An Economic Perspective on the Reinsurance Market

59
An Economic Perspective on the Reinsurance Market Re Underwriting: Building Professional Expertise New York, NY September 11, 2013 Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038

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An Economic Perspective on the Reinsurance Market. Re Underwriting: Building Professional Expertise New York, NY September 11, 2013. Steven N . Weisbart, Ph.D., CLU , Senior Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038 - PowerPoint PPT Presentation

Transcript of An Economic Perspective on the Reinsurance Market

Page 1: An Economic Perspective on the Reinsurance Market

An Economic Perspectiveon the Reinsurance Market

Re Underwriting: Building Professional ExpertiseNew York, NY

September 11, 2013

Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: 212.346.5540 Cell: 917.494.5945 [email protected] www.iii.org

Page 2: An Economic Perspective on the Reinsurance Market

2

The Growth of the Reinsurance Industry Depends on …

The Growth of the Global Exposure Base–New lines of business (e.g., flood in the U.S.)–GDP/capita growth–Increased world trade

Capital Market DevelopmentsThe Growth and Capital Position of the Primary Insurance Industry

The Capital Position of the Reinsurance IndustryThe Attractiveness and Extent of Alternate Sources/Methods of Risk Capital

Page 3: An Economic Perspective on the Reinsurance Market

Global Economic Outlook: Regional and Major Economy

Perspectives

3

Strength of Economies and Pace of Recovery Varies Greatly

Important Consequences for Insurer and Reinsurer Growth Opportunities

3

Reinsurance is a Global Business

Page 4: An Economic Perspective on the Reinsurance Market

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Shares of Global Output, Advanced vs. Developing Economies, 2012

Advanced Economies

50.1%Developing Economies

49.9%

Sources: International Monetary Fund, World Economic Outlook, April 2013, p. 139; Ins. Info. Institute

China became the world’s second largest economy in 2010. The

developing world’s share of GDP will

exceed that of advanced economies in 2013 and beyond.

35 economies, led by US with

18.9%

153 economies, led by China with 14.9%

Largest economies (% of world GDP)

U.S. 18.9%China 14.9%Japan 5.6%India 5.6%

Germany 3.8%

Page 5: An Economic Perspective on the Reinsurance Market

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Forecasts of 2013-14 GDP Growthof Selected Advanced Economies

Sources: International Monetary Fund, World Economic Outlook Update, July 2013, Table 1; Ins. Info. Institute.

-1.6%

2.0%2.7% 2.2%

1.5% 1.3% 0.8% 0.7%0.0%

1.2%

-1.8%

-0.2%

0.3%0.9%

1.7%1.7%

-2%

0%

2%

4%

6%

8%

UnitedStates

Canada UnitedKingdom

Germany France Italy Spain Japan

2013 2014

The July 2013 IMF report forecasts growth in advanced economies in 2013 generally around 1% or less in Europe, under 2% in North America.

Slight improvement forecast for 2014.

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Forecasts of 2013-14 GDP Growthof Selected Developing Economies

*Indonesia, Malaysia, the Phillipines, Thailand, and VietnamSources: International Monetary Fund, World Economic Outlook Update, July 2013, Table 1; Ins. Info. Institute.

3.2% 3.3%

6.3%

7.7%

3.2%

5.7%5.6%

2.9%

7.8%

5.6%

2.5%2.5%

0%

2%

4%

6%

8%

Brazil Russia India China Mexico ASEAN-5*

2013 2014

IMF continues to forecast that 2013 growth in emerging/developing economies will outpace advanced economies’ growth

but now says growth will be more moderate than previously forecast.

Page 7: An Economic Perspective on the Reinsurance Market

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World Trade Volume:2010—2014F

Growth in World Trade Volume (Imports + Exports)Has Slowed But Continues to Grow

Percentage Change (%)

12.9%

6.0%

2.5% 3.1%

5.4%

0%

2%

4%

6%

8%

10%

12%

14%

2010 2011 2012 2013F 2014F

After falling in 2011 and 2012, global trade

volume is expected rise in 2013 and 2014

Sources: IMF World Economic Outlook April 2013 and WEO Update, July 2013; Insurance Information Institute.

