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2016 Insurance Market Briefing – MENA

Shangri La Hotel, Dubai, United Arab Emirates

5 October 2016

2016 Insurance Market Briefing - MENA

5 October 2016 2016 Insurance Market Briefing - MENA 2

Roger Sellek Chief Executive Officer

A.M. Best EMEA & Asia-Pacific

Welcome

Disclaimer

2016 Insurance Market Briefing - MENA 5 October 2016 3

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Disclaimer

2016 Insurance Market Briefing - MENA 5 October 2016 4

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

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

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

Agenda


14:10 Global Reinsurance Update Nick Charteris-Black, MD, Market Development - EMEA

14:45 Regional Reinsurance Update Mahesh Mistry, Director, Analytics

15:45 Networking coffee

16:15 Impact of Regulation & Oil Prices on the Insurance Industry Vasilis Katsipis, GM, Market Development - MENA & SCA

17:00 The Updated Best’s Credit Rating Methodology (BCRM) & New Best’s Capital Adequacy Ratio (BCAR) Model

Greg Carter, MD, Analytics - EMEA

18:00 Cocktail Reception

Global Reinsurance Market Trends

Nick Charteris-Black Managing Director, Market Development - EMEA


Discussion Outline


Commentary on the Global Economy

Global Reinsurance Results and Trends

Alternative Capital

Where does the Market go from Here?

Reinsurance Rating Outlook

The Talk of Monte Carlo…


Commentary on the

Global Economy

The Global Backdrop


Negative interest rates

The United States, the world’s largest economy, has debt/GDP over 100%

The United Kingdom voted to leave the European Union

Terrorism seems to be rampant around the world

Housing bubbles in many parts of the world

Stock Markets are hovering near all-time highs

This is far from normal


Global Reinsurance Results and Trends

Global Reinsurance


77.3%

60.2% 56.5% 56.2% 56.2%

62.2%

61.3%

31.5% 31.6%

32.3% 33.5% 34.2% 33.9% 32.6%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0%

20%

40%

60%

80%

100%

120%

2011 2012 2013 2014 2015 2016 Q2 5yr Avg

Expense Ratio

Loss Ratio

Loss ReserveDevelopment

Global Market Trends

Source: A.M. Best data & research

Global Reinsurance



107%

91% 91% 92% 92% 97%

0%

20%

40%

60%

80%

100%

120%

2011 2012 2013 2014 2015 2016Q2

Loss Ratio Expense Ratio

112% 93%

87% 87% 89% 94%

2011 2012 2013 2014 2015 2016Q2

108%

91% 87% 88% 90% 98%

2011 2012 2013 2014 2015 2016Q2

European “Big Four” U.S. & Bermuda Lloyd’s

Combined Ratios by Reinsurance Sector

Global Reinsurance


1.9%

12.4% 13.0%

11.6%

9.5% 9.0%

0%

2%

4%

6%

8%

10%

12%

14%

2011 2012 2013 2014 2015 2016 Q2(annualised)


Global Market Trends Return on Equity and Five-Year Average

Global Reinsurance


-3%

15% 16%

15%

9%

12%

2011 2012 2013 2014 2015 2016Q2

6.6%

13.0% 13.1%

11.0%

11.5%

9.9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2011 2012 2013 2014 2015 2016Q2

-0.9%

10.6%

11.4%

10.9%

7.5% 6.9%

2011 2012 2013 2014 2015 2016Q2

Note: Red line indicates five-year average. Source: A.M. Best data & research

European “Big Four” U.S. & Bermuda Lloyd’s

Return on Equity by Reinsurance Sector


Alternative Capital

Alternative Capital


Market is still largely

influenced by global leaders

M&A will continue

Alternative capacity is

driving change

Alternative capital is driving a great deal of structural change in the market

However, the market continues to be heavily influenced by the global reinsurance leaders

Top 50 Global Reinsurers


The Top 10 global reinsurance companies continue to strongly influence the landscape

Reinsurance

Premiums Written

2016 Life & Non-Life (USD m)

Ranking Company Name Gross Net

1 Munich Reinsurance Co. 36,976 35,279

2 Swiss Reinsurance Co. Ltd. 32,249 30,442

3 Hannover Rueck SE 18,651 15,945

4 SCOR S.E. 14,665 13,228

5 Lloyd’s 12,740 10,237

6 Berkshire Hathaway Inc. 12,236 12,236

7 Reinsurance Group of America Inc. 9,371 N/A

8 China Reinsurance (Group) Corp. 8,283 7,546

9 Everest Re Group Ltd. 5,876 5,378

10 PartnerRe Ltd. 5,548 5,230

Source: A.M. Best data and research

Rank 1-10 72%

Rank 11-20 13%

Rank 21-30 7%

Rank 31-40 5%

Rank 41-50 3%

Life and Non-Life GPW Distribution by Ranking

Dedicated Reinsurance Capacity


292 320 340 332 340

19

48 60 68 71

0

50

100

150

200

250

300

350

400

450

2012 2013 2014 2015 6M 2016E

ConvergenceCapacity

TraditionalCapacity

Total Dedicated Reinsurance Capacity (USD billions)

Note: * Estimate by Guy Carpenter and A.M. Best Source: A.M. Best, Guy Carpenter

Alternative Capital


Capacity by Market Segment

Total approx.

