BEST’S SPECIAL REPORT

Europe Non-Life & Life

Our Insight, Your Advantage.

Market Review September 5, 2016

“Europe’s Largest Cedants take advantage of soft market conditions to purchase more reinsurance protection and lock in favourable pricing and terms with multi-year deals”

Analytical Contact:

Carlos Wong-Fupuy, London Tel: +44 20 7397 0287 Carlos.Wong-Fupuy @ambest.com

Editorial Managers:

Richard Hayes, London Tel: +44 20 7397 0326 [email protected] Edem Kuenyehia, London Tel: +44 20 7397 0280 Edem.Kuenyehia @ambest.com SR-2016-599

Europe’s Largest Cedants Take Advantage of Opportune Market Conditions Europe’s 20 largest cedants are taking advantage of plentiful and inexpensive reinsurance capacity, taking out more cover and locking in favourable rates with multi-year reinsurance arrangements. While retention ratios are down slightly year-on-year, the biggest change is the significant percentage increase in cessions (17%) in comparison to much lesser increases in premiums. This trend towards increased cessions suggests cedants are making the most of the soft reinsurance market conditions and, in many instances, enhanced negotiating powers to benefit from this efficient form of contingent capital. The move to centralise reinsurance buying remains a theme among the larger cedants for 2016, with all the advantages this entails, including enhanced buying power, reduced administration and more control over counterparty credit risk. Buying behaviours are also influenced, in some instances, by changing business models. Groups with a strong track record in personal lines, including Allianz, Axa, Mapfre and Aviva, either continue to reinforce or are broadening their product range in commercial and specialty lines in order to better serve their European and international clients. Such classes of business typically require greater reinsurance support, which could be one factor behind the reduced retentions and increased cessions in 2015 in comparison to 2014.

Making hay Europe’s biggest reinsurance buyers remain those that are focused on underwriting lowfrequency, high severity exposures, with Lloyd’s ranking in first position by premiums ceded by a significant margin. In 2015, Lloyd’s ceded EUR 7.7 billion in non-life premiums, up from EUR 6.7 billion in 2014. Europe’s second and third biggest cedants are Chubb and Zurich Insurance Group, which both increased their year-on-year cessions in 2015 (to EUR 5.6 billion and EUR 5.2 billion respectively). Chubb, following its USD 28 billion (EUR 25 billion) merger with ACE, is expected to further centralise its group reinsurance buying. However, the impact of mergers and acquisitions on the top 20 cedants is difficult to extrapolate at this early stage as typically it takes several years for combined entities to fully realise their potential synergies and adapt reinsurance programmes accordingly. It should also be noted that cession ratio increases can be witnessed in most groups in this year’s top 20 ranking, not only those that have recently undergone consolidation. There are several factors driving increased cessions to the reinsurance market, including favourable pricing, particularly for catastrophe and larger risks that have historically been more expensive to reinsure. Insurers are benefiting from greater risk transfer in high risk layers, a segment of risk where there is abundant capacity, enabling them to reduce volatility and further protect their balance sheets in the event of major catastrophe losses. Many of the largest buyers are negotiating multi-year treaty placements to lock in favourable renewal rates and terms and maintain stable long-term relationships with their counterparties.

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Special Report

Europe Non-Life & Life

Terms and conditions are becoming increasingly broad, with a number of cedants requesting and being granted - extended hours clauses for flooding and other natural disasters, for instance. The trend towards increased reinsurance cessions should also be understood in the context of more consolidated buying practices. In recent years many of the largest cedants overhauled their reinsurance buying, in part driven by Solvency II, with Allianz and Generali among those pursuing a more centralised buying strategy. Having adopted such an approach, these cedants were able, in most instances, to reduce reinsurance spend and increase their retentions. Now the focus has shifted somewhat, with a greater impetus to increase return on capital. Cedants are taking advantage of the enhanced bargaining power they have gained from a more centralised approach to managing risk exposures, including reinsurance capital, to access broader more cost-effective programmes, using reinsurance as a cheap form of contingent capital. With relationships still a cornerstone of the European insurer-reinsurer interaction, there remains still significant stability in the make-up of reinsurance panels. While some cedants are tapping new capacity providers, including collateralised reinsurance and other nontraditional sources of cover, there is a theme of continuity with insurers looking to strengthen

Exhibit 1 Europe Non-Life – 20 Largest Group Cedants Ranked by 2015 premiums ceded. (EUR Millions)

Rank 2015 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Rank 2014 1 2 3 4 7 5 6 12 8 10 9 11 13 14 15 20 17 n/r n/r n/r

Company Name Lloyd’s of London Chubb Zurich Insurance Group Allianz MAPFRE AXA HDI Aviva RSA Insurance Group Munich Reinsurance Company Assicurazioni Generali Admiral Group Covea Wiener Staedtische Versicherung Grupo Catalana Occidente SCOR Groupama UnipolSai Assicurazioni Deutsche Rückversicherung Achmea B.V.