Page 8: An Economic Perspective on the Reinsurance Market

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Global P/C Insurance Snapshot

Developing Economiesare Severely Under-insured;

Will Faster GDP Growth Translate into Significant Premium Growth?

15

Page 9: An Economic Perspective on the Reinsurance Market

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Nonlife Premium: Advanced vs. Emerging Economies, 2012

Sources: Swiss Re Sigma No 3/2013 “World Insurance in 2012”; Insurance Information Institute research.

Nonlife premiums in the emerging economies grew 8.1% in 2011 and 8.6% in 2012, after inflation adjustment.

In the advanced economies, nonlife premiums grew by 0.9% in 2011 and 1.5% in 2012.

Premium Growth Facts

17.3%82.7%

Industrialized Economies

$1, 647.5

Emerging Markets$344.1

2012, US$ Billions

Developing economies now produce half of

global GDP but just 17% of nonlife premiums

Page 10: An Economic Perspective on the Reinsurance Market

Non-life Premium/GDP* (Penetration)for Advanced Economies, 2002-2012

4.98

%

4.56

%

2.22

%

2.97

% 3.70

%

3.88

%

5.14

%

3.68

%

2.25

%

3.14

% 3.86

%

4.05

%

4.80

%

3.40

%

2.20

%

3.10

% 3.60

%

3.90

%4.60

%

2.90

%

2.20

%

3.00

% 3.50

%

3.80

%4.50

%

2.90

%

2.10

%

3.10

% 3.70

% 4.10

%4.52

%

2.84

%

2.27

%

3.28

%

3.62

%

3.89

%

0%

1%

2%

3%

4%

5%

6%

U.S. U.K. Japan France Germany Canada

2002 2004 2006 20082010 2012

*both measured in U.S. dollars; premiums exclude cross-border business Source: Swiss Re Sigma, various volumes

Year-to-year comparisons of the penetration percentage indicates the degree to which premium growth is keeping

up with exposure growth (as proxied by GDP).

Page 11: An Economic Perspective on the Reinsurance Market

Non-life Premium/GDP* (Penetration)for the BRIC Economies, 2002-2012

1.74

%

1.81

%

0.67

%

0.95

%1.62

% 2.22

%

0.64

% 1.05

%1.60

% 2.30

%

0.60

% 1.00

%1.60

% 2.30

%

0.60

% 1.00

%1.50

%

2.30

%

0.70

% 1.30

%

1.66

%

1.24

%

0.78

% 1.26

%

0%

1%

2%

3%

4%

5%

6%

Brazil Russia India China

2002 2004 2006

2008 2010 2012

*both measured in U.S. dollars; premiums exclude cross-border business Source: Swiss Re Sigma, various volumes

From 2001-2009, penetration in China and Russia grew steadily—an especially strong showing in light of the rapid growth in GDP (denominator in the Penetration ratio). Similarly, although the Penetration ratios in Brazil and India were essentially

flat, that means premium growth basically kept pace with exposure growth.

Page 12: An Economic Perspective on the Reinsurance Market

2012 Non-life Premium if Penetration in BRIC Economies Equaled Advanced Economies

$37.

48

$24.

30

$13.

14

$104

.30

$45.

16

$39.

19

$33.

70

$165

.56

$67.

74

$58.

78

$50.

55

$248

.33

$90.

32

$78.

37

$67.

39

$331

.11

$0

$100

$200

$300

$400

Brazil Russia India China

What it was2% (Japan)3% (UK, France)4% (US, Canada)

Sources: Swiss Re Sigma, various volumes; I.I.I. calculations

$US, billions

Page 13: An Economic Perspective on the Reinsurance Market

As Economies Grow Wealthier, Insurance Market Penetration Grows Also

0%

2%

4%

6%

8%

10%

12%

14%

$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000GDP per capita

Pene

tratio

n (%

)

Source: A.M. Best.

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Reinsurance Market Conditions

Record Global Catastrophe Activityis Pressuring Pricing

24

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Reinsurer Share ofRecent Significant Market Losses

Source: Insurance Information Institute from reinsurance share percentages provided in RAA, ABIR and CEA press release, Jan. 13, 2011.