USD 71bn

Catastrophe Bonds approx.

USD 23bn

Collateralized Reinsurance

approx. USD 40bn

Sidecars approx.

USD 5bn

Industry Loss Warranties

approx. USD 3bn

Alternative Capital – Top 10


Nephila 10.0

Credit Suisse Asset Management 7.0

LGT Insurance-Linked Partners 5.8

Fermat Capital Management 4.8

Stone Ridge Capital Management 4.8

Securis Investment Partners 3.7

Catco 3.7

Leadenhall Capital Management 2.9

Elementum Advisors 2.9

Aeolus 2.5

Vast majority of alternative capital is influenced by the Top 10 players (USD billions)

Catastrophe Bond Issuance


0

50

100

150

200

250

300

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

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

Size

of A

vera

ge D

eal (

USD

mill

ions

)

Tota

l Cat

astr

ophe

Bon

ds (U

SD m

illio

ns)

Property and Casualty Industry – Year to Date 2016


Where does the Market go from here?

Capacity Utilisation


Capacity Utilisation Based on Aggregate Risk-Adjusted Capitalisation of Rated Balance Sheets

81% 76% 73% 72%

0

25

50

75

100

2012 2013 2014 2015

%

The Case for Mergers and Acquisitions


Broader product capability

Broader geographic reach

Greater influence

Greater attractiveness to

alternative capital

Opportunity for growth

Alternatively Mergers and Acquisitions are

the result of strategic opportunities

Price to Book Value


40

60

80

100

120

140

160

180

200

220

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Pric

e-to

-Boo

k Va

lue

AVERAGE

Low Reached March 2009 (0.75x BV)

1.0x P/BV

Peak reached February 2002 (1.83x BV) Current P/BV: 1.03x Average 1994-Present: 1.16x

Note: Excluding accumulated other comprehensive income. Sources: A.M. Best data and research, Bloomberg, company reports


Reinsurance Rating Outlook

Global Reinsurance


Negative Outlook

Increased client

retentions

Excess capacity

Capital convergence

Benign catastrophe

losses

Questionable underwriting

discipline

Declining reserve

development

Low yields

Europe Non-Life – 20 Largest Group Cedants


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Prem

ium

s Ced

ed (

EUR

Mill

ions

)

2014

2015


Top 10 Global Reinsurance Groups


Financial Strength Rating (FSR)

Issuer Credit Rating (ICR) Outlook

Munich Reinsurance Co. A+ aa- Stable

Swiss Reinsurance Co. Ltd. A+ aa- Stable

Hannover Rueck SE A+ aa- Stable

SCOR S.E. A a+ Positive

Lloyd’s A a+ Stable

Berkshire Hathaway Inc. A++ aaa Stable

Reinsurance Group of America Inc. A+ aa- Stable

China Reinsurance (Group) Corp. A a Stable

Everest Re Group Ltd. A+ aa- Stable

PartnerRe Ltd. A a+ Stable

Notes: A.M. Best ratings as of 2 September, 2016 The ratings for Berkshire Hathaway Inc are taken from their subsidiary, NICO. The ratings for PartnerRe Ltd. are for Partner Reinsurance Company Ltd. The ratings for Reinsurance Group of America Inc. are for RGA Reinsurance Company (St. Louis, MO), RGA Americas Reinsurance Company, Ltd (Bermuda) and its subsidiaries.

Questions about the Future


Who will be the market leaders in 10 years?

Which companies will weather the storm better?

How will alternative capital continue to fit in?

Will ultra-low interest rates pressure financial strength?

Can the market be disrupted by players outside the industry?

5 October 2016 32

Q&A


Regional Reinsurance Update

Mahesh Mistry Director, Analytics


MENA Reinsurance Markets

5 October 2016 2016 Insurance Market Briefing - MENA 34 34

Market Overview

Key Characteristics

Peer Comparison

Retakaful

Effect on Primary Insurers

Final Remarks

Key Market Issues


• Depressed oil prices

• Regional instability

• Currency depreciations

• Declining sovereign ratings

• Pressure on public finances

• Regulatory developments

• Over capacity / pressure on rates

Challenging operating environment

Market Overview


-15%-10%

-5%0%5%

10%15%20%25%30%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Development of MENA Insurance Markets compared to GDP (movements based on USD conversion)

Change in GDP (Year on Year)

Change in Premium (Year on Year)

-

10

20

30

40

50

60

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

MENA Premium Volumes (USD billions)

Source: A.M. Best data & research and Swiss Re sigma “World Insurance” series

Premium Volume


Approximately USD 55 billion of premium revenue Mainly generated by the non-life market

-

2

4

6

8

10

12

Turkey UnitedArab

Emirates

SaudiArabia

Iran Morocco Qatar Egypt Lebanon Algeria Oman Kuwait Tunisia Jordan Bahrain

USD

Bill

ions

MENA Insurance Market 2015

Non-Life Life

Source: A.M. Best data & research and Swiss Re sigma “World Insurance” series

Why the Middle East?


