Global Reinsurance Guide 2015 Global Reinsurance Guide 2015 Contents

Overview 1

2015 Outlook: Global Reinsurance 2

Special Reports 8 Global Reinsurance’s Shifting Landscape 10 Alternative Reinsurance 2014 Market Update 16 Reinsurer Mergers and Acquisitions 24 Asian Reinsurance Markets 28 Latin American Reinsurance Markets 34 Global Reinsurers’ Mid-Year 2014 Financial Results 40

Summary of Company Reports 48 Alleghany Corporation 50 Arch Capital Group Ltd 51 AXIS Capital Holdings, Ltd 52 Berkshire Hathaway Inc. 53 Hannover Rueck SE 54 Lloyd’s of London 55 Munich Reinsurance Company 56 Reinsurance Group of America, Inc. 57 RenaissanceRe Holdings Ltd. 58 SCOR S.E. 59 Swiss Reinsurance Company Ltd 60 Validus Holdings, Ltd. 61 XL Group plc 62

Global Reinsurance Guide 2015 Contributors

For information on Fitch’s rating Martyn Street process please contact: Senior Director, Insurance +44 20 3530 1211 [email protected] Europe/Middle East Lucinda Jeffrey + 44 20 3530 1350 [email protected] Brian Schneider David Turner Senior Director, Insurance + 44 20 3530 1442 +1 312 606 2321 [email protected] [email protected] North America/Bermuda Brad Istwan +1 312 368 3197 Siew Wai Wan [email protected] Senior Director, Insurance +65 6796 7217 Greg Hiltebrand [email protected] +1 312 368 5448 [email protected]

Asia Chris Waterman Wayne Li Managing Director, Insurance + 852 2263 9915 +44 20 3530 1168 [email protected] [email protected]

Additional information on Fitch’s ratings and research is available at www.fitchratings.com Harish Gohil Managing Director, Insurance +44 20 3530 1257 [email protected]

Global Reinsurance Guide 2015 Overview

The fifth edition of Fitch Ratings’ 2015 Global Reinsurance The Asian Reinsurance Markets explores the effects of softening Guide provides reinsurance brokers, security committees and pricing conditions across the region, as well as providing an update reinsurance investors with the latest research on the global on how market growth is attracting foreign companies to establish reinsurance sector and views on the ratings in the agency’s operations within the region. universe of reinsurance coverage. The Latin American Reinsurance Markets report discusses The 2015 Outlook: Global Reinsurance report discusses the key growth trends across the region, as well as reinsurers’ performance, drivers behind the negative sector outlook that Fitch maintains, catastrophes losses and the evolving regulatory framework. as well as outlining the conditions that could lead the agency to The Global Reinsurers’ Midyear 2014 Financial Results revise its rating outlook to negative from stable. The report details report provides a review of the financial results and performance three key issues that are expected to pose a challenge to reinsurers highlights released during the half-year 2014 reporting period by during 2015: Fitch’s monitored universe of reinsurers. 1. Deterioration of pricing adequacy and terms and conditions; The final section of the report contains the most recent research 2. Search for higher yields increases risk as low investment on a selected group of reinsurers that are rated by Fitch. The returns persist; summary credit reports provide details on key rating drivers and rating sensitivities for each reinsurer. 3. Structural change threatens to weaken traditional reinsurers’ competitive position. The Global Reinsurance’s Shifting Landscape report discusses how the prevailing adverse conditions in the reinsurance market go beyond a normal cycle. The paper sets out in detail the factors that Fitch considers when seeking to identify those reinsurers that could be most vulnerable to adverse shifts in the reinsurance landscape. The Alternative Reinsurance 2014 Market Update discusses the continued convergence of the traditional and alternative reinsurance markets, examining some of the factors that continue to attract alternative forms of capital. The Reinsurer Mergers and Acquisitions (M&A) report outlines the factors that support the agency’s expectations of greater M&A activity in the reinsurance market, including the increasing availability of alternative reinsurance, offset by continued deal impediments.

1 Global Reinsurance Guide 2015 2015 Outlook: Global Reinsurance

Rating Outlook Reinsurers Face Intense Market Pressure, STABLE But Maintain Financial Strength (2014: STABLE) Sector Outlook Negative: Fitch Ratings’ fundamental outlook for the reinsurance sector is negative, as intense market competition Rating Outlooks and sluggish cedent demand has resulted in a softening market for Positive Stable Negative/RWN reinsurers. In addition, the onslaught of alternative capital, which 100% Fitch views as enduring, leads us to expect that prices will continue to fall, and for terms and conditions to weaken into 2015 across 80% a wider range of business lines. The agency initially moved to a negative global reinsurance sector outlook in January 2014. 60% Rating Outlook Stable: Despite growing headwinds, Fitch maintains a stable rating outlook. This assumes a base case 40% scenario that over the next 12-18 months a majority of reinsurers will be able to maintain overall adequate profitability and strong 20% capitalisation despite softening prices, and that any declines in earnings will be within ranges that current ratings can tolerate. 0% 2013 (%) Current (%) While ratings for most reinsurers are expected to be unchanged, Source: Fitch there is heightened risk a select group of smaller monoline companies, especially those with property catastrophe books, Sector Outlook could suffer downgrades or be moved to Negative Outlooks. In aggregate, this may be offset by selective upgrades of a small NEGATIVE group of well-established larger and more diversified players (2014: NEGATIVE) viewed as most resilient to market conditions. • Deterioration of pricing adequacy and terms and conditions Pricing Adequacy to Decline: Price adequacy is expected to • Search for higher yields increases risk as low investment decline in 2015, although rates of return are expected to remain returns persist above reinsurers’ cost of capital. Earnings pressure is forecast to increase across the sector as softening pricing in property • Structural change threatens to weaken traditional reinsurers’ business will migrate to other lines, such as casualty, as reinsurers competitive position look to redeploy capital in more profitable areas. Search For Yield Creates Risk: Persistence of low investment Analysts yields increases the risk of adverse investor behaviour as both Martyn Street reinsurers and investors seek higher returns. The inflow of +44 20 3530 1211 alternative capital has included select use of hedge fund-based [email protected] investment strategies, which not only impact balance sheet quality, but are designed to provide a pricing advantage for the Brian Schneider reinsurer that can aggravate softening markets. +1 312 606 2321 [email protected] Traditional Reinsurers Face Structural Pressures: Alternative reinsurance and changes in reinsurance purchasing are expected to Jeremy Graczyk have long-term implications. The growth of alternative capital is viewed +1 312 368 3208 as a credit negative for traditional reinsurers’ ratings, as a significant [email protected] portion of capital-market funds is expected to remain permanent. Thus, Fitch views the current soft market as not just a normal cycle. Related Research Alternative Reinsurance 2014 Market Update (September 2014) Outlook Sensitivities Global Reinsurance’s Shifting Landscape (September 2014) Deterioration in Sector Profitability: Fitch would change the Latin American Reinsurance (September 2014) rating outlook to negative if we reach a point where run-rate Reinsurer Mergers and Acquisitions (August 2014) combined ratios would be expected to hover closer to 100% (2015 Global Reinsurers’ Mid-Year 2014 Financial Results (August 2014) forecast is 95.7%) or return on equity dropped below 10% (2015 at Asian Reinsurance Markets (August 2014) 11.1%), even if capital remained strong. This could be driven by any