Billions of 2011 Dollars

$0$5

$10$15$20$25$30$35$40

JapanEarthquake/

Tsunami (Mar2011)

New Zealand Earthquake (Feb

2011)

Thailand Floods(Aug - Nov 2011)

Chile Earthquake(Feb. 2010)

AustraliaCyclone/ Floods(Jan-Feb 2011)

Reinsurer SharePrimary Insurer Share

40% Reinsurance share of total insured loss

Reinsurers paid a high proportion of insured losses arising from major catastrophes around the world in recent years

$0.4$4.0

$22.5 $9.5

$15.0

$3.5

$37.5

$13.0

$6.0

$10.0

$7.9

$8.3$2.2$2.8

$5.0

73%60%

95%44%

25

Page 16: An Economic Perspective on the Reinsurance Market

Global Reinsurance Capital,2007-2012

$ Billions

% Change

Source: Aon Reinsurance Market Outlook, April 2013 Update from Individual Company and AonBenfield Analytics; Insurance Information Institute.

$410

$340

$400

$455$470$505

18%

-17%

-3%

11%

18%

$300

$400

$500

$600

2007 2008 2009 2010 2011 2012-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Reinsurer Capital Change

2007-2012 compound average growth rate: 4.3%High Global Catastrophe Losses Have Had a Modest Adverse Impact on

Global Reinsurance Market Capacity

26

Page 17: An Economic Perspective on the Reinsurance Market

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1Q1360

80

100

120

140

160

180

200

USD

bn

Soft market

Hard market

Hard market softening

Crisis

Excess capital

Guy Carpenter Reinsurance Composite,Historical Capital Levels, 1998 - 2013:Q1

Source: Guy Carpenter

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Regional Property Catastrophe Rate-on-Line Index, 1990—2013 (as of January 1)

Sources: Guy Carpenter; Insurance Information Institute.

Property-Cat reinsurance pricing was up in the US as of 1/1/13 but was down in Europe/UK

US

UK

Europe

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Catastrophe Bonds,Risk Capital Issued, 2002-2012

$2.73$3.39

$4.60$3.86

$5.85

$1.22$1.73

$1.14

$1.99

$4.69

$7.00

$0

$1

$2

$3

$4

$5

$6

$7

$8

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: GC Securities and Guy Carpenter & Company, LLC.

($ Billions)

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Catastrophe Bonds,Risk Capital Outstanding, 2002-2012

$12.04 $12.51 $12.18 $11.89

$14.83

$2.95 $3.45 $4.04$4.90

$8.54

$14.02

$0

$2

$4

$6

$8

$10

$12

$14

$16

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: GC Securities and Guy Carpenter & Company, LLC.

($ Billions)

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Reinsurance Utilization Rates,1995-2011

20.6%

21.4%21.1%

19.6%

20.6%

18.8%18.6%18.8%

20.0%

18.9%

19.7%

17.4%

16.2%

16.9%17.2%

18.7%19.0%

16%

17%

18%

19%

20%

21%

22%19

95

1996

1997

1998

1999

2000

2000

1

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Sources: RAA, from GC Securities and Guy Carpenter & Company, LLC.; I.I.I.

Since 1999, the reinsurance utilization rate has been continually above 18.5%, despite the remarkable increase in surplus per dollar of premium.

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Economic Threatsto the Reinsurance Industry

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Near-Term Issues

Effects of the near-stagnation of the major European economiesTight monetary/fiscal policy => Slow/No GrowthOther headwinds affecting growth:

– Population agingInflation Transmitted Globally

From Russia, India, Brazil, and other countriesSoaring food and other commodity pricesOil prices and supply reliability

Helpful and Harmful: Inflation affects claims and investment income

Page 24: An Economic Perspective on the Reinsurance Market

IMF Inflation Rate Forecast for 2013-14 for Selected Emerging Economies

6.1% 6.

9%

10.8

%

3.0%

6.6%

5.8%

3.7% 4.

5%4.7%

6.2%

10.7

%

3.0%

5.3% 5.5%

3.2%

4.5%

0%

2%

4%

6%

8%

10%

12%

Brazil Russia India China Turkey SouthAfrica

Mexico ASEAN-5

2013 2014

Sources: International Monetary Fund, World Economic Outlook, April 2013, Chapter 2; Ins. Info. Institute.