• High growth rates for insurance markets

• Low insurance penetration

• Profitable markets

• Greater diversification

• Benign to catastrophe events

• Excess capacity

Attractive market proposition

Proximity to clients is becoming extremely important – Dubai International Financial Centre is becoming

a major insurance hub

Balancing business profile

The Market Place


Source: A.M. Best research

Established Reinsurer Domicile

1929 Milli Re Turkey 1957 Egypt Re Egypt 1960 SCR Morocco Morocco 1971 Bimeh Markazi Iran 1972 Kuwait Re Kuwait 1972 Arab Re Lebanon 1973 CCR Algeria Algeria 1974 Arab Union Re Syria 1980 ARIG Bahrain 1981 Tunis Re Tunisia 1989 Trust Re Bahrain 2003 Amin Re Iran 2005 Takaful Re UAE 2006 Hannover Retakaful Bahrain 2008 Saudi Re Saudi 2008 Emirates Re UAE 2008 Gulf Re UAE 2008 ACR Ratakaful Bahrain 2009 Qatar Re Qatar 2009 Oman Re Oman

2010 Iranian Re Iran

• Pre-2000 – Government owned – Participation from local insurers – Compulsory cessions

• Post-2000 – Influx of new entrants pre-financial crisis – Mixture local/foreign capital – Post-financial crisis less activity

Most international reinsurers have some form of presence in the Middle East. Primary insurers are increasingly writing inward fac business.

Establishment of Regional Reinsurers

Premium Retention


Lowest premium retention – increasing due to introduction of mandatory covers

50%

55%

60%

65%

70%

75%

80%

85%

90%

2007 2008 2009 2010 2011 2012 2013 2014 2015

Estimated Non-life Premium Retention

Europe

MENA

Southeast Asia


South America

Market Profile


Motor 30%

Medical 42%

Other 28%

Gross Written Premium

Motor 36%

Medical 51%

Other 14%

Net Written Premium

Source: SAMA, JOIF, IA, EFSA, CBB, A.M. Best research Selected countries: Saudi Arabia, Jordan, UAE, Egypt, Bahrain

Retention is high on retail lines, with commercial lines ceded to reinsurers

Reinsurance Utilisation

Business Line Net Retention

Motor > 90%

Health 60% to 80%

A&L 40% to 60%

Marine 20% to 35%

Property < 15%

Engineering < 15%

Aviation < 5%

Energy < 2%

Source: A.M. Best research. Ceded premiums include inter-group contracts.

How much business is retained?


Gross Written Premium USD 3.5 bn Net Written Premium USD 2 bn Approximately 50% of business non-MENA Gross Written Premium growth 17% (mainly Qatar Re and Saudi Re)

-

200

400

600

800

1,000

1,200

1,400Gross Written Premium (USD millions)

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Total

2014

2015

68%

32%

2014

Retained Ceded

57% 43%

2015

The Marketplace


MENA MARKETS

High growth markets Softening rates

Low penetration

Diversification DIFC = centre for

reinsurance

Dependence on foreign expertise

Low exposure to catastrophes

Primary insurers writing inward fac

Participation from other markets, e.g. Asia, Africa

Greater interest from international players

Excess capacity

Compulsory cessions Reinsurance pools

Iran sanctions Low oil prices

Market pressures create greater competition

Currency depreciation

International and Regional Players


• Liberalisation of markets has encouraged participation from foreign players

• International players lead market

• Improves global presence / diversification

• Technical expertise

• Ability to dictate pricing and adapt policy wording (event limits, SRCC)

• Greater capacities

• Stronger financial strength ratings

• Operate more on size and scale

International Players

International and Regional Players


• Competition from foreign players (including Asian reinsurers)

• Act as market follower

• Narrower profiles – subject to greater volatility

• Higher proportion of bouquet treaties – less control over risk selection

• Benefit from compulsory cessions / status in market

• Some operate within the niche Takaful segment

• Rating sensitive business restricts opportunities

• Opportunities targeting smaller clients / niche segments

Regional Players

Exposure Management


• Catastrophe Risk – Cyclones – Oman – Storms – UAE – Floods – Jeddah

• Availability of risk modelling • Managing accumulation risk • Concentration risk • Reclaimed land • Inward Retro • Risk selection

• Large Losses – The Address

Hotel – Quarayyah

Power Plant – Aqua Power – Almarai – Hajr – Emirates Steel

• Is the loss frequency increasing? – Risk

management – Culture – Regulation – Human error – Risk controls /

mitigation

Estimated gross loss between USD 200 – 300 million

Are all risks factored into the underwriting decision?