Global Reinsurance Guide 2015 2 combination of softening pricing, low investment yields, unexpected to deteriorate significantly more before profit erosion becomes shifts in loss costs, reserve deficiencies, or a failure of market pricing untenable, as reinsurers in aggregate posted combined ratios to adequately respond to a sizable industry loss event(s). below 90% and returns on equity (ROE) of around 12% in the last few years. Catastrophic Loss With Interest Spike: A significant catastrophic loss event of USD70bn or more, coupled with significant unrealised investment losses from an abrupt jump in interest rates of 300bp or Rating Outlook Could Move Negative Under More more also could threaten the sector’s stable rating outlook. Such a Severe Conditions scenario would leave balance sheets temporarily more exposed to If a more stressed scenario emerged, Fitch would expect to move adverse events and is particularly concerning if reinsurers do not its rating outlook to negative. Such a scenario could involve either have sufficient liquidity to pay claims and need to sell investments a shock to capital or an enduring decline in profits, even if balance at a loss and/or raise new capital at a higher cost. sheets stayed strong, or an unanticipated and severe shock to capital. Profitability pressure would likely be driven by an acceleration Key Issues of current competitive market conditions, with continued double-digit price softening in property lines and rate declines Sector Outlook Negative, Rating Outlook Stable spreading wider across most casualty business. At the same The absence of large losses, intense market competition and time, extraordinary low investment yields continuing into the sluggish demand from reinsurance buyers has resulted in a future would limit investment returns as a source of earnings. softening market for reinsurers, characterised by falling prices An unexpected jump in loss costs at a greater rate than earned and, less visibly, weakening terms and conditions. The high level premium increases would more quickly result in deteriorating of surplus capital held by reinsurers within the sector leads Fitch underwriting profitability, particularly if it led to the emergence of to expect that soft market conditions will continue, although reserve deficiencies. the rate and extent of further price deterioration is unclear. This A shock to capital could come from a significant catastrophic or expectation, coupled with previous pricing reductions, is the key disaster loss event or series of events, either natural or man-made. factor that led the agency to assign a negative fundamental sector This would be particularly problematic if it was a non-modelled risk outlook in January 2014. or unexpected loss event, as it would not have been priced into Fitch maintains a stable outlook for the ratings of the reinsurance current business. To the extent that loss-affected price increases sector. Fitch believes most reinsurers will maintain both failed to respond adequately to the event, capital would remain profitability and balance sheet strength over the next 12- depressed and reinsurers would be forced to reduce expectations 18 months commensurate with current ratings. There is an of future payback. increasing risk, however, that a select group of smaller reinsurers, especially those with more heavily exposed property books, could Figure 1 experience downgrades and/or movements to Negative Outlooks. In aggregate, such negative actions could be offset by upgrades of 2014/2015 Non-Life Projections a select group of larger, more diverse players seen as most resilient (USDm) 2015F 2014F 2013A to market conditions. Fitch’s recently upgraded reinsurers include Net premiums written 109,200 107,100 103,905 Hannover Re, Lloyd’s and XL, with Swiss Re, SCOR and Arch Capital Catastrophe losses 11,700 7,050 3,500 currently on a Positive Outlook. Net prior-year favourable 4,250 6,250 6,210 The agency’s central scenario entails a further strengthening of reserve development the sector’s capital, driven by solid, although declining, profitability Calendar-year combined ratio 95.7 89.0 85.5 in 2014/2015, as softening pricing continues, but remains (%) adequate overall and in line with loss cost trends. This follows favourable results in 2013, as catastrophe losses have been Accident-year combined ratio 99.7 95.0 91.6 manageable. Throughout 2015, the agency anticipates low but (%) stable investment yields and reduced contributions from prior- Accident-year combined ratio 88.6 88.2 88.1 year reserve surpluses. excl. catastrophes (%) Ironically, the favourable underwriting results posted by the Shareholders’ equity 260,400 248,000 236,195 industry since the record catastrophe loss year in 2011 has fostered (excluding Berkshire the current challenging reinsurance environment. Reinsurers’ Hathaway) profitable results are attracting more capital to the sector, which Net income ROE (excluding 11.1 11.8 12.2 has created excess reinsurance underwriting capacity, leading Berkshire Hathaway) to price competition and falling reinsurance rates. However, Source: Fitch monitored universe of reinsurers recent performance reveals that pricing and competition need

3 Global Reinsurance Guide 2015 A near-term spike in interest rates could also result in a capital Fitch would consider any change in its expectations in which decline from sizable unrealised investment losses. This would the calendar year combined ratio would move above 100% as a reduce near-term financial flexibility and overall liquidity in the key driver of future, broad-based ratings downgrades, as such a event that reinsurers need to pay out an increased level of claims. fluctuation in performance on a run-rate basis would fall outside Fitch calculates that each 100bp increase in interest rates would cyclical norms embedded in most ratings. result in an approximate 5% decline in the reinsurance sector’s Despite weakening earnings, industry capitalisation should remain stated shareholders’ equity. strong. Given limited underwriting opportunities, Fitch expects annual shareholders’ equity growth of around 5% in the near Deterioration of Pricing Adequacy and Terms term as reinsurers return the majority of earnings to shareholders and Conditions through share repurchases and dividends. These overall results The majority of Fitch’s rated reinsurers demonstrate a reasonable translate into a declining net income ROE of 11.1% in 2015, down level of diversification within their portfolios, which affords some from 11.8% forecast for 2014 and 12.2% actual in 2013, as both resilience to market conditions. In contrast, smaller size and scale underwriting and investment results are expected to remain under can reduce a reinsurer’s ability to influence prices and terms and pressure. Fitch would view an ROE below 10% as signaling broad- conditions compared with larger players. It can also prove harder based downgrade pressure. for smaller players to withdraw capacity from unattractive market segments, or achieve meaningful diversification into new lines, Fitch’s base case also assumes that reserve development will should this be required. Accordingly, Fitch views small mono-line remain favourable in 2014 and 2015, although the level of surplus property catastrophe reinsurers as most vulnerable to a protracted will deteriorate from 6% of earned premiums in 2014 to 4% in period of market price softening (see Global Reinsurance’s Shifting 2015. The agency believes that many property-focused reinsurers Landscape, published 3 September 2014, for details). have benefitted from 2014 reserve releases being supported by favourable development on loss provisions related to Hurricane In the absence of a major loss event, pricing and terms and Sandy in 2012. The lower claims costs arising from major losses conditions for the majority of business lines are expected to since that event narrows the possible sources for reinsurers to deteriorate during 2015, increasing earnings pressure across the make future releases. sector. However, the price adequacy of written business, which usually considers a rate of return above a company’s cost of capital, While the continued growth of alternative capital is increasingly is expected to remain positive for most classes. seen as a structural change within the property catastrophe reinsurance sector (see Alternative Reinsurance 2014 Market The agency expects the sector to remain profitable in 2015, Update, to be published 8 September 2014), the agency views albeit at a reduced level compared with that forecast for 2014. A the occurrence of major loss activity as the main determinant of deterioration in the calendar-year combined ratio to 95.7% (2014F: cyclical pricing conditions. In contrast to 2013 and 2014, there is 89%; 2013A: 85.5%) reflects Fitch’s expectation that catastrophe a growing likelihood that the most significant price declines in the losses will return to the long-term historical average (USD39bn), of early 2015 renewals will occur across loss-free European and Asian which 30% would fall to reinsurers. property classes. The ultimate outcome of renewals will be partly influenced by the volume of underwriting capacity that is redeployed by reinsurers as Figure 2 they reduce exposure to certain North American classes. Driven by Recent Reinsurance Renewal Pricing Trends an exceptional combination of cyclical soft market and structural change, US property catastrophe rates have experienced steep Renewal declines in the last 18 months to a point where expected returns season Developments have fallen into high-single digits. On a risk-adjusted basis, this June/July U.S. Property Loss Affected: Flat to down 5%. level is considered as inadequate by some reinsurers. 2014 U.S. Property Nonloss Affected: Down 5% to 15%. Many loss-free casualty reinsurance rates have softened through Florida Property Nonloss Affected: Down 15% to 25%. 2014 and the agency believes that this could extend into 2015. Casualty Excess of Loss No Loss Emergence: Down This pressure is being driven in part by increased competiveness 5% to 20%. in the casualty market as more reinsurers look to non-catastrophe January U.S. Property Loss Affected: Down 10% to up 5%. lines for profit. The profit margins of casualty classes are viewed as 2014 U.S. Nonloss Affected: Down 10% to 25%. increasingly attractive by many reinsurers, in contrast to property International Property Loss Affected: Flat to Up 10%. lines. The fundamental difference between property and casualty International Property Nonloss Affected: Down 10% risks, including longer-tail liabilities for the latter, are viewed as a to 15%. hurdle for reinsurers that would otherwise be new entrants into June/July U.S. Property Loss Affected: Down 5% to up 5%. the casualty market. The growth of alternative capital within the 2013 U.S. Property Nonloss Affected: Down 10% to 20%. casualty sector is also expected to be slower than the property Florida Property Nonloss Affected: Down 15% to 25%. market, reflecting reduced investor appetite for longer duration Casualty No Loss Emergence: Flat to declining. risks that are less easily modelled. January U.S. Wind Programs Loss Affected: Up 10%. 2013 U.S. Nonloss Affected: Flat to down 5%. Marine: Increases up to 30%. International Property: Flat to down 5%. Source: Company and broker reports

