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The Aon Benfield Aggregate Aon Benfield Analytics | Market Analysis The Aon Benfield Aggregate Results for the six months ended June 30, 2014 Risk. Reinsurance. Human Resources. Table of Contents Global Reinsurer Capital ................................................................................................... 3 Executive Summary .......................................................................................................... 4 ABA Capital ...................................................................................................................... 5 Capital Development ......................................................................................................... 5 Capital Management .......................................................................................................... 7 Premium Income .............................................................................................................. 8 Earnings .........................................................................................................................12 Underwriting Performance ............................................................................................... 13 Investment Results ........................................................................................................... 15 Net Income ...................................................................................................................... 16 Return on Equity .............................................................................................................. 17 ABA Business Model Evolution ........................................................................................20 Who Are The New Investors? ........................................................................................... 20 How Is New Money Being Deployed? .............................................................................. 20 Implications for ‘Traditional’ Reinsurers ............................................................................ 20 Convergence in Action .................................................................................................... 20 ABA Valuation ................................................................................................................22 Financial Strength Ratings ..............................................................................................23 Appendix 1: ABA Data ....................................................................................................24 2 The Aon Benfield Aggregate – Results for the six months ended June 30, 2014 Global Reinsurer Capital Aon Benfield estimates that global reinsurer capital totaled USD570 billion at June 30, 2014, an increase of 6% relative to the end of 2013. This calculation is a broad measure of capital available for insurers to trade risk with and includes both traditional and alternative forms of reinsurer capital. Exhibit 1: Global Reinsurer Capital 700 Traditional Capital Alternative Capital 570 600 540 Global Reinsurer Capital 505 470 455 6% 500 7% 410 400 11% 385 -3% 400 340 18% 6% -17% 18% 511 300 490 466 USD (billions) 447 428 200 368 388 378 321 100 17 22 19 22 50 59 0 24 28 39 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 1H 2014 Source: Company reports, Aon Benfield Analytics Major insurers and reinsurers generally maintained their solid operating performance during the first half of 2014, aided by below average insured catastrophe losses, economic recovery in the United States, exposure growth in emerging markets and relatively stable capital market conditions. Retained earnings were bolstered by unrealized gains on bond portfolios, driven in particular by lower yields in the eurozone, providing a boost to reported capital positions. The involvement of capital market investors in the reinsurance sector through non-equity participations continues to expand. This is evidenced by record levels of catastrophe bond issuance in the first half of 2014 (exceeding the prior year period by almost 50%), growth in fully collateralized placements, the establishment of new sidecar vehicles and the exploration of alternative business models by hedge fund managers. Aon Benfield Analytics | Market Analysis 3 Executive Summary In the absence of significant catastrophe losses, industry Reactions to lower property catastrophe pricing varied, with capital continues to build. some companies shrinking their books on both a gross and net basis and others leveraging third party capital to maintain or Aon Benfield estimates that global reinsurer capital rose by 6% build their business positions. to USD570 billion during the six months to June 30, 2014, driven by generally solid earnings, unrealized gains on bond Increased competition is impacting underwriting portfolios and a continuing influx of new funds from capital margins. markets investors. The combined ratio of the listed ABA rose by 0.4 percentage The reported shareholders’ funds of the 31 ABA companies points to 90.3% in the first half of 2014, while P&C stood at USD351 billion (62% of global reinsurer capital), an underwriting profit was unchanged at USD7.9 billion. increase of 4%, driven by net income of USD18.6 billion and Reported catastrophe losses declined relative to the prior year unrealized gains of USD9.4 billion. period and were well below the long-term average. Convergence is driving risk transfer costs down and Underlying fundamentals were negative. Weakening pricing freeing-up equity capital. and business mix changes impacted attritional loss and expense ratios and support from prior year reserve Net catastrophe exposures are reducing as ABA companies lay- development was reduced. off increasing amounts of risk to the capital markets via sidecars, insurance-linked securities and more cost effective Low interest rates continue to depress underlying retrocession cover. investment results. Public dividends and share buybacks rose by 11% to USD12.4 The listed ABA reported a 4% increase in ordinary investment billion in the first half of 2014. This was equivalent to 5.4% of income to USD13.4 billion, driven by underlying asset growth opening capital, up from 5.0% previously. and portfolio repositioning. However the yield of 2.9% is down by a third relative to 2007. Most ABA companies continue to achieve premium growth, despite difficult market conditions. Headline return on equity remains resilient, but is declining on an underlying basis. Property and casualty premiums written by the listed ABA (excluding NICO and Gen Re – see below) rose by 4% to Net income reported by the listed ABA rose by 12% to USD109 billion in the first half of 2014, with growth split USD14.0 billion, an annualized return on average equity of evenly between insurance and reinsurance business. 12.2%. This result was heavily influenced by realized and unrealized capital gains. Return on equity based on pre-tax The main drivers were acquisitions, diversification into new operating profit stood at 10.3%. lines, expansion in emerging markets, a shift towards longer- tail proportional business and the impact of multi-year contracts. Evolution of the ABA Aon Benfield Aggregate (ABA) reports are produced on a half-yearly basis and cover the reported results of 31 major reinsurers worldwide, with the aim of identifying the latest trends in the P&C reinsurance marketplace. The study comprises 29 publicly-listed holding companies (‘the listed ABA’) and two US-domiciled subsidiaries of Berkshire Hathaway, namely National Indemnity Company (NICO) and General Reinsurance Corporation (Gen Re). NICO entered into a significant intra-group reinsurance transaction with GEICO Group effective January 1, 2014, which has had a material impact on its reported results. To provide a more meaningful picture of the sector’s underlying performance, many of the charts and ratios used in this report focus on the listed ABA. 4 The Aon Benfield Aggregate – Results for the six months ended June 30, 2014 ABA Capital The reported shareholders’ funds of the 31 ABA companies stood at USD351 billion at June 30, 2014, an increase of 4% or USD14 billion since the end of 2013. The total for the listed ABA was USD239 billion, an increase of 4% or USD10 billion. Exhibit 2: ABA Shareholders’ Funds 400 351 337 317 278 283 4% 300 6% 242 12% 226 2% 201 187 15% 200 12% -17% 29% USD (billions) USD 100 0 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 1H 2014 Source: Company reports, Aon Benfield Market Analysis Capital Development The main drivers of the growth in ABA capital were net income of USD18.6 billion and unrealized investment gains of USD9.4 billion, partly offset by dividends of USD10.1 billion and share buybacks of USD4.2 billion. The most significant unrealized gains were reported by Munich Re (USD2.4 billion), Swiss Re (USD1.7 billion), NICO (USD1.2 billion), ACE (USD0.9 billion) and Mapfre (USD0.6 billion). Exhibit 3: Year-to-Date ABA Shareholders’ Funds Development 375 9.4 -4.2 -10.1 18.6 0.6 -1.1 351.3 350 337.5 0.5 325 USD (billions) 300 FY 2013 Additional Net FX Investment Share Dividends Other 1H 2014 SHF capital income gains buybacks SHF Source: Company reports, Aon Benfield Market Analysis Aon Benfield Analytics | Market Analysis 5 Between them, NICO and Gen Re reported USD112 billion of shareholders’ funds at June 30, 2014, representing 32% of the ABA total. On a combined basis, Munich Re, Swiss Re and ACE contributed USD101 billion or 29%. More than half of the ABA companies
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