2015 Technical Performance


Technical performance remains mixed Market champions benefitting from compulsory cession Overall improvement in technical performance Life diversification adds some stability

-50,000

-40,000

-30,000

-20,000

-10,000

-

10,000

20,000

30,000

40,000Market


-50,000

-40,000

-30,000

-20,000

-10,000

-

10,000

20,000

30,000

40,000Technical Performance (USD millions)

2014 2015

Five-Year Average Technical Ratios


0%

20%

40%

60%

80%

100%

120%

140%

Milli Re Trust Re Qatar Re SCRMorocco

ARIG CCRAlgeria

Kuwait Re Saudi Re Arab Re Emirate Re Tunis Re Gulf Re ACRRatakful

Five-Year Average Technical Ratios

Loss Ratio Expense ratio

Pressure on underwriting performance for most reinsurers


Operating Performance


Investment income drives earnings; Return on Equity remains low

6%

-3%

12%

-3%

1%

8%

12%

7%

-2%

9% 8%

9%

-60,000

-40,000

-20,000

0

20,000

40,000

60,000

80,000

100,000

ACRBahrain

Arab Re ARIG CCRAlgeria

EmiratesRe

Gulf Re Kuwait Re Milli Re Qatar Re Saudi Re SCRMorocco

Trust Re Tunis Re

Operating Performance 2015 (USD millions)

Technical Income Investment Income Return on Equity

Paid-Up Capital


-

100,000

200,000

300,000

400,000

500,000

600,000

ACRBahrain

Al FajerRe

Arab Re ARIG CCRAlgeria

EmiratesRe

Gulf Re Kuwait Re Milli Re Qatar Re Saudi Re SCRMorocco

Trust Re Tunis Re

Change in Paid-Up Capital (USD millions)

2011 2015


Capital Adequacy

5 October 2016 51 2016 Insurance Market Briefing - MENA

34%

9% 12%

-10%

19%

-6%

8%

-2%

(400)

(300)

(200)

(100)

0

100

200

300

400

500

600

2008 2009 2010 2011 2012 2013 2014 2015

MENA Reinsurers – Development of Capital 2008-2015 (USD millions)

Dividend Change in Paid-Up CapitalInvestment income Technical profit


Comparison against global peers


40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

2011 2012 2013 2014 2015

Loss Ratio

MENA Global

70%

75%

80%

85%

90%

95%

100%

105%

110%

115%

120%

2011 2012 2013 2014 2015

Combined Ratio

MENA Global

MENA reinsurers continue to underperform

Source: A.M. Best research. 2015 excludes some MENA reinsurers due to fluctuations arising from inter-group reinsurance.

Comparison – Gross Written Premium


Source: A.M. Best research. Other sources include: Singapore Re, Arab Re, Viet National Re, PVI Re, Emirates Re, CICA Re, Tunis Re, National Re (Philippines), Gulf Re, East Africa Re, Ghana Re, Tune Project Re, Asian Re

Market profile small compared to global peers (USD millions)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

0%

20%

40%

60%

80%

100%

120%

140%

160%

Loss Ratio Expense Ratio Ave Loss Ratio Ave Combined Ratio

Middle East

North Africa

Sub-Saharan Africa

Southeast Asia

Comparison – Five-Year Average Technical Ratios



Comparison – Five-Year Average Return on Equity


-10%

-5%

0%

5%

10%

15%

20%

ROE Average ROE


Middle East

North Africa

Sub-Saharan Africa

Southeast Asia

Retakaful – an uphill struggle

Is success dependent on the enforceability to utilise retakaful capacity?

56 5 October 2016 2016 Insurance Market Briefing - MENA

RETAKAFUL

Weak Performance

Available Capacity

Credit Rating

Quality of Takaful Business

Service

Value-added Proposition

Size / Scale Business Model

Impact on Direct Insurers


-200

0

200

400

600

800

1000

Energy

0

200

400

600

800

1000

Motor

Earnings are generally driven by inward reinsurance commission

Note: Examples for illustration purposes. Actual data has not been used

Final Remarks


• Market remains highly competitive • Gradual movement towards greater market discipline

MENA Reinsurance Market

• Generally well-capitalised; however profiles constrained

• Profiles and strategies vary by reinsurer

• Market environment remains challenging

• Opportunities are available, but risk selection remains important

• Management key to long-term stability

• Most ratings remain stable; underlying track record of technical performance will generally dictate positive or negative rating trends

• Improved business profile is important for higher ratings

MENA Reinsurers

5 October 2016 59

Q&A


Oil price decline and regulatory changes in MENA – the makings of a perfect storm

Vasilis Katsipis General Manager, Market Development – MENA, SCA


Agenda


1. Reduction in price of oil has focused the market on less profitable lines of business

2. Regulatory changes: short-term pain for long term gain(?)

3. Finally...

Agenda




3. Finally...

Oman Bahrain Jordan

EgyptLebanonQatar

UAE

KSA

Morocco

0

2,000

4,000

6,000

8,000

10,000

12,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Premium growth of Middle Eastern and North African markets(USD millions)

Main insurance markets in the Middle East have continued their strong growth


Source: Swiss Re Sigma reports

• UAE and Saudi Arabia are the largest insurance markets in MENA

• These together with Qatar (from 2013 onwards) have been the main growth markets in the region

• Introduction of compulsory covers and price increases have been critical to market growth

Motor and medical are the main growth lines


• Motor and medical have grown much faster than the market average in most markets

• Growth of these lines has continued unabated even in years of declining oil prices

• This is particularly the case in KSA and to a lesser extent to the rest of the GCC

• Introduction of compulsory covers combined with rate increases seem to be the main drivers of growth