Global Reinsurance Guide 2015 4 2015 Outlook: Global Reinsurance

Search for Higher Yields Increases Risk as Low Figure 3 Returns Persist Asset Allocation YE 2013 The persistence of low investment yields increases the risk of the reinsurance sector being exposed to adverse investor behaviour, driven by a search for higher yields. Increasing the risk weighting Other of assets held within an investment portfolio, in a search of 10% Cash and Short-Term higher yield, is an option available to all (re)insurers. Unique to the Equities 20% reinsurance sector are the adverse consequences of capital flowing 8% in as external investors, including pension and hedge funds, search Mortgage for yield by investing in alternative reinsurance products such as and Real catastrophe bonds. Estate 3% Fitch views the ingress of alternative capital as posing a greater long-term threat to the reinsurance sector because of the BIG potentially permanent erosion of profit margins on historically Fixed Income profitable products. The agency considers that a significant 4% proportion of these funds will be a permanent presence within the reinsurance sector, due to the portfolio diversification that catastrophe risk provides for investors. Fitch expects low interest rates to exert earnings pressure for all reinsurers during 2015. While long-term interest rates for several developed countries, including the US and UK, are forecast to Investment Grade Fixed rise next year, their absolute level is forecast to remain below the Income historical long-term average. Subsequently, reinvestment rates for 55% reinsurers with longer duration fixed income portfolios are likely to be lower than for maturing instruments. Source: SNL Financial for US/Bermuda, Fitch data for European Reinsurers The agency does not expect the possibility of protracted low investment yields to result in reinsurers deviating from their pricing and resulted in a deteriorating profitability profile for the core investment strategies. These include maintaining sufficient reinsurance sector. liquidity to meet and settle liabilities in a timely manner, and avoidance of excessive balance sheet volatility. The investment The erosion of traditional reinsurers’ profit margins reduces their risk profile of the majority of Fitch’s reinsurance universe remains ability to absorb underwriting volatility, should it occur. Reinsurers conservative, with fixed-income bonds representing the main that are especially vulnerable to the current market conditions are asset class. Within this category, there has been a gradual shift those with a greater exposure to property catastrophe risks, as away from government to corporate instruments, partly driven third-party capital continues to focus on model-driven property by a more stable and improving economy but also in search of risks, and, in particular, US peak zone risk, which historically has higher returns. the highest margins. While currently limited in scope, the (re)emergence of hedge- Fitch believes that changes in reinsurance buying habits will fund sponsored reinsurers employing an alternative investment reduce the overall amount of reinsurance protection purchased, strategy is another sign of some capital providers addressing the particularly by larger primary cedents. Primary insurers’ are limited yield on traditional investments. The use of targeted excess retaining more risk with favourable capital levels to boost returns investment returns to provide a pricing advantage can also be a in the face of low investment yields. It is unclear to what extent this source of soft market pressure if such vehicles gain traction. will prove to be a structural or cyclical change. Historically, primary companies have increased reinsurance Structural Change Threatens to Weaken purchasing as prices fall. But large cedents increasingly transact Competitive Position business in a centralised way and on a global scale. Using increased It remains unclear exactly how the growth of alternative capital data and more readily available sophisticated modelling, these and changes in reinsurance purchasing habits will affect the companies bundle risks into multiple territory programmes, sector, though Fitch believes the impact will be both negative with peak risks then being placed on an excess of loss basis. and enduring. These two trends represent a major challenge Subsequently, programmes are better diversified, which, together for traditional reinsurers, as each is expected to reduce demand with an increased scale, allow the cedent to retain a greater for traditional reinsurance products. Of the two, Fitch views the proportion of their risk than smaller cedents can. growth in alternative capital as exerting the greatest influence on Decreased demand for reinsurance is also driven by recent benign the future competitive position of traditional reinsurers. underlying loss-costs trends that have allowed insurers to be more Fitch views the emergence of the alternative reinsurance market comfortable accepting risk and volatility. These trends could easily on balance as a negative for reinsurers’ credit ratings and financial reverse, as an unexpected shift in inflation or interest rates would strength in the current competitive market. While there are some specifically influence insurance claims’ costs, such as medical positives for individual companies (ie, added fee income), the costs, litigation settlements or social inflation. Under such a more added competition and increased supply of capacity from the cyclical change, demand for risk protection by primary insurers capital markets has served to meaningfully dampen reinsurance could increase and shift business back to reinsurers.

5 Global Reinsurance Guide 2015 2014 Review: Non-Life Performance Non-life reinsurers in aggregate achieved marginal reinsurance net premiums written growth of approximately 2.6% from 1H13 (after Profitable But Deteriorating adjusting for foreign-currency translations). This is largely due to Non-life reinsurers’ underwriting results slightly deteriorated in flat or declining prices in both property and casualty reinsurance 1H14 but remained profitable as catastrophe losses continued to lines. Expansion into various specialty lines was partly offset by run below the average trend. The weaker results reflect pressure declines in property catastrophe reinsurance business as prices on reinsurance margins with premium rate declines, an increase in continue to drop, with increased competition from the growing non-catastrophe property losses that hit several reinsurers, and a alternative reinsurance market. higher expense ratio from increased ceding commissions. Shareholders’ equity grew 5.2% in 1H14 from year-end 2013. Solid The deterioration is also due to a reduction in excess of loss earnings and unrealised gains on fixed-income securities drove property catastrophe business written by traditional reinsurers the increase, partially offset by continued share repurchases and and an increase in casualty reinsurance. With pressure on excess dividends, albeit at a lower level than in 1H13. of loss premium rates pushing prices down to inadequate levels, reinsurers are shifting into quota share. Quota share reinsurance 2014 Review: Life Premiums Grow; business carries a higher, but less volatile, average loss ratio than excess of loss and property catastrophe business. Profits Recover The group of life reinsurance operations monitored by Fitch Figure 4 reported a moderate increase in net premiums earned in 1H14 from a year earlier mainly due to foreign-currency appreciation. 1H14 Non-Life Reinsurance Results In US dollar terms, net premiums earned increased by 3.2% from (USDm) 1H14 1H13 1H13 after the effects of foreign-currency translation, and by 0.9% Net premiums written 47,093 45,074 holding the exchange rate constant. Combined ratio (%) 87.4 85.9 The 1H14 pre-tax income of the life reinsurance operations Shareholders’ equity (including 442,126 388,013 tracked by Fitch increased by 27% in US dollar terms compared Berkshire Hathaway) with a year earlier after several reinsurers ran across problems in group risk business in the Australian market in 2013. The group’s Note: The above results include data only for those companies that had reported shareholders’ equity increased by 5.0% from year-end 2013 as both 1H14 and 1H13 results on a comparable basis at this report’s publication date. shareholders’ equity is organisation-wide equity and includes equity that these reinsurers benefited from higher earnings, unrealized bond supports operations other than non-life reinsurance operations gains, and foreign-currency exchange gains. Source: Individual company data