Country United Kingdom Switzerland Switzerland Germany Spain France Germany United Kingdom United Kingdom Germany Italy United Kingdom France Austria Spain France France Italy Germany Netherlands

Total

Premiums Ceded 2015 2014 7,690 6,713 5,581 4,503 5,157 4,503 4,933 3,961 3,442 2,599 3,224 2,907 3,065 2,718 1,847 822 1,229 1,268 1,161 1,021 1,136 1,222 963 824 809 792 758 771 738 692 641 518 581 550 445 420 410 403 398 303 44,208

Notes: The list is ranked on 2015 ceded reinsurance premium. n/r - Not ranked. Company was outside the ranking in 2014. Source: Best’s Statement File—Global, A.M. Best data and research

2

37,510

Non-Life Gross Premiums Written 2015 2014 36,218 32,281 21,794 17,491 33,102 32,711 51,597 48,322 17,441 16,370 34,931 32,872 13,633 11,934 11,857 11,429 9,306 9,326 24,789 23,654 20,898 20,818 1,628 1,408 11,573 11,171 4,997 4,947 2,836 2,464 5,723 4,935 5,004 4,992 7,373 8,451 1,077 1,038 17,556 17,293 333,336

313,907

Net Premiums Written 2015 2014 28,528 25,568 16,213 12,988 27,945 28,208 46,664 44,361 13,999 13,771 31,707 29,965 10,568 9,216 10,011 10,607 8,077 8,058 23,628 22,633 19,762 19,596 665 584 10,764 10,378 4,239 4,176 2,098 1,772 5,082 4,417 4,423 4,442 6,929 8,031 668 635 17,158 16,990 289,128

276,397

Special Report existing long-term partnerships with their counterparties, particularly when entering new lines of business.

Europe Non-Life & Life

Exhibit 2 Europe Non-Life – 20 Largest Group Cedants’ Retention Ratios Ranked by 2015 retention ratio.

While retention ratios have decreased for half of the top cedants, retentions remain high for the majority of them (with an average of 81.2%). In A.M. Best’s opinion, cedants are sufficiently capitalised to keep these risks on their balance sheets, provided they continue to take a sophisticated approach to portfolio and exposure management, utilising modelling and analytics to manage accumulations within their books of business.

Retention Ratio 2015

2014

Change

Achmea B.V.

97.7%

98.2%

▼

Munich Reinsurance Company

95.3%

95.7%

▼

Assicurazioni Generali

94.6%

94.1%

▲

UnipolSai Assicurazioni

94.0%

95.0%

▼

Covea

93.0%

92.9%

▲

AXA

90.8%

91.2%

▼

Allianz

90.4%

91.8%

▼

SCOR

88.8%

89.5%

▼

Groupama

88.4%

89.0%

▼

RSA Insurance Group

86.8%

86.4%

▲

Wiener Staedtische Versicherung

84.8%

84.4%

▲

Aviva

84.4%

92.8%

▼

Zurich Insurance Group

84.4%

86.2%

▼

MAPFRE

80.3%

84.1%

▼

Lloyd’s of London

78.8%

79.2%

▼

HDI

77.5%

77.2%

▲

Chubb

74.4%

74.3%

▲

Grupo Catalana Occidente 74.0% 71.9% An exception to those with high retention ratios is Admiral Group (with a retention UNIQA Österreich Versicherungen 60.7% 55.9% ratio of 40.8%) which relies more heavily Admiral Group 40.8% 41.5% on reinsurance support than the other Source: Best’s Statement File—Global, A.M. Best data and research top cedants. This is due to the particular features of its business models. For motor insurer Admiral, a significant amount of the risk underwritten is transferred to its reinsurance partners with the insurer’s main focus being efficiencies in distribution and administration.