Source: Swiss Re Sigma, Central Bank of Bahrain (CBB), Egyptian Financial Services Authority (EFSA), Jordan Insurance Federation (JOIF), Saudi Arabian Monetary Agency (SAMA), UAE Insurance Authority, US Energy Information Administration (EIA) A.M. Best analysis

50

150

250

350

450

550

650

750

850

950

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Premium growth of motor and medical lines(index)

UAE KSA Rest GCC Levant NA Crude oil

Remaining lines are stagnating in most oil-producing countries


Source: Swiss Re sigma “World Insurance” series, CBB, EFSA, JOIF), SAMA, UAE Insurance Authority, EIA, A.M. Best analysis

50

100

150

200

250

300

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Est

Premium growth of non-motor, non-medical business(index)

UAE KSA Rest GCC Levant NA Crude oil

• Growth of remaining non-life product lines has been slower

• Growth rate is reduced and often premiums have declined in years that there is oil price decline

• Countries of the Levant the only ones which have continued their growth in recent years

Medical business: unprofitable in most years


• In KSA pre-2013, profitability needs to be viewed in the light of recent reserve strengthening. Probably only 2015 truly profitable which is a direct impact of regulatory actions

• Medical business unprofitable in most recent years in the UAE • Reserving levels of medical in the UAE have not been tested to the same level as those

in KSA

60%

80%

100%

2009 2010 2011 2012 2013 2014 2015

Claims Ratio - Medical

KSA UAE

80%

100%

120%

2009 2010 2011 2012 2013 2014 2015

Combined Ratio - Medical

KSA UAE

Source: SAMA, UAE Insurance Authority, A.M. Best analysis

60%

80%

100%

2009 2010 2011 2012 2013 2014 2015

Claims Ratio - Motor

KSA UAE

Motor business unprofitable in recent years in most markets


• Different dynamics shape the profitability of the business in the two countries: - KSA: underinsurance and reserve strengthening - UAE: competitive pressures

• Pre-2012 profitability of motor business seemingly good mainly due to low expense ratios

• Reserving levels in the UAE yet to be tested

80%

100%

120%

2009 2010 2011 2012 2013 2014 2015

Combined Ratio - Motor

KSA UAE


In some tariffed markets the review of tariffs has helped reduce losses


• Tariff increases in Jordan and Egypt have helped reduce claims ratio of motor in both countries

• Indications that MTPL remains unprofitable in both markets highlighting the need for regular tariff reviews and increases

• Companies and market as a whole try to improve profitability by increasing proportion of comprehensive covers

MTPL

All motor

40%60%80%

100%120%140%160%180%200%220%240%260%

2011 2012 2013 2014 2015 (est)

EgyptMotor loss ratios

MTPL

All motor

60%

80%

100%

120%

2011 2012 2013 2014 2015

Jordan marketMotor loss ratios

Source: EFSA, JOIF, A.M. Best analysis

Comprehensive Comprehensive

KSA: cost reduction a key driver for improvement in technical profitability


• Profitability improvement is due to internal actions rather than increased reinsurance cessions. Especially for medical business retention ratio has increased significantly in recent years

• Reduction in management expenses and acquisition expenses have saved nine and ten percentage points in the combined ratios of medical and motor respectively in the last six years

0%

20%

40%

60%

80%

100%

120%

2009 2010 2011 2012 2013 2014 2015

Medical busines KSA - combined ratio composition

Acquisition Ratio Management expense ratio Claims Ratio Retention ratio

0%

20%

40%

60%

80%

100%

120%

2009 2010 2011 2012 2013 2014 2015

Motor busines KSA - combined ratio composition

Acquisition Ratio Management expense ratio Claims Ratio Retention ratio


Profitability of MENA markets reduced due to increased proportion of motor and medical


• Technical profitability of MENA markets has converged

• Profitability of GCC markets is now similar to those of the Levant and North Africa

• Increased focus on motor and medical have pushed combined ratios higher

70%

75%

80%

85%

90%

95%

100%

105%

110%

115%

120%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Combined ratio

KSA UAE Rest GCC Levant NA

Agenda




3. Finally...

KSA and Turkey: examples of regulatory driven reserve reviews

5 October 2016 72

• Reserve reviews result in a “step-up” of reserving patterns

• Reinsurance plays little role as the majority of business is ceded on a non-proportional basis

0%

20%

40%

60%

80%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Turkey reserving

Net reserves / NWP Gross reserves / GWP Reserve Cession Ratio

0%

20%

40%

60%

80%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

KSA reserving


• Reserve reviews act as one-offs

• Reinsurance helps reduce impact on companies financials as there are significant portions of business reinsured on a proportional basis


UAE likely to have similar review under new regulations(?)