Change from Prior Year

Inflation is forecast to be 6% or more in 2013 in some major emerging economies. Inflation there can spread to advanced economies through imports. The IMP

forecasts a slight decrease in inflation in 2014.

Page 25: An Economic Perspective on the Reinsurance Market

IMF Inflation Rate Forecast for Selected Advanced Economies, 2013-2014

1.7%

1.6%

2.7% 2.8%

1.6% 2.

0%

0.3% 0.5%

1.8%

1.5%

1.5% 1.7% 2.

5%

1.7%

1.5%

1.4%

2.3%

-0.2

%

1.7% 1.8%

-2%

0%

2%

4%

6%G

erm

any

Fran

ce UK

Net

herla

nds

Italy

Spai

n

Swee

den

Switz

erla

nd

US

Can

ada

2013 2014

Sources: International Monetary Fund, World Economic Outlook, April 2013, Chapter 2; Ins. Info. Institute.

Change from Prior Year

Inflation is forecast to be less than 2% in 2013 across most major European economies. If so, inflation is unlikely to be imported to the US, and interest rates

are likely to remain low, obscuring tight conditions in trade credit markets.

Page 26: An Economic Perspective on the Reinsurance Market

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Longer-Term Issues (a partial list)

1.Persistently Low Interest Rates2.Currency Market Instability3.Sovereign Bond Market Concerns (Greece,

Spain, Ireland, etc.)4.Strong Capital Flows to Emerging/Developing

Economies => Asset Price Bubbles?5.Regulatory Backlash/Developments6.Terrorism

Page 27: An Economic Perspective on the Reinsurance Market

1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

3.25%

2012:Q4 2013:Q1 2013:Q2 2013:Q3 2013:Q4

U.S. Germany U.K. Canada

Sources: Wells Fargo Economics Group, Global Chartbook, September 2012; I.I.I.

As these nations’ economies improve and concerns about inflation increase, actions to keep interest rates low will ease, and the yields on

longer-term bonds are expected to rise. But persistent high rates of unemployment and excess capacity will likely keep them from rising more

than one percentage point by the end of 2013.

Yield Forecasts for 10-Year Government Bonds, 2012:Q4-2013:Q4

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38

Terrorism Risk and Insurance

38

Download I.I.I.’s Terrorism Insurance Report at:

http://www.iii.org/white_papers/terrorism-risk-a-constant-threat-2013.html

Page 29: An Economic Perspective on the Reinsurance Market

“Traditional” Losses Arisingfrom Terror Attack Scenarios

Risk ConcernProperty •Cost to repair, rebuild, replace

Casualty •Death/injury of workers•Death/injury customers & other 3rd parties

Liability •Claims of negligence (direct & 3rd party)

Business Interruption

•Loss of income/extra expense may exceed insurance and company resources

Source: Insurance Information Institute

Page 30: An Economic Perspective on the Reinsurance Market

“Less Traditional” Losses Arising from Terror Attack Scenarios

Risk ConcernContingent Business Interruption

•Upstream damage/dislocations interfere with ability to operate

D&O •Shareholders could allege management/ directors did not take prudent steps to prevent attack or manage its effects

Latent Liability

•Claims of disability/disease/death well after the event (e.g., first responders post 9/11)

Political Risk

•Global political landscape and economic opportunities could shift•US government policy influences risk

Source: Insurance Information Institute

Page 31: An Economic Perspective on the Reinsurance Market

“Non-Traditional” Losses Arising from Terror Attack Scenarios

Risk ConcernCyber Risk •Infiltration, disruption or disruption

•Could involve your IT, or up/downstream

Investment Risk •Terrorist attack will likely negatively influence investment opportunities, possibly for extended period

Reputational Risk

•Loss of income/extra expense may exceed insurance and company resources

Regulatory Risk •Responses could impact performance

Economic Risk •State of the economy pre/post-attack influences performance

Source: Insurance Information Institute

Page 32: An Economic Perspective on the Reinsurance Market

Insurance Industry RetentionUnder TRIA and Its Successors

$10.0$12.5

$15.0

$25.0$27.5

$0

$5

$10

$15

$20

$25

$30

$35

2003 (Year 1)