Figure 6 The group of reinsurers that Fitch tracks generated a calendar- 1H14 Life Reinsurance Results year reinsurance combined ratio of 87.4% in 1H14, up from (USDm) 1H14 1H13 85.9% in 1H13 and 85.5% in 2013. The group’s 1H14 results included favourable prior-accident-year reserve development that Net premiums earned 27,009 26,171 provided a six-point benefit to the calendar-year combined ratio. Pre-tax operating income 1,850 1,457 The profitable underwriting results reflect continued underwriting Source: Individual company data discipline in the sector, as loss-cost trends on most lines of business are about in line with earned pricing trends. This will be imperative given the current competition in pricing that will test reinsurers’ underwriting discipline.

Figure 5 Change in 1H14 Equity - Reinsurers

(%) 14 12 10 8 6 4 2 0 -2 -4 XL (A+) XL ACE (AA) ACE AXIS (A+) AXIS Arch (A+p) Validus (A) RenRe (A+) Aspen (N/R) SCOR (A+p) Fairfax (N/R) Fairfax Everest (N/R) Montpelier (A) Platinum (N/R) Alleghany (A+) Swiss Swiss (A+p)Re Berkshire (AA+) Berkshire PartnerRe (AA-) PartnerRe Munich Re (AA-) Re Munich White Mount. (A) Endurance (N/R) Allied (A+) World

IFS ratings in parentheses. N/R - Not rated. p - positive outlook (AA-) Re Hannover Source: Fitch, company reports

Global Reinsurance Guide 2015 6 2015 Outlook: Global Reinsurance

Appendix

Figure 7 Fitch’s International-Scale Ratings on Select (Re)Insurance Organisations Long- Long- IFS term Rating IFS term Rating Group rating IDR outlook Group rating IDR outlook ACE Ltd. AA− Stable MutRe A− Stable ACE Tempest Reinsurance Ltd. AA Stable National Indemnity Co. AA+ Stable Allied World Assurance Company A Stable Pacific Life Re Ltd. A+ Stable Holdings, Ltd. Partner Reinsurance Company Ltd. AA− Stable Allied World Assurance Company, A+ Stable PartnerRe Ltd. A+ Stable Ltd. QBE Insurance Group Ltd. A− Negative Amlin AG. A+ Stable QBE Re (Europe) Ltd. A+ Negative Amlin plc. A− Stable QBE Reinsurance Corporation A+ Negative Arch Capital Group Ltd. A Positive Reaseguradora Patria, S.A. A− Stable Arch Reinsurance Company A+ Positive Reinsurance Group of America, A− Stable AXIS Capital Holdings Ltd. A Stable Inc. AXIS Reinsurance Company A+ Stable Renaissance Reinsurance Ltd. A+ Stable Berkley Insurance Company A Stable RenaissanceRe Holdings, Ltd. A Stable Berkshire Hathaway, Inc. AA− Stable RGA Reinsurance Company A+ Stable Brit Insurance Holdings BV. BBB+ Stable RMB Financial Services Ltd. BBB Stable China Taiping Insurance Holding A− Stable SCOR Global Life S.E. A+ Positive Co. Ltd. SCOR Global P&C S.E. A+ Positive DEVK Rueckversicherungs-und A+ Stable Beteiligungs-AG SCOR Holding (Switzerland) AG A+ Positive Echo Rueckversicherungs-AG A− Stable SCOR S.E. A+ A+ Positive General Reinsurance Corp. AA+ Stable SIGNAL IDUNA A− Stable Rueckversicherungs AG Hannover Rueck SE. AA− AA− Stable Sirius America Insurance A Stable Hiscox Insurance Company A+ Stable Company (Bermuda) Ltd. Sirius International Group Ltd. BBB+ Stable Hiscox Insurance Company A+ Stable (Guernsey) Ltd. Sirius International Insurance A Stable Corporation Hiscox Ltd. A− Stable Society of Lloyd’s A+ Stable Lloyd’s of London AA− Stable Swiss Reinsurance Company Ltd. A+ A+ Positive Malaysian Reinsurance Berhad A Stable Taiping Reinsurance Co. Ltd. A Stable Mapfre Re Compania De A− Stable Transatlantic Holdings, Inc. A− Stable Reaseguros S.A. Transatlantic Reinsurance A+ Stable Mapfre SA. BBB Stable Company Markel Corporation BBB+ Stable Validus Holdings, Ltd. A− Stable Markel Bermuda Ltd. A Stable Validus Reinsurance, Ltd. A Stable MNRB Retakaful Berhad BBB+ Stable XLIT Ltd. A− Positive Montpelier Re Holdings, Ltd. A− Stable XL Re Ltd. A+ Stable Montpelier Reinsurance Ltd. A Stable Ratings at 3 September 2014 Munich Reinsurance America, Inc. AA− Stable Source Fitch Munich Reinsurance Company AA− AA− Stable

7 Global Reinsurance Guide 2015 Special Reports

Global Reinsurance Guide 2015 8 9 Global Reinsurance Guide 2015 Global Reinsurance’s Shifting Landscape

Making Sense of Soft Markets and in select cases, true specialist product knowledge and technical expertise are offerings that are less size-dependent, but are strongly Structural Change sought by some reinsurance buyers, and can also offer resilience. Moving Beyond a Normal Cycle: Fitch Ratings views the prevailing Soft Market Versus Structural Change: An assessment of the adverse reinsurance macro operating environment as extending impact of a changing reinsurance landscape needs to distinguish beyond what would be considered a normal soft market cycle. This between short-term cyclical fluctuations and longer-term structural is due mainly to the growth in alternative capital. This report sets trends. Cyclical price reductions will always be part of the natural out in detail the factors that the agency considers when seeking underwriting cycle. However, the growth and convergence of to identify those reinsurers that could be most vulnerable to these alternative capital, coupled with changes in reinsurance purchasing adverse shifts in the reinsurance landscape. It also discusses what habits, represent what Fitch views as a longer-term and more Fitch believes to be driving these changes. permanent change in reinsurance that will be difficult for some reinsurers to adapt to. Analysis Extends Beyond Reported Results: Despite industry difficulties, recently reported financial data still presents a solid Perfect Storm for US Property Catastrophe: Current pricing financial picture across the global reinsurance sector, underscored deterioration is viewed as the combination of a cyclical soft market by strong capitalisation and near record profitability. This is and structural change. A reduction in peak-zone windstorm activity inconsistent with market trends, and highlights a limitation of has led to a build-up of underwriting capacity, resulting in a cyclical historical results. Thus, for our analysis to be predictive, it needs soft market. This has been exacerbated by the continued ingress to be enhanced by a qualitative assessment to help determine an of alternative capital, which has intensified competition between individual reinsurer’s vulnerability to changes in market conditions. and among alternative and traditional reinsurers. The growth of alternative capital represents a structural change to which Qualitative Early Warning Indicators: Significant diversification or shifts into new business lines or geographic markets, and reinsurers need to adapt. growth at a pace above market averages are among the factors Pace of Softness in Casualty Key: Fitch believes the pace at which that Fitch will monitor closely in the current market. These are softness in property lines bleeds into casualty lines will be a critical typically a sign of aggressiveness through either a lack of discipline element in further shaping the reinsurance landscape. This will or lack of expertise. come as traditional capital diverts from soft property catastrophe lines into casualty lines, seeking higher returns. It will also be driven Franchise Value Aids Resilience: Strong market positioning, scale and diversity (see Figure 1), are viewed by Fitch as key qualities by market reactions to the perceived encroachment of alternate that can provide resilience against falling reinsurance prices and capital via new hedge fund sponsored vehicles like Watford Re. increased competition. This implies that larger and more diverse players will be best positioned in the changing landscape. However, Consequences for Reinsurers’ Ratings