• Historically higher proportion of premiums has been reserved than in other markets

• Indications of a step-up since regulation was released

• Part of the impact is “hidden” as several companies restated prior year results (especially 2014) in order to show more profits in 2015

• As in KSA reinsurance plays a significant role to alleviate the impact on companies’ financials

0%

20%

40%

60%

80%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

UAE reserving


No impact on asset allocation on the industry as a whole


NEW LIMITS

< 30%

< 30% in UAE +

<20% abroad < 30%*

>5%

* For Government Bonds the limits are: - 100% for UAE Government issues and - 80% for other “A” rated sovereigns

< 10%

29 31 31 37 40 45 43 42 36 33 29

56 45 48 33 2823 20 20 27 27 28

1 3 3 4 5 6

815 16

23 23 22 23 22 21 20 21

3 5 2 3 5 3 3 3 3 3 3

2 3 12 3

4 6 910 11 11

0

25

50

75

100

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Asset allocation all UAE companies(percentage points)

Cash Bonds Shares UL assets Loans Real Estate Affiliates Other

But significant impact on most companies …

915 16

2535

29

9 8

22

3

20 18

40

24 20

4335

16

2938

11

52

75

24

6558

67

85

8

1 10

16

22

0

43

36 13

13

27

22

19

18

15 5

1

105

12

23

2610

4046

47 85

64

58

57 46

43

31

7

18

1329

1

12

2

27

820

7

10

13

5

6

11

44

70

4

80 8072

52

37

37 5133

31

12 168

31

15

2516 19

14 7

71

29

9 717

2 913

3

5

39 6

16

41

19 19

0

25

50

75

100

COMPANIES

Company specific asset allocation as at 31/12/15(percentage points)

Other

Affiliates

Real Estate

Loans

UL assets

Shares

Bonds

Cash


Real Estate 9

Equities 10 Bo

nds

2 Other 3

Number of companies with excessive exposure to:

Two-thirds of companies have asset allocations which contravene new regulations

95

75

35

100

3 4

28

11 15

100

2820

813

85

2

47

3 3

0

2 2

11

43

7

2

0

34

25

10

34

0

19

1

3

911

2

13

21

42

1

5

25

65

0

97 96

72

89 85

7280

92100

87

99

15

98

53

97 97 100 100 100 100 100 100 100 100

COMPANIES

Admissible / inadmissible assets backing shareholder's equity (percentage points)

Admissible capital Inadmissible capital x MCR covered

… with many companies unable to meet new capital requirements


Based on the analysis of our sample:

14% of shareholder equity (equal to USD 540m) is invested in inadmissible assets

45% of companies have MCR coverage of up to x2. They could face problems meeting SCR

Could UAE follow in the footsteps of KSA?


• Small and medium companies have suffered the most in KSA

• Majority had to raise capital

• Some may lose their license

• Could this happen in the UAE?

MCR

0

50

100

150

200

250

300

350

2014 2015 H1 2016

Saudi market - insurers with Shareholders' Equity below MCR in 2014

6 companies

raised equity

1 company retained earnings

3 companies uncertain

future

Source: SAMA, A.M. Best analysis

Agenda




3. Finally...

What about excessive reinsurance?


• KSA, Morocco and the markets of the Levant have normal retention levels

• In all other markets, reinsurance cessions are excessive

• Some governments may be concerned about outward flows of money from their countries

• What about ERM and the use of reinsurance as part of it?

40%

50%

60%

70%

80%

90%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Retention Ratio


Is it time for regulators to insist on write-off of long overdue balances?


• In most MENA markets, balances remain outstanding for more than 120 days

• KSA is the only market where the collection of money due to insurers has improved

• SAMA’s rules on admissible assets must have influenced the improvement

60

70

80

90

100

110

120

130

140

150

160

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Days balances remain outstanding


In summary


• Most markets are at a critical juncture with the majority of their premiums arising out of the less profitable lines of business (motor and medical)

• Focusing on expense reduction (as Saudi companies did in the past) will certainly help; but it remains unclear if it will be enough

• Regulators around the region are trying to strengthen supervision and policyholder protection

This will result in short-term strain for most companies – it is up to them to turn it into long-term gain

5 October 2016 82

Q&A


Update A.M. Best's Credit Rating Methodology and

New Best’s Capital Adequacy Ratio


Greg Carter Managing Director, Analytics

Rating Methodology 2017 • Released for initial comment period on 10 March, 2016

– Understanding BCAR for U.S. Property/Casualty Insurers – Best’s Credit Rating Methodology

• Comment period ended 30 June, 2016 • Next criteria releases in 2016 will contain the following:

– Revised Understanding BCAR for U.S. Property/Casualty Insurers draft

– Revised Best’s Credit Rating Methodology – Initial draft of Understanding BCAR for U.S. and Canadian

Life/Health Insurers – Initial draft of Understanding Universal BCAR


Rating Methodology 2017 • New criteria procedures/methodology are expected

to go live in 2017

• However, timing will depend on the quantity and depth of comments received

• Received a substantial amount of comments during the initial comment period

• Revisions to the BCAR and the BCRM are currently underway


Recap: The Current Process

Business Profile Operating Performance

Balance Sheet Strength

Country Risk

Enterprise Risk Management

5 October 2016

Best’s Ratings

2016 Insurance Market Briefing - MENA 86

The Building Block Approach

• The building blocks themselves will remain the same

• Components of the building blocks are currently being reviewed

87

A.M. Best’s Rating Process

5 October 2016 2016 Insurance Market Briefing - MENA

The Building Block Approach Balance Sheet Strength • Rating unit balance sheet strength assessment