2004 2005 2006 2007-2014

$ B

illio

ns

Source: Insurance Information Institute

• Individual company retentions fixed at 20% for 2007-2014

• Above the retention, federal government pays 85% for 2007-

2014

“Room” for a significant role for reinsurance

Page 33: An Economic Perspective on the Reinsurance Market

A Steady Take-Up Ratefor Terrorism Coverage

Source: Marsh, Inc.: 2013 Terrorism Risk Insurance Report, p.9; Insurance Information Institute

27%

49%

58% 59% 59% 57%61% 62% 64% 62%

0%

10%

20%

30%

40%

50%

60%

70%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

In 2011 overall terrorism coverage

take-up rate reached a record 64%The effective take-up rate

for workers comp is 100%

Page 34: An Economic Perspective on the Reinsurance Market

Cyber Risk

45

Cyber Risk is a Rapidly Emerging Exposure for Businesses in Every

IndustryNew I.I.I. White Paper:

http://www.iii.org/assets/docs/pdf/paper_CyberRisk_2013.pdf

45

Page 35: An Economic Perspective on the Reinsurance Market

Data Breaches 2005-2013, By Number of Breaches and Records Exposed# Data Breaches/Millions of Records Exposed

* 2013 figures as of March 19, 2013.Source: Identity Theft Resource Center

157

321

446

656

498

419447

662

17.322.935.7

19.1

66.9

222.5

16.2

127.7

100

200

300

400

500

600

700

2005 2006 2007 2008 2009 2010 2011 2012020406080100120140160180200220

# Data Breaches # Records Exposed (Millions)

The total number of data breaches and number of records exposed fluctuates from year to year and over time.

Millions

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47

2012 Data Breaches By Business Category, By Number of Breaches

3.8%11.2%

13.6%

34.5%

36.9%

Source: Identity Theft Resource Center, http://www.idtheftcenter.org/ITRC%20Breach%20Report%202012.pdf.

The majority of the 447 data breaches in 2012 affected business and medical/healthcare organizations, according to the Identity Theft Resource Center.

Business, 165 (36.9%)Govt/Military, 50 (11.2%)

Banking/Credit/Financial, 17 (3.8%)

Educational, 61 (13.6%)

Medical/Healthcare, 154 (34.5%)

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48

Average Organizational Cost of a Data Breach, 2008-2011* ($ Millions)

*Findings of this benchmark study pertain to the actual data breach experiences of 49 U.S. companies from 14 different industry sectors, all of which participated in the 2011 study. Total breach costs include: lost business resulting from diminished trust or confidence of customers ;costs related to detection, escalation, and notification of the breach; and ex-post response activities, such as credit report monitoring.Source: 2011 Annual Study: U.S. Cost of a Data Breach, the Ponemon Institute.

$6.8

$5.5

$7.2

$6.7

$0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10

2011

2010

2009

2008

($ Millions)

The average organizational cost of a data breach in 2011 was $5.5 million, down 24% from $7.2 million in 2010. Companies have improved steps

taken in both preparing for and responding to a data breach.

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Marsh: Increase in Purchase of Cyber Insurance Among U.S. Companies, 2012

Source: Marsh Global Analytics, Marsh Risk Management Research Briefing, March 2013

27.7%

20.2%

21.6%

22.9%

32.2%

72.2%

75.5%

33.3%

All Other

Health Care

Communications, Media & Technology

Retail/Wholesale

Financial Institutions

Education

Services

All Industries

Interest in cyber insurance continues to climb. The number of companies purchasing cyber insurance increased 33 percent from 2011 to 2012.

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52

Marsh: Total Limits Purchased, By Industry: Cyber Liability, Revenue $1 Billion+

Source: Marsh Global Analytics, Marsh Risk Management Research Briefing, March 2013

$27.

9

$59.

4

$11.

7

$46.

6

$12.

7 $18.

7

$30.

0 $38.

7

$41.

8

$11.

3 $17.

3

$11.

6

$27.

5

$9.0

$40.

6

$14.

1

$0

$10

$20

$30

$40

$50

$60

$70

All Industries Comms, Media& Technology

Education FinancialInstitutions

Health Care Retail/Wholesale Services All Other

Avg. 2011 Limits Avg. 2012 Limits

Among larger companies in 2012, average cyber insurance limits purchased increased nearly 30% over 2011.