▲

Six of the top 20 cedants have retention ratios exceeding 90%. For large (re) insurance groups such as Munich Re, Allianz and Generali, this is expected and reflects their size, scope and broad diversification across international markets and lines of business. Munich Re’s retention ratio remains the highest at 95.3%, although it is down marginally year-on-year from 95.7% in 2014.

Company Name

A buyer’s market... but for how long? The cost of reinsurance continues to fall as high levels of competition, the influx of alternative capacity, several years of benign catastrophe losses and excess capital exert downward pressure on rates. This is most pronounced within the U.S. property catastrophe market but there is a widespread softening trend across the market as reinsurers seek to redeploy their capacity into classes of business and territories where rates and terms and conditions are deemed more favourable. Traditional global reinsurance capacity contracted by 3.5% to USD 357 billion in 2015, according to broker Willis Re, as reinsurers sought to return capital to shareholders where it could not be effectively deployed. However, this was offset by continued growth in alternative capital, which grew to USD 70 billion. There are tentative signs pricing may be nearing the bottom of the cycle, with rate reductions slowing at the mid-year 2016 reinsurance renewals. And casualty and specialty lines of business are showing more resilience to pricing pressure being felt in property catastrophe 3

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Special Report

Europe Non-Life & Life

classes of business. As a result, reinsurers are continuing to expand their product offerings in areas where they are able to achieve better margins, including marine, energy, cyber and political risk. At present, the reinsurance industry maintains sufficient capital with which to absorb exposures in the market. However, storm clouds are looming as reduced investment income and underwriting margins will ultimately place a drag on risk-adjusted returns and financial strength, as noted in A.M. Best’s December 2015 briefing, “Reinsurance Outlook Maintained at Negative - Redundant Reserves, Benign Catastrophes Mask Reality”. There is no guarantee reinsurance companies will continue to benefit from the low occurrence of major catastrophes. Some major events, including the Fort McMurray wildfires in Canada, severe thunderstorms and flooding in the US and Europe and two major earthquakes on the southern Japanese island of Kyushu have already dented first half reinsurer earnings for 2016. The ability to prop up disappointing results with prior accident year reserve releases will continue to be an option, but for how long? While the situation differs from company to company, on a percentage point basis the amount of reserve releases has reduced across the sector and it is clear that the current level of favourable development is declining. As a result of these dynamics, A.M. Best is maintaining its negative outlook on the sector. In A.M. Best’s view, a significant catastrophe event or the slowing down of reserve releases could compress reinsurance margins significantly. It is also A.M. Best’s expectation that the significant ongoing operating challenges will hinder positive rating actions and could translate into negative rating actions over the longer term. Many of the larger reinsurance companies boasted return on equities (RoEs) above 11% in 2015, although this was a reduction on 2014 where average RoEs were in excess of 14%. Should insured catastrophe losses return to more normal levels in 2016 and reserve releases continue to decline it could compress RoEs quite substantially. Large, well diversified reinsurance groups will continue to navigate the current pressures with most success, leveraging their broad distribution capabilities and practising active and disciplined cycle management. The drive for scale and capital efficiencies may prompt further consolidation within the sector, with the gap between the panel of top tier of larger, more sophisticated companies, and second and third tier reinsurers getting wider. A.M. Best anticipates that reinsurers will continue to harness third-party capital as they seek to differentiate and innovate, offering cedants a broader range of products, including collateralised reinsurance. As an asset class, reinsurance remains attractive to capital market investors, including pension funds and other institutional investors, as it is largely uncorrelated to their other investments and continues to offer attractive returns. However, the unknown quantity of how the capital markets will react to a major unexpected loss in the market remains a factor that could lead to a re-evaluation of the sector’s attractiveness. The non-traditional reinsurance market has yet to be properly tested by major claims, particularly substantial unmodelled losses or events that demonstrate some correlation between the catastrophe and equity markets. It is clear however that third-party capital providers have a long-term commitment to the reinsurance sector and many anticipate that more capital is waiting at the sidelines to flow into the sector post-event to take advantage of any market corrections. The ease with which 4

Special Report

Europe Non-Life & Life

investors can release funds to back unrated structures such as cat bonds, ILS funds, sidecars and special purpose syndicates has, in A.M. Best’s view, fundamentally altered the reinsurance cycle, impacting the duration and volatility of future market peaks and troughs.

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