– BCAR – Internal capital models – Other qualitative and quantitative factors

• Holding company impact • Country risk impact



The Building Block Approach Balance Sheet Strength

89 5 October 2016

Summary of Changes to BCAR • Various scores calculated at different confidence intervals –

instead of one: ▪ 95%, 99%, 99.5%, 99.6%, 99.6% plus cushion (now to be included)

99.8%, and 99.9% (to be dropped following public consultation)

▪ Level of public disclosure under discussion

• New Calculation of BCAR ▪ Formula change

▪ Available Capital – Net Required Capital Available Capital

▪ Score above 0 means “Available Capital” > “Net Required Capital”




Country Risk

Balance Sheet

Strength

Baseline

Rating Unit Balance Sheet

Strength Assessment

Consolidated BCAR Financial Leverage

Operating Leverage Coverage Financial

Flexibility/Liquidity Intangible Assets

Holding Company Impact

Assessment

91 5 October 2016



Positive Neutral Negative Very NegativeStrongest Strongest Strongest Very Strong Adequate

Very Strong Strongest Very Strong Strong WeakStrong Very Strong Strong Adequate Very Weak

Adequate Strong Adequate Weak Very WeakWeak Adequate Weak Very Weak Very Weak

Very Weak Weak Very Weak Very Weak Very Weak

Holding Company

Lead

Rat

ing

Uni

t

5 October 2016



CRT-1 CRT-2 CRT-3 CRT-4 CRT-5

Strongest a+/a a+/a a/a- a-/bbb+ bbb+/bbb

Very Strong a/a- a/a- a-/bbb+ bbb+/bbb bbb/bbb-

Strong a-/bbb+ a-/bbb+ bbb+/bbb/bbb- bbb/bbb-/bb+ bbb-/bb+/bb

Adequate bbb+/bbb/bbb- bbb+/bbb/bbb- bbb-/bb+/bb bb+/bb/bb- bb-/b+/b

Weak bb+/bb/bb- bb+/bb/bb- bb-/b+/b b+/b/b- b/b-/ccc+

Very Weak b+ and below b+ and below b- and below ccc+ and below ccc and below

Country Risk Tier

Com

bine

d B

alan

ce S

heet

Ass

essm

ent

(Rat

ing

Uni

t/ H

oldi

ng C

ompa

ny)

5 October 2016

94



The Building Block Approach Operating Performance • Underwriting performance • Investment performance • Total operating earnings • Prospective financial forecasts • Other considerations • Unique to line of business, region of operation,

structure


Operating Performance Assessment

Adjustment (Notches) Key Operating Performance Characteristics

Very Strong +2 Historical operating performance is exceptionally strong and consistent. Trends are positive and prospective operating performance is expected to be exceptionally strong. Volatility of key metrics is low.

Strong +1 Historical operating performance is strong and consistent. Trends are neutral/slightly positive and prospective operating performance is expected to be strong. Volatility of key metrics is low to moderate.

Adequate 0 Historical operating performance and trends are neutral. Prospective operating performance is expected to be neutral. Volatility of key metrics is moderate.

Weak -1 Historical operating performance is poor. Trends are neutral/slightly negative and prospective operating performance is expected to be poor. Volatility of key metrics is high.

Very Weak -2/3 Historical operating performance is very poor. Trends are negative and prospective operating performance is expected to be very poor. Volatility of key metrics is high.

Depending on a company’s operating performance, the baseline can be adjusted up or down

– Using appropriate benchmark – Looking at level, trend and volatility

96

The Building Block Approach Operating Performance


The Building Block Approach Business Profile

Review key areas including


Business Profile Assessment

Adjustment (Notches) Key Characteristics of Business Profile

Very Favorable +2

The company's market leadership position is unquestionable, demonstrated, and defensible with high brand recognition. Distribution is seen as a competitive advantage; business lines are non-correlated and generally lower risk. Its management capabilities and data management are very strong.

Favorable +1

The company is a market leader with strong business trends and good control over distribution. It has diversified operations in key markets that have high to moderate barriers to entry with low competition. It has a strong management team that is able to meet projections and utilize data effectively.

Neutral 0 The company is not a market leader, but is viewed as competitive in chosen markets. It has some concentration and/or limited control of distribution. It has moderate product risk but limited severity and frequency of loss. Its use of technology is evolving and its business spread of risk is adequate.

Limited -1

The company has a lack of diversification in geographic and/or product lines; its control over distribution is limited and undifferentiated. It faces high/increasing competition with low barriers to entry and elevated product risk. Management is unable to utilize data effectively or consistently in business decisions.

Very Limited -2 The company faces high competition and low barriers to entry. It has high concentration in commodity or higher-risk products with very limited geographic diversity. It has weak data management. Country risk may factor into its elevated business profile risks.

The Building Block Approach Business Profile • Sub-assessments are qualitatively combined by analyst into a single business profile assessment • Ultimate “weights” of each sub-assessment will vary depending on which metrics will have biggest

impact on future financial strength


The Building Block Approach Enterprise Risk Management • Analyst assessment of the overall risk management framework that is in place • Analyst assessment of the rating unit’s risk profile relative to its risk management

capabilities • Overall assessment of ERM

– Evidence of use test, process changes – Performance under stressed environments

99

ERM Assessment

Adjustment (Notches)

Key Characteristics of ERM

Very Strong +1 The insurer's ERM framework is sophisticated, time/stress tested and embedded across the enterprise. Risk management capabilities are excellent and are suitable for the risk profile of the company.