($ Millions)

Page 40: An Economic Perspective on the Reinsurance Market

53

Cyber Liability: Historical Rate (price per million) Changes

-0.21%

2.67%

0.55%

2.92%

-0.81%

2.22%2.24%

0.54%

-1.0%

1.0%

3.0%

5.0%

12:Q1 12:Q2 12:Q3 12:Q4

Primary Price Per Million Change

Total Price Per Million Change Overall, rates for cyber insurance were essentially flat in the fourth quarter of 2012.

Source: Marsh Global Analytics, Marsh Risk Management Research Briefing, March 2013

Page 41: An Economic Perspective on the Reinsurance Market

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Catastrophe Loss Update

Catastrophe Losses in Recent Years Have Been Very High

54

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55

Total Value of Insured Coastal Exposure in 2012(2012, $ Billions)

Source: AIR Worldwide

$293.5$239.3

$182.3$164.6$163.5

$118.2$106.7$81.9$64.0$60.6$58.3

$17.3

$567.8$713.9

$849.6$1,175.3

$2,862.3$2,923.1

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500

New YorkFloridaTexas

MassachusettsNew JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

$1.175 Trillion Insured Coastal Exposure in Texas in 2012, up

$280.2 bill or 33.1% since 2007—well above the 20% for overall

coastal exposure growth

In 2012, New York Ranked as the #1 Most Exposed State to Hurricane Loss, Overtaking Florida with $2.862 Trillion. Texas is very exposed too, and

ranked #3 with $1.175 Trillionin insured coastal exposure

The Insured Value of All Coastal Property Was $10.6 Trillion in 2012 , Up 20% from $8.9 Trillion in 2007 and

Up 48% from $7.2 Trillion in 2004

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57

Total Potential Home Value Exposure to Storm Surge Risk in 2013*($ Billions)

*Insured and uninsured property. Based on estimated property values as of April 2013.Source: Storm Surge Report 2013, CoreLogic.

$65.2$51.0$50.3

$35.0$22.4$20.5

$15.9$10.4$7.2$4.7$3.1$2.7$2.6$0.6

$65.6$72.0$78.0

$118.8$135.0

$386.5

$0 $50 $100 $150 $200 $250 $300 $350 $400 $450

FloridaNew York

New JerseyVirginia

LouisianaS. CarolinaN. Carolina

TexasMassachusetts

ConnecticutMarylandGeorgia

DelawareMississippi

Rhode IslandAlabama

MaineNew

PennsylvaniaDC

Texas has $51 billion in home value is exposed

to storm surge

The Value of Homes Exposed to Storm Surge was $1.147 Trillion in 2013.* Only a fraction of this is insured, hence the huge demand for federal aid

following major coastal flooding events.

Page 44: An Economic Perspective on the Reinsurance Market

Meteorological events(Storm)

Hydrological events(Flood, mass movement)

Climatological events(Extreme temperature, drought, forest fire)

Geophysical events(Earthquake, tsunami, volcanic eruption)

Natural Catastrophes Worldwide 1980 – 2013Number of Events (Annual Totals 1980 – 2012 vs. First Six Months 2013)

Source: MR NatCatSERVICE

200

400

600

800

1 000

1 200

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

First Six Months in 2013 460 Events

Number

58

Page 45: An Economic Perspective on the Reinsurance Market

Natural Catastrophes Worldwide 1980 – 2013Overall and Insured Losses (Annual Totals 1980 – 2012 vs. First Six Months 2013)

Overall losses (in 2012 values) Insured losses (in 2012 values)

Overall losses totaled US$ 45bn; Insured losses totaled US$ 13bn

Source: MR NatCatSERVICE

50

100

150

200

250

300

350

400

450

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

(bn US$)

60

Page 46: An Economic Perspective on the Reinsurance Market

New Study Suggests Increase inConvective Activity Is Costly for Insurers

• Study examines convective (hail, tornado, heavy rainfall and thundersquall) events in the US with losses exceeding US$ 250m in the period 1970–2009

• Past losses are normalized (i.e., adjusted) to currently exposed values

• After normalization there are still increases of losses • Increases are correlated with the increase in the

meteorological potential for severe thunderstorms and its variability

For the first time, research shows that climatic changes have already influenced US thunderstorm losses

61Source: Munich Re research paper, March 18, 2013: Rising Variability in Thunderstorm-Related U.S. Losses as a Reflection of Changes in Large-Scale Thunderstorm Forcing.