Analysts Picking Market Survivors Is Not Straightforward Identifying winners and losers is not straightforward as the effects Martyn Street of falling premium prices and weakening terms and conditions can +44 20 3530 1211 [email protected] take years rather than months to depress an individual company’s financial strength and be reflected in reported financial results. This Brian Schneider point is emphasised by current results that present a solid financial +1 312 606-2321 picture, underscored by strong capitalisation and near record [email protected] profitability. Fitch views small mono-line property catastrophe reinsurers, without other distinguishing attributes, as the most Related Research vulnerable to a protracted period of market price softening. This is because of a more limited ability to set and control contract terms 2015 Outlook: Global Reinsurance (September 2014) and achieve controlled diversification into less exposed lines. Alternative Reinsurance 2014 Market Update (September 2014) Latin American Reinsurance (September 2014) To enhance its predictive surveillance, the agency uses a Reinsurer Mergers and Acquisitions (August 2014) qualitative assessment that seeks to determine an individual Global Reinsurers’ Mid-Year 2014 Financial Results (August 2014) company’s vulnerability to continued price softening and the Asian Reinsurance Markets (August 2014) structural changes being observed (see Soft Market or Structural Change section). A good understanding of a company’s position within the wider market, as well as an assessment of its strategy, Related Criteria can provide a useful insight into how the fortunes of one may pan out versus a competitor. Insurance Rating Methodology (September 2014)

Global Reinsurance Guide 2015 10 Qualitative early warning indicators that Fitch monitors include: Scale and Diversity Suggest Greater significant diversification or shifts into new business or geographic Financial Resilience markets, where the company may lack strong knowledge; and The concept of tiering, which places individual reinsurers in a above market growth, which may increase a reinsurer’s exposure to specific tier based on one or several metrics, has been used by under-priced business or indicate a lack of underwriting discipline. some market commentators to support views on how the sector Fitch would also look for signs of a reinsurer writing business that may evolve. Usually, those companies that appear in the top tier are falls significantly below the reinsurer’s technical price floor, to the largest and arguably most diversified players, who are viewed maintain market share, but this last factor is very difficult to detect. as being the best placed to withstand and potentially profit from current market forces. Reinsurer Strategy: Mono-Line and Portfolio Reinsurers Figure 1 provides an illustrative example of the tiering concept, in this case with reinsurers being placed into their respective Market Fitch’s monitored universe of global reinsurers is diverse, with Position and Size/Scale category, as assigned by Fitch. They are companies varying in size, geographic scale, product diversity size-ranked based on total net written premiums (including primary and risk appetite. Corporate strategy is key in determining each of premiums where applicable), given the current focus on declining these variables. premium prices. Comparing geographic and portfolio diversity is From the biggest picture perspective, Fitch identifies two separate made more challenging given the lack of comparability between and distinct groups. individual companies reporting. The first is mono-line reinsurers whose strategy is to write business that is technical but analysable, usually through the use of models. Value Provision and Realisation Are Less The profitability of each individual transaction is a key determinant Size-Dependent to writing the business, meaning that hard market conditions Fitch views scale and diversity as two factors that can allow a favour this group. US catastrophe programmes represent one such reinsurer to be resilient when market conditions grow more area where companies of this type would focus and operate. During adverse. But the agency also considers the provision and realisation soft market conditions, sustaining profits can be challenging, with of value within the reinsurance purchasing chain as an important a company’s viability requiring a disciplined approach to cycle key determinant of an individual reinsurer’s continued success. management, and an ability to vary the amount of capital within Value can be derived from factors including specialist product the company in tune with the cycle. knowledge and technical expertise, offerings that are less size- dependent but often are sought-after commodities for some Amongst Fitch’s rated universe, Renaissance Re (A+ IFS) and reinsurance buyers, whether their requirements are for traditional Montpelier Re (A IFS) are viewed as falling within this broad category. or alternative reinsurance products. The second group comprises traditional portfolio reinsurers While this list is not exhaustive, Fitch would consider Renaissance that write a more diversified book of business with a longer-term Re and White Mountains to be smaller rated reinsurers that appear profitability horizon. Profitability is assessed across a portfolio, to offer value within the purchasing chain beyond size and scale. where a lower return for one transaction may be offset by higher profitability from another. Companies typically have the scale and scope to write globally placed premium, seeking to optimise capital Soft Market or Structural Change? allocation through diversity. In contrast with the first group, these When making longer-term analytical assessments, it is important reinsurers seek to prioritise portfolio management and can move to distinguish between short-term cyclical fluctuations and longer- in and out of lines of business. They also can accept some degree term structural trends. Price reductions that are the result of lower of under-pricing in certain lines if offset by profits in others, as long loss experience or temporary, opportunistic swings in capacity are as not taken to an extreme. Nonetheless, these companies can reflective of the underwriting cycle that companies would manage still face an erosion of earnings, if the soft cycle is prolonged and through as part of the normal course of business. broadens into numerous lines. In contrast, the growth of alternative capital and changes in The majority of Fitch’s rated reinsurers fall into this second reinsurance purchasing habits are expected to have long-term category, though the strength of market positioning and diversity implications for the sector. Fitch views the emergence of alternative varies, both within non-life/life reinsurance lines and diversity capital as an enduring credit negative to traditional reinsurers’ outside of the reinsurance business. Those with less significant ratings. It remains unclear whether changes in primary companies’ reinsurance positions include Markel (A IFS), W.R. Berkley (A IFS), reinsurance purchasing habits are permanent or cyclical. White Mountains (A IFS), Allied World (A+ IFS) and ACE (AA IFS), while those with lesser levels of diversity include Validus (A IFS), Alleghany The growth and convergence of alternative capital, including (A+ IFS), Partner Re (AA− IFS) and Reinsurance Group of America (A+ catastrophe bonds, collateralised reinsurers and industry loss IFS), as highlighted in the next section. warranties, together with changes in reinsurance purchasing habits

11 Global Reinsurance Guide 2015 e

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Global Reinsurance Guide 2015 12 Global Reinsurance’s Shifting Landscape

