncertainty of modeling risk
property catastrophe business under In The Longer Term                                                           two to three years, unsurprisingly the
                                                                       Alternative capital impact on
constant  Regulatory
                           reinsurers have been Growth opportunities                         are somewhat        more than 20 global reinsurers that
                                                                       the reinsurance sector
                                            Climate change impact
reluctant to give much ground on other                    limited,
                                                on underwriting
                                                                     and   returns     are   barely meeting      responded identified the same key issues
lines of business.                                        cost of capital. Some players that might               facing the sector that we did (Chart 5).
    CasualtyChartreinsurance      achieved
                  is based on reinsurersʼ      someto S&P
                                          responses       have   been
                                                             Global      patiently
                                                                     Ratingsʼ survey. waiting for a better          F r om r e i n s u r e r s ’ p e r s p e c t ive ,
modest Copyright
             rate increases,       and pricing
                       © 2018 by Standard                 market
                                            & Poor'sisFinancial     environment
                                                                Services              and
                                                                         LLC. All rights   improved pricing
                                                                                         reserved.               reinsurance pricing adequacy and the
somewhat more stable than in recent conditions are probably questioning                                          longer-term impact of alternative capital

16         Global Reinsurance Highlights | 2018
Sources: Company financial statements, Aon Benfield Analytics, and Aon Securities Inc.
        Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.

                                                                                                                      Reinsurance Outlook

        Chart 5: Top Challenges And Opportunities                                                       seems there is a greater optimism about
               Challenges                    Opportunities
                                                                                                        gains from M&A—both for reinsurers that
                                                                                                        are involved in one and for the broader
                                          Economic conditions                                           sector—hoping for less competition and
                                          and geopolitical risk
                                                                                                        greater underwriting discipline as the
                             Disruptors       16             U.S. tax reform
                                              14                                                        sector consolidates.
                         Others                                         M&A and sector                     Overall, the survey response highlights
                                              10                                                        a sector hard at work to shape up and
        Cyber threat and                       8                                Reinsurance pricing
                                                                                                        find its stride for a long road ahead.
            data privacy                                                        adequacy
     Reserve adequacy                                                            Investment returns     Crossing The Finish Line
                                                                                                        Reinsurers are not oblivious to a market
                                                                                                        that is fundamentally changing in terms
 Expense management/                                                             Meeting investorsʼ
          cost control                                                           expectations           of the permanence of alternative capital,
                                                                                                        increasing commoditization of business
              Growth and                                                       Technology investments   lines, and evolving cedant expectations
                                                                                                        along with the increasing specter of new
            Talent management                                          Uncertainty of modeling risk     technologies driving market disruption.
                                                                  Alternative capital impact on
       Regulatory framework/changes                                                                     With business models under stress,
                                                                  the reinsurance sector
                                   Climate change impact                                                reinsurers are in various phases of self-
                                       on underwriting
                                                                                                        discovery, trying to adapt their strategies
                                                                                                        to remain relevant. Short-term tactical
        Chart is based on reinsurersʼ responses to S&P Global Ratingsʼ survey.
        Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.              moves might help but are not a lasting
                                                                                                        solution. Rather, we believe most
                                                                                                        reinsurers will need transformational
continue to dominate the agenda. These               bottom lines, which was evident from               changes to survive over time. Similar
two topics go hand in hand. With the                 the top two opportunities identified:              to long-distance marathoners, sound
pricing sentiment changing, reinsurers               growth/diversification and technology              strategy, discipline, preparation, and grit
are trying not to let the recent gains slip.         investments. To help find growth and               are necessary ingredients if reinsurers
Although excess reinsurance capacity will            offset the margin pressures, reinsurers            are to succeed. Indeed, the competitive
continue to make life difficult, the sector          are pursuing various initiatives to                landscape could look very different a
is actively looking at ways to adjust to the         diversify into new products and markets.           couple of years from now. We are already
new normal of a heightened presence of               For example, reinsurers have growing               observing greater differentiation among
alternative capital. Discussions aren’t just         interest in finding protection gaps in             players, and this will only expand over
centered around the property catastrophe             business lines such as cyber, flood,               time. The market has shifted slightly,
business but also on how alternative                 mortgage, and life reinsurance, though             boosting the power of brokers, the capital
capital can find its way into other business         those lines come with their own risks.             markets, and large cedants. If the sector
lines and how best to leverage it.                   Moreover, investments in technology to             can coalesce around some large players,
    In addition, reinsurers are keeping a            update legacy systems can help achieve             it could regain its balance. n
close watch on the economic environment,             expense efficiencies, which will be key in
which has gained steam in recent years               today’s pricing environment, but that is           Taoufik Gharib
but is facing increased risk of higher               just one aspect.                                   New York, (1) 212-438-7253
trade tariffs and geopolitical concerns.                 Reinsurers are increasingly investing
Depending on how far these risks                     in opportunities that are afforded by Big
escalate, it can start to put drag on the            Data and machine learning, and they’re             Johannes Bender
global economy, give rise to inflation, and          looking for ways to tap into technologies          Frankfurt, (49) 69-33-999-196
perhaps even disrupt business—all with               like blockchain, which—if achieved—      
potential negative implications for global           can provide a competitive advantage.
reinsurers. Furthermore, the regulatory              Reinsurers are also optimistic about               David Masters
compliance burden from managing                      interest yields and the resultant gains            London, (44) 20-7176-7047
multiple regulatory regimes and evolving             that would come through as the portfolio 
requirements remains a key concern.                  turns. With that, at least one driver
    In response to key challenges,                   of operating income will move up and               Hardeep S Manku
reinsurers have been pursuing                        offset to a certain extent the pressure            Toronto, (1) 416-507-2547
strategies to address both top and                   on underwriting income. Furthermore, it  

                                                                                                              Global Reinsurance Highlights | 2018 17
The Cost of Capital

Global Reinsurers’ Returns
Will Barely Cover Capital Costs
In 2018 And 2019
By David Masters and Taoufik Gharib

In 2017, the reinsurance sector generated returns on capital of only 1.2%. At 6.3% below its cost of
capital, this represents the worst level in more than 13 years.

      he impact of the 2017 U.S.            2017 catastrophes, this remains close       increased and the momentum is
      hurricane season was a significant    to reinsurers’ cost of capital, which we    weakening, as witnessed through
      factor, but even during the benign    anticipate will increase modestly through   the latest renewals. While reinsurers
first half of 2017, returns were only       the rest of 2018 and in 2019, remaining     welcome rate increases, their
1.0 percentage points higher than the       within the 7%–8% range.                     profitability continues to be hampered by
cost of capital. S&P Global Ratings            Despite the optimism reinsurers          persistent competitive pressures within
expects the sector’s return on capital to   showed when heading into the 1/1 2018       the property/casualty (P/C) underwriting
increase to around 6%–8% by year-end        renewal season, overall reinsurance         cycle and low investment returns, which
2018. Despite modest price rises the        renewal rates have only modestly            will initially lag the increase in benchmark

                                                                                                                                       istock photo / 35007

18   Global Reinsurance Highlights | 2018
You can also read