Page 47: An Economic Perspective on the Reinsurance Market

Investments: A Key Driver of Profitability

62

Depressed Yields Will Necessarily Influence Underwriting & Pricing

62

Page 48: An Economic Perspective on the Reinsurance Market

P/C Industry Investment Gains, Inflation-Adjusted: 1994–20121

$54.8

$64.5$69.1

$74.8

$57.6

$45.9

$56.5$59.4

$69.8

$63.4

$70.9

$33.8

$42.0

$56.2$57.4$53.9

$50.0

$81.7

$71.5$75.9

$30

$45

$60

$75

$90

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11 1213:Q1E

Because the Federal Reserve Board aims to keep interest rates exceptionally low until the unemployment rate hits 6.5%—likely at least

another year off—maturing bonds will be re-invested at even lower rates.1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.*2005 figure includes special one-time dividend of $3.2B; 2013F figure is I.I.I. estimate for 2013:Q1, annualized.

Sources: ISO; Insurance Information Institute.

($ Billions, 2012 dollars) 1994-2012 average yearly gain:

$60.85B. We haven’t hit that average in the last 5 years.

Page 49: An Economic Perspective on the Reinsurance Market

64

U.S. Treasury Security Yields*:A Long Downward Trend, 1990–2013

*Monthly, constant maturity, nominal rates, through May 2013.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Recession2-Yr Yield10-Yr Yield

Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.

Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.

U.S. Treasury security yields

recently plunged to record lows

64

Page 50: An Economic Perspective on the Reinsurance Market

65

Distribution of Bond Maturities,US P/C Insurance Industry, 2003-2012

16.0%

15.2%

15.7%

16.2%

16.3%

29.8%

29.2%

28.8%

29.5%

30.0%

32.4%

36.2%

39.5%

41.4%

40.4%

31.3%

32.5%

34.1%

34.1%

33.8%

31.2%

28.7%

26.7%

26.8%

27.6%

15.4%

15.4%

13.6%

13.1%

12.9%

12.7%

11.7%

11.1%

10.3%

9.8%

9.2%

7.6%

7.6%

7.4%

8.1%

8.1%

7.3%

6.4%

6.3%

5.7%16.5%

15.2%

14.4%

16.0%

15.4%

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

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Under 1 year1-5 years5-10 years10-20 yearsover 20 years

Sources: SNL Financial; Insurance Information Institute.

The main shift over these years has been from bonds with longer maturities to bonds with shorter maturities. The industry first trimmed its holdings of over-10-year bonds

(from 24.6% in 2003 to 15.5% in 2012) and then trimmed bonds in the 5-10-year category (from 31.3% in 2003 to 27.6% in 2012) . Falling average maturity of the P/C industry’s bond portfolio is contributing to a drop in investment income along with lower yields.

Page 51: An Economic Perspective on the Reinsurance Market

Bonds Rated NAIC Quality Category 3-6 as a Percent of Total Bonds, 2003–2012

2.69%

2.10% 2.17%1.98%

3.07% 3.10%

4.07%

2.04%2.27%

2.58%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

There are many ways to capture higher yields on bond portfolios.One is to accept greater risk, as measured by NAIC bond ratings.

The ratings range from 1 to 6, with the highest quality rated 1.Even in 2012, over 95% of the industry’s bonds were rated 1 or 2.

Sources: SNL Financial; Insurance Information Institute.

From 2006-07 to year-end 2012, the percentage of lower-quality

bonds in P/C industry portfolios more than doubled

Page 52: An Economic Perspective on the Reinsurance Market

67

P/C Insurance Industry Financial Overview

Profit Recovery in 2012 After High CAT Losses; Ultimate

Impact of Sandy Still Unclear

67

Page 53: An Economic Perspective on the Reinsurance Market

P/C Net Income After Taxes1991–2013:Q1 ($ Millions)

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 5.9% 2013:Q1 ROAS1 = 9.6%

• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 9.7% ROAS in 2013:Q1, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.

Sources: A.M. Best, ISO, Insurance Information Institute

$14,

178

$5,8

40

$19,

316

$10,

870

$20,

598

$24,

404 $3

6,81

9

$30,

773

$21,

865

$3,0

46

$30,

029

$62,

496

$3,0

43

$35,

204

$19,

456 $3

3,52

2

$14,

394$2

8,67

2

-$6,970

$65,

777

$44,

155

$20,

559

$38,

501

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13:Q1

2012:Q1 ROAS

was 7.2%Net income is up

substantially (+40.9%) from 2012:Q1 $10.2B

Page 54: An Economic Perspective on the Reinsurance Market

-5%

0%

5%

10%

15%

20%

25%

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1213

:Q1

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013:Q1*

*Profitability = P/C insurer ROEs. 2011-13 figures are estimates based on ROAS data. Note: Data for 2008-2013 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%2006:12.7%

1984: 1.8% 1992: 4.5% 2001: -1.2%

10 Years

10 Years9 Years

2012: 5.9%

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2013:Q1 9.7%

Page 55: An Economic Perspective on the Reinsurance Market

A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEsCombined Ratio / ROE

* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012 combined ratio including M&FG insurers is 103.2, 2011 combined ratio including M&FG insurers is 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data.

97.5100.6 100.1 100.8

92.7

101.299.5

101.0

94.8

102.4

106.5

95.79.7%

6.2%4.7%

7.9%7.4%4.3%

9.6%

15.9%14.3%

12.7% 10.9%

8.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013:Q10%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs

A combined ratio of about 100 generates an ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

Catastrophes and lower investment

income pulled down ROE in 2012

Page 56: An Economic Perspective on the Reinsurance Market

P/C Insurer Impairments, 1969–20128

1512

711 9

349

13 1219

916 14 13

3649

3134

50 4855

60 5841

2916

1231

18 1949 50

4735

1814 15 16

19 2134

18

5

0

10

20

30

40

50

60

70

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Source: A.M. Best Special Report “1969-2011 Impairment Review,” June 2012 and March 6, 2013 update; Insurance Info. Institute.

The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets

71

Impairments among P/C insurers remain infrequent

Page 57: An Economic Perspective on the Reinsurance Market

$0$50

$100$150$200$250$300$350$400$450$500$550$600$650

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13*

US Policyholder Surplus:1975–2013*

* As of 3/31/13.Source: A.M. Best, ISO, Insurance Information Institute.

“Surplus” is a measure of underwriting capacity. It is

analogous to “Owners Equity” or “Net Worth” in non-

insurance organizations

($ Billions)

The Premium-to-Surplus Ratio Stood at $0.77:$1 as of3/31/13, A Near Record Low (at Least in Recent History)*

Surplus as of 3/31/13 was a record $607.7, up 3.6% from $586.9 of 12/31/12, and up 39.0% ($170.6B) from the crisis trough of $437.1B at 3/31/09. Pre-

crisis peak was $521.8 as of 9/30/07. Surplus as of 3/31/13 was 16.5% above 2007 peak.

Page 58: An Economic Perspective on the Reinsurance Market

73

Policyholder Surplus, 2006:Q4–2013:Q1

Sources: ISO, A.M .Best.

($ Billions)

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$540.7$530.5

$544.8$559.2 $559.1

$538.6$550.3

$567.8

$583.5$586.9

$607.7

$570.7$566.5

$505.0$515.6$517.9

$420$440$460$480$500$520$540$560$580$600$620

06:Q407:Q107:Q207:Q307:Q408:Q108:Q208:Q308:Q409:Q109:Q209:Q309:Q410:Q110:Q210:Q310:Q411:Q111:Q211:Q311:Q412:Q112:Q212:Q312:Q413:Q1

2007:Q3Pre-Crisis Peak

Surplus as of 3/31/13 stood at a record high $607.7B

*Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business in early 2010.

The Industry now has $1 of surplus for every $0.80

of NPW, close to the strongest claims-paying

status in its history.

Drop due to near-record 2011 CAT losses

The P/C Insurance Industry Both Entered and Emerged from the 2012 Hurricane

Season Very Strong Financially.

Page 59: An Economic Perspective on the Reinsurance Market

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