Figure 2 Cat Bond Issuance by Peril and Year U.S. Hurricane U.S. Earthquake U.S. Severe Storm European Windstorm (USDbn) Japan Earthquake Japan Typhoon All Perils 9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1H14 Source: Fitch by primary players, potentially represents a greater and more Changes Affecting the Wider Market – permanent adjustment for traditional reinsurers. In the long-term, Casualty Next? these two factors are expected to reduce demand for traditional To a lesser extent, a reduced claims burden and intense reinsurance products, especially in established markets. competition has seen softening market conditions extend more Traditional reinsurers will look for ways of offsetting reduced broadly throughout the reinsurance sector during 2014. Some of premium income, through emerging market expansion, new the main pricing falls observed at the April 2014 renewals, which business lines, or the development of new products, which could is an important renewal date for Asia-Pacific business, saw marked diversify earnings. declines for Japanese business, with prices for loss free earthquake and wind/flood programmes decreasing by up to 20pp. The US Property Catastrophe Prices Hit by negative movement follows more than two years of significant Perfect Storm rate increases after the 2011 losses that affected this region. With losses ‘earned back’ by reinsurers, there is naturally going to be Fitch views the current pricing deterioration in the US property some price readjustment. catastrophe market as a combination of a cyclical soft market and structural change, created by the perfect storm of low loss activity Looking to 2015, one of the key market sectors to watch is casualty and intense supply-side competition. The cyclical soft market was lines. As property catastrophe continues to soften, traditional preceded by a build-up of underwriting capacity in recent years, capital is likely to be redirected to lines seen as providing greater primarily due to a reduction in windstorm activity and associated pricing adequacy, such as casualty. In addition, 2014 saw the insured losses across the peak-zones of the Gulf of Mexico and emergence of alternate capital in the casualty business with the southern US states. formation of Arch sidecar Watford Re. Structurally, the availability of underwriting capacity has been It is too soon to judge if a vehicle like Watford, which will employ exacerbated by the continued ingress of alternative capital, which an alternate investment strategy (heavily hedge fund-managed has grown especially rapidly in this part of the reinsurance market. non-investment grade secured loans) designed to give it a pricing This has intensified competition, both between new alternative advantage, will gain any real traction. However, Fitch believes that entrants and established traditional players, and more recently some traditional reinsurers may decide be proactive in defending amongst traditional reinsurers as they look to preserve market their market share from a potential new wave of hedge-fund share. Figure 2 highlights the marked growth in the catastrophe backed casualty reinsurers by cutting back on pricing. This would bond issuance since 2008. provide yet another source of pricing pressure in the near term. If vehicles like Watford gained real traction, such pricing pressures While Fitch believes that the growth of alternative capital will lead to a would endure. natural evolution of the market rather than sweeping reform, it does represent a structural change for traditional reinsurers, prompting some market observers to question the long-term viability of traditional reinsurers that have a high exposure to these conditions.

13 Global Reinsurance Guide 2015 Figure 3 Renewal Pricing Trends US Property Catastrophe - Loss Free

Jan 14

Jan 13

Jan 12

Jan 11

-30 -25 -20 -15 -10 -5 0 5 10 15 20 % Price change Source: Company and broker reports

Figure 4 US Property Catastrophe Trends (1990 = 100) 400

350

300

250

200

150

100

50

0 1990 1993 1996 1999 2002 2005 2008 2011 2014 Rate movements using 100 in 1990 as baseline Source: Willis Re

Falling Prices and Price Adequacy a benchmark level that is often the company’s cost of capital. For The US property catastrophe reinsurance market has been the example, recent commentary from reinsurers following the mid- focus for market commentators for some time, most recently due year 2014 renewals have indicated that market pricing for property to double-digit percentage point price cuts across some lines. catastrophe risk has dropped into the high-single digit expected returns, a level which many market players consider inadequate While the observation of pricing movements is important, it is also given the risk and volatility of catastrophes. necessary to consider pricing adequacy. Figure 3 highlights the rate change for loss free US property catastrophe business renewed The differing hurdle rates and variations in how individual reinsurers at the June-July renewals. A reduction in insured loss activity saw classify business classes dilutes comparison with peers, although a prices change from increases up to 15% in 2011 to decreases of up review of the data that has been published during 2014 by certain to 25% in 2014. As a result, rates are at their lowest level since 2005, European reinsurers indicates that they continue to view US prior to Hurricanes Katrina, Rita and Wilma (KRW) hitting the US that property catastrophe, at the highest class level, as being profitable. year (see Figure 4). This view is independently supported by long-term pricing indexes that suggest that on a historical basis, prices remain high despite Many reinsurers publish data on how they view the adequacy of the sharp falls reported in the last two years. pricing across major classes. Indicators usually assess adequacy on an economic basis, looking to achieve a rate of return above

Global Reinsurance Guide 2015 14 Global Reinsurance’s Shifting Landscape

Forming a view on the overall adequacy of reinsurance pricing is hampered by the lack of comparability between published pricing data and the opaqueness created by the detail that is not. Broker reports that provide pricing detail at key renewals are widely used by market observers, including Fitch, as they offer useful information across a broad range of lines and geographies. Given the high volume of catastrophe exposed business that is placed through the broker distribution channel, this information can be considered to give a fair representation of current market conditions. A key shortcoming of broker data is that it does not capture price changes for non-renewed business, or business that is ceded directly with reinsurers, which is more applicable to specialised lines, and emerging markets. In these cases, the picture is less clear and relies on the reporting of individual companies. Detail concerning changes in terms and conditions, which can alter significantly a (re) insurers risk exposure are rarely reported in detail.

Changes in Purchasing Habits Fitch views the emergence of a few large players within the primary, reinsurance and broking communities as an important factor driving changes in purchasing habits of primary insurance companies. It is unclear whether these will prove to be cyclical or structural. Centralised buying often sees the bundling of reinsurance products into an individual programme, to better suit the requirements of the cedent. This can result in a reduced amount of reinsurance spend by the reinsurance buyer. Of greatest significance is the centralised purchasing of reinsurance cover by larger global companies, as well as an increased retention of risk by primary insurance companies of all sizes, which has been assisted by apparently improved capital and risk modelling techniques. At the same time, centralised programmes are resulting in decision-making shifting from individuals to committees, which makes the reinsurance relationship more business-to-business. This potentially reduces the value that a reinsurer may place on a given relationship.

15 Global Reinsurance Guide 2015 Alternative Reinsurance 2014 Market Update

Structural Market Change Pressuring returns. However, it is also starting to increase competition in the primary market. Traditional Reinsurers Property Catastrophe Under Most Pressure: The nature of Capital Markets Are A Permanent Fixture: Alternative forms of risk property catastrophe risk as being highly modeled serves as an transfer are here to stay, having gained acceptance by both cedents important force driving its transfer into the capital markets. The and most traditional reinsurance providers as a structural change lower cost of capital for capital market providers that results from to the reinsurance sector, principally in property catastrophe risk. the noncorrelated portfolio benefit has pushed expected returns These nontraditional forms include catastrophe bonds (cat bonds), on property catastrophe business into the high single digits. This collateralized quota-share reinsurance vehicles (sidecars), industry is below the 10%–15% level many traditional reinsurers consider loss warranties (ILWs), hedge fund-supported reinsurers and asset adequate, but in line with the 6%–10% returns new capital market managers investing in insurance-linked securities (ILS). providers find acceptable. Net Negative Impact to Reinsurers: Fitch Ratings views the Casualty Risk Expands Presence: The entry of Watford Re Ltd. growth and acceptance of alternative reinsurance as a strain on into the nontraditional reinsurance market is creating a stir, as the credit quality of reinsurers, particularly for smaller, stand- its focus is on multi-line casualty risk, rather than the customary alone property catastrophe reinsurers. The benefit to traditional property risk. Fitch expects that the amount of alternative capital reinsurers from added fee income and risk management tools is dedicated to casualty business will no doubt grow. However, the more than offset by the increased competition from capital market jury is still out as to its longer-term impact, and growth will certainly capacity that, in conjunction with the strong overall capitalization be constrained to a limited group of capital market participants of the reinsurance industry, are resulting in a deteriorating that are willing to accept longer-tailed, generally unmodeled, risks profitability profile for the sector. in a more permanent vehicle. Primary Insurers Are Benefiting: The intense competition Investors to Remain Long Term: One area of uncertainty is between traditional reinsurers and capital market providers has how investors would react to an environment of less favorable aided primary insurers through significant price reductions and catastrophe risk spreads or a large unexpected catastrophe loss, more favorable terms and conditions. These savings are being either of which could cause capital to retreat. Fitch considers a used by primary insurers to either purchase more reinsurance limit significant portion of capital market investor funds to remain as or add to earnings, improving their overall risk profile and expected permanent, given the nature of catastrophe risk as providing a very valuable portfolio diversification of investment market risk and institutional investors longer-term investment horizon, especially Analysts pension funds. Brian Schneider Cat Bond Issuance Grows in 2014: As investor demand remains +1 312 606-2321 strong for cat bond issuance, repeat sponsors have been able to [email protected] replace maturing issues and take advantage of current favorable Martyn Street market conditions, although there have been signs that market +44 20 3530 1211 pricing may be reaching a floor. New sponsors have also had a [email protected] strong presence in the cat bond market in 2014 as (re)insurers Christopher Grimes have become increasingly comfortable with the issuance process. +1 312 368-3263 As of midyear, 2014 is on track to produce a record amount of [email protected] catastrophe bond issuance.

Related Research Alternative Reinsurance Is A 2015 Outlook: Global Reinsurance (September 2014) Permanent Fixture Global Reinsurance’s Shifting Landscape (September 2014) Latin American Reinsurance (September 2014) Capital market alternatives to traditional reinsurance will continue Reinsurer Mergers and Acquisitions (August 2014) to grow as alternative reinsurance products have reached a Global Reinsurers’ Mid-Year 2014 Financial Results (August 2014) level of critical mass and acceptance by cedents that make Asian Reinsurance Markets (August 2014) them a more permanent fixture in the market, particularly for property catastrophe risk. Most reinsurers have accepted that the dynamics of the reinsurance marketplace have structurally Related Criteria changed and are looking for ways to match their client needs to the appropriate capital, be it traditional or nontraditional. This Insurance Rating Methodology (September 2014) Insurance-Linked Securities (August 2014)

Global Reinsurance Guide 2015 16 Alternative Capacity as a % of Global Property Alternative Reinsurance Activity Catastrophe Reinsurance Limit Selected Recent and/or Active Alternative (Year End) (Re)insurer Reinsurance Vehicles 16% ACE Limited Altair Re (Sidecars) 14% Alleghany Ares Management (ILS Fund); Pillar Capital (ILS 12% Fund); Pangaea Re (Sidecar) 10% Allied World Aeolus Capital (ILS Fund) 8% Amlin Leadenhall Capital Partners (ILS Fund); Tramline Re (Cat Bonds) 6% Arch Capital Watford Re (Sidecar/Hedge Fund Reinsurer) 4% Argo Group Harambee Re (Sidecars); Loma Re (Cat Bond); 2% Horseshoe Re (ILS Fund) 0% Aspen Silverton Re (Sidecar); Aspen Capital Markets 2008 2009 2010 2011 2012 2013 Source: Guy Carpenter estimates. Insurance (ILS Fund); Cartesian Iris Re (ILS Fund) AXIS Capital Northshore Re (Cat Bond); AXIS Re Ventures approach is necessary for reinsurers to remain relevant in the face (ILS Fund) of considerable reinsurance industry headwinds. Catlin Galileo Re (Cat Bond) Alternative nontraditional capital continues to enter the reinsurance Everest Re Mt. Logan Re (Sidecar); Kilimanjaro Re (Cat Bond) market from sources such as cat bonds, sidecars, ILWs, hedge fund- supported reinsurers and asset managers investing in ILS. Guy Hannover Re Leine Investment (ILS Fund); Eurus (Cat Bond) Carpenter & Company estimates that capital from the alternative Hiscox Kiskadee Re (Sidecar); Third Point Re (Hedge markets currently totals a meaningful $50 billion, or approximately Fund Reinsurer) 15% of the global property catastrophe reinsurance limit, up from Lancashire Kinesis Re/Saltire Re/Accordion Re (Sidecars); only 8% in 2008. Furthermore, several analysts estimated that this Kinesis Capital/Saltire Management (ILS Funds) level could double to near 30% within a few years. Markel New Point Re (Sidecars) At the same time, capitalization of the traditional reinsurance Montpelier Re Blue Capital Re (Sidecar); Blue Capital sector remains at record levels. Reinsurers have accumulated a Management (ILS Fund) large capital buffer from manageable catastrophe losses in recent years. This capacity glut is also driven by limited growth areas for Munich Re MEAG Munich Ergo (ILS Fund); Queen Street profitably deploying reinsurance capital. This creates a tension (Cat Bonds); Eden Re (Sidecar) between the traditional and alternative reinsurance markets that PartnerRe Lorenz Re (Sidecar) increases pressure on reinsurance pricing. QBE VenTerra Re (Cat Bond) RenRe DaVinci Re/Top Layer/Tim Re/Upsilon Re Alternative Reinsurance Not Benefiting (Sidecars); Mona Lisa Re (Cat Bond); Medici (ILS Reinsurers’ Credit Quality Fund) SCOR Atropos (ILS Fund); Atlas Re (Cat Bonds, Sidecar) Fitch views the emergence of the alternative reinsurance market on balance as a negative to reinsurers’ credit quality and financial Swiss Re Mythen Re (Cat Bonds); Successor (Cat Bonds); strength in the current competitive market environment. While there Sector Re (Sidecars) are some positives for individual companies, the added competition Validus AlphaCat Re (Sidecars); AlphaCat Fund (ILS and increased supply of capacity from the capital markets has fund); PaCRe (Hedge Fund Reinsurer) served to meaningfully dampen reinsurance pricing and resulted in a White Sirius Capital Markets (ILS Fund) deteriorating profitability profile for the reinsurance sector. Mountains Favorably, the alternative reinsurance market provides an XL Group New Ocean Capital Management (ILS Fund) additional diversified source of revenue for reinsurers that receive fee income to underwrite or provide management ILS – Insurance-linked securities. services for such transactions or receive added premiums from Source: Company press releases and filings. also participating in the business. In addition, the nontraditional reinsurance market can be used by reinsurers to manage their

17 Global Reinsurance Guide 2015 exposure, opportunistically retroceding risk at favorable market catastrophe risk tends to be more fragmented and not as easily pricing in order to reduce volatility, and thus optimize earnings, modeled and, thus, is less commoditized as U.S. risk. while maintaining relationships with the ceding clients. Capital market providers of reinsurance are very competitive However, reinsurers’ core financial performance and earnings on price, given their lower cost of capital resulting from the are driven by their ability to accept potential underwriting noncorrelated portfolio diversification benefit. As a result, volatility from primary insurers, especially in the case of property expected returns on property catastrophe business, while still catastrophe reinsurance. As a result, reinsurers expect to obtain profitable, have been pushed down into the high single digits. This lower run-rate combined ratios and higher long-term returns on is below the 10%-15% level many traditional reinsurers have stated equity than primary insurers. So while the alternative market can they consider as adequate for the volatility risk, but still in line with provide some level of benefit to reinsurers, it does not compensate the 6%-10% returns that the new capital market providers view to for the reduction in earnings from the loss of underwriting business be acceptable. Reinsurers must adapt and have been looking to or the reduced level of market pricing. reduce their own cost of capital in order to better compete with alternative capital providers. Primary Insurers Gain from Additional Reinsurance Capacity Smaller Reinsurers More Vulnerable The competition between the traditional reinsurance market and than Diversified Players the considerably larger overall capital market has been a benefit The current market is particularly challenging for smaller, stand- to primary insurers that are taking advantage of having diversified alone traditional property catastrophe reinsurers that have a less sources of reinsurance. The abundant reinsurance market capacity diversified source of earnings and compete more directly with has resulted in lower reinsurance pricing (particularly on excess of the alternative reinsurance market. It will be imperative for these loss business), and the broadening of policy terms and conditions. players to maintain strong underwriting discipline should market These expanded provisions include larger limits, increased ceding conditions continue to deteriorate. However, these reinsurers must commissions, multiyear agreements, additional reinstatements, also maintain a delicate balance between shrinking their portfolio extended hours clauses, inclusion of terrorism coverage and an and accepting some business at lower rates of return. If they increase in the availability of aggregate covers. shrink too much, they risk becoming less relevant in a contracting reinsurance market and damaging their competitive position. Furthermore, the nontraditional reinsurance market has helped insurers manage their exposure, transfer risk and reduce capital In contrast, more diversified traditional (re)insurers with a volatility. In addition, primary insurers benefit from the reduced larger capital base have a greater financial ability to withstand volatility of reinsurance rates after a catastrophe, as alternative the heightened competition from the alternative reinsurance reinsurance coverage frequently remains available during a period market. However, even these companies have had to agree to of more scarce underwriting capacity and serves to dampen pricing concessions and more generous terms and conditions in potential rate increases. However, most of these sources of order to protect their capacity share against the nontraditional capital market reinsurance have yet to be tested by a significant reinsurance market. catastrophe event loss, and thus, primary insurers still remain somewhat cautious in placing too much concentration risk in alternative reinsurance markets. Casualty Risk Through Watford Re Reduced reinsurance costs can add to insurers’ earnings or be used Causing Market Concern to purchase additional lower cost reinsurance protection at the Fitch expects that given the sizable level of alternative capital margin as a means to further manage and reduce risk and improve that continues to flow into the market, the amount that will be overall returns. However, reinsurance savings are also pressuring dedicated to casualty business will no doubt grow. However, reductions in primary rates as cheaper reinsurance costs increases growth will be constrained to those capital market participants that the competiveness of the primary market. are willing to accept medium to long-tailed, generally unmodeled Fitch expects insurers to continue to find it economically risks in a more permanent vehicle. Currently, the pool of investors efficient to transfer to the capital markets a portion of their more willing to jump into liability risks is considerably less than those standardized property and property catastrophe tail risk business. that have gained comfort over time with more short-term, model- This action moves higher risk business off-balance sheet, thus driven property risk that is more easily priced. freeing up capital in rated entities that can be used to support less Casualty risks are typically more specialized than property, volatile business or for other capital management activities. requiring significantly more expertise in underwriting and suffer from a limited ability to model such risks. This longer-tail casualty Property Risk Exposed to Most business has created problems for capital market providers, which have more of a short-term focus. Pricing Pressure As such, one of the more interesting and potentially market Reinsurers that are especially vulnerable to the current market changing developments in the alternative reinsurance market conditions are those that have a greater exposure to property in 2014 was the formation of Bermuda-domiciled Watford Re catastrophe risks, as third-party capital continues to focus on Ltd. Unlike most sidecars that overwhelmingly focus on property model-driven property risks, and, in particular, U.S. peak zone risk, and property catastrophe risk, Watford writes predominately which historically has the highest margins. Non-U.S. international longer-tail, multi-line casualty reinsurance business. This includes

Global Reinsurance Guide 2015 18 Alternative Reinsurance 2014 Market Update

general casualty, professional liability, workers’ compensation, In addition, insurance securitizations have grown to a level in nonstandard and standard auto lines. which ILS funds have become an accepted asset class, attracting new investors. This has been driven in large part by the more Arch Capital Group Ltd. (ACGL), with an ownership interest of favorable spreads available from catastrophe investments relative approximately 11%, performs the underwriting services for the to the exceptionally low investment market yields, although this reinsurance sidecar, utilizing the same proven underwriting spread has diminished considerably due to the increased investor standards as the business written on its own books. Highbridge demand. The market has expanded to an extent that individual Principal Strategies, L.L.C. (Highbridge; owned by JP MorganChase), investors can invest in multiple transactions to create a more a private equity and credit investment hedge fund company diversified portfolio of insurance securitizations. launched in 2007, manages the investments for Watford Re. The investment strategy seeks increased yields through higher risk, non-investment-grade fixed-income securities (mainly secured Investor Capital Has Permanency Even loans), as the longer-tail nature of the liabilities can be matched with longer duration invested assets. With Altering Events If successful, companies like Watford could prove to be formidable. Fitch considers a significant portion of capital market investor Given a hedge fund’s higher investment return expectations, funds to remain as permanent, given the nature of catastrophe Watford or reinsurers like it could strategically use its above-average risk as providing a very valuable portfolio diversification of expected investment results to price lower than competitors. investment market risk. However, the two events that would cause This could allow such companies to establish a firm foothold and the most potential disruption to the market include an increase in compete effectively with the traditional market at an enduring investment market yields or a major catastrophe loss event. pricing advantage. How investors would ultimately react to an environment of However, there are also notable risks associated with the strategy. significantly higher investment yields remains a source of It would be particularly concerning should the hedge fund push uncertainty, as it could potentially cause capital to retreat. If interest too hard for business to be written to add to the investment rates were to rise to higher levels as QE monetary policies begin to portfolio, resulting in the latest version of cash flow underwriting. abate, other asset classes could become relatively more attractive This would expose the company to not only direct heightened to investors if catastrophe risk spreads became less favorable. risks in the investment portfolio and losses to capital should Fitch views hedge fund capital as opportunistic and thus more defaults come in higher than expected, but also the risk of future likely to pull out, as pension funds have a longer-term investment reserve development risk. The worst-case scenario is the “double horizon and generally lower return expectations given their lower whammy” of reserves blowing up at the same time defaults on the risk appetite. This is important given that pension funds provide a investment portfolio rise. greater source of current and potential investable assets with total Fitch’s broader concern is that a more widespread replication of global pension fund assets estimated to be at least $20 trillion. structures similar to Watford Re could push the overall market to In addition, a major catastrophe loss event on a scale nearing $100 accept lower priced business in casualty lines, whereas to date, the billion could result in third-party capital deciding not to replenish significant reinsurance market pricing declines have been more the market, based on a higher perceived level of risk. Fitch notes limited to property lines. Indeed, even the market fear of having that individual pension funds that invest in ILS tend to have a more casualty-focused sidecars is affecting behavior with some more limited overall allocation of 5% or less to this asset class, and traditional reinsurers being more willing to accept lower rates in therefore, may not be affected as much after a large loss event as order to thwart the ability of Watford Re to establish a sustainable hedge funds that generally have more concentrated risk exposure. market position. However, pension funds face more potential headline flight risk Fitch believes the next 12 month will be enlightening as to whether should they suffer losses from a sizable catastrophe event. markets will accept vehicles with Watford’s profile, or if such vehicles will be a passing phase that never gain real traction. In Catastrophe Bond Market at addition, beyond the impact of nontraditional capital from vehicles such as Watford, Fitch also believes there is an increasing risk that Record Heights pricing softness will accelerate in casualty lines more generally. As Growth in the catastrophe bond market has been considerable in property rates grow softer, traditional capital will increasingly be the first half of 2014 as the market has produced over $5.7 billion redirected to casualty lines, pressuring them as well. of new issuance and reached a new high watermark for the amount of outstanding bonds at over $21 billion. Demand has remained Persistent Low Yields Drive Increased very strong in the marketplace as repeat sponsors have been eager to replace maturing cat bond issues and take advantage of Investor Demand favorable market conditions to expand the alternative portion of The lack of correlation between catastrophe losses