Adequate 0 The insurer's ERM framework is well developed and is adequate given the size and complexity of its operations. Risk management capabilities are good and are adequate for the risk profile of the company.

Weak -1/2 The insurer's ERM framework is emerging and management is still developing formal risk protocols. Risk management capabilities are insufficient given the risk profile of the company.

Very Weak -3/4 There is limited evidence of a formal ERM framework in place. Risk management capabilities contain severe deficiencies relative to the risk profile of the company.


• Evaluation of key rating factors includes parameters which place limits on any one factor

• Recognises a truly uncommon strength/weakness that is not captured through the rating process

100

Comprehensive Adjustment

Adjustment (Notches) Key Characteristics

Positive +1 The company has uncommon strengths that exceed what has been captured throughout the rating process.

None 0 The company's strengths and weaknesses have been accurately captured throughout the rating process.

Negative -1 The company has uncommon weaknesses that exceed what has been captured throughout the rating process.

The Building Block Approach Comprehensive Adjustment


Comments

101

Type of Company (Dominant Business Line) % of Comments Received

U.S. Property/Casualty 46.2%Reinsurance 17.9%International 12.8%Non-Insurance 10.3%Reinsurance Broker 7.7%Other 5.1%


Official Comments

• Issued an update to the Call for Comment on 5 May • Update was designed to encourage additional market feedback on

use of models and understanding of BCRM

• Three specific questions were asked: – Do you fully understand the Building Block approach outlined in

the BCRM and is it fully transparent? – Are there any parameters outlined for Balance Sheet Strength, Operating

Performance, Business Profile, ERM, or Comprehensive Adjustment you disagree with?

– What are your views on using VaR metrics for risk modeling in general? Do your views concerning the value of these metrics change as one goes out further into the tail (e.g. VaR 99.8 and 99.9)?


Official Comments

• Comments tended to focus on the BCAR • BCRM generally seen as facilitating transparency through the

building block approach • Goal remains consistency and transparency

– Currently considering areas where more visibility needed – Intend to add detail where questions have arisen


Changes Under Consideration: VaR • Moving off of the tail

– Issues of consistency and availability of data globally – Removing 99.8 and 99.9 and including lower probability

tail events in ERM discussion • Adding 99.6

104

Confidence Level (%) BCAR Implied Balance Sheet Strength

99.6 > CUSHION + CUSHION at 99.6 Strongest

99.6 > CUSHION at 99.6 Very Strong

99.5 > 0 at 99.5 & ≤ 0 at 99.6 Strong

99 > 0 at 99 & ≤ 0 at 99.5 Adequate

95 > 0 at 95 & ≤ 0 at 99 Weak

95 ≤ 0 at 95 Very Weak


Summary of Changes to BCAR • Various scores calculated at different confidence intervals –

instead of one: ▪ 95%, 99%, 99.5%, 99.6%, 99.6% plus cushion (now to be included)

99.8%, and 99.9% (to be dropped following public consultation)

▪ Level of public disclosure under discussion

• New Calculation of BCAR ▪ Formula change

▪ Available Capital – Net Required Capital Available Capital

▪ Score above 0 means “Available Capital” > “Net Required Capital”


Changes Under Consideration: Stochastic Modeling within the BCAR

• Moving to stochastic-based factors as opposed to conducting stochastic modeling within the BCAR model itself – Will provide more transparency – Allow the running of “what if” scenarios


Changes Under Consideration: Covariance Adjustment • Reviewing the assumption that catastrophe risk is correlated

to other risks – Moving the natural catastrophe (B8) under the square root


Changes Under Consideration: Interest Rate Shocks • Reviewing the assumption that an interest rate shock would

occur at the same time as an equivalent tail event – Proposal is to hold constant the liquidity need (10%

minimum) for interest rate shocks across the VaR levels


Changes Under Consideration: ERM • Making the ERM framework assessment more

prominent/transparent via a redesign of the Risk Impact Worksheet (RIW) – Part I: ERM Framework – Part II: Risks – Part III: Overall ERM Assessment


5 October 2016 110

Q&A



2016 Insurance Market Briefing – Europe and Methodology Review Seminar

Wednesday 16 November 2016:

2016 Insurance Market Briefing – Europe 08:30 – 13:00 GMT, followed by lunch

Methodology Review Seminar 14:15 – 16:15 GMT

ETC Venues St Paul's, London 200 Aldersgate, London, EC1A 4HD

EMEA Market Overview ● Natural Catastrophe Schemes in Europe ● Major Challenges Facing the Industry and the Potential Impact on Credit Quality ● Reinsurance Panel

Overview - Structural Changes to Best's Credit Rating Methodology ● Ongoing Restructuring and Revised Presentation ● The New Universal BCAR and its Application ● Sector Specific Revisions

There is no charge to attend this event, but registration is required as space is limited.


Shangri La Hotel, Dubai, United Arab Emirates

5 October 2016

2016 Insurance Market Briefing – MENA - A.M. Best … 2016 Insurance Market Briefing - MENA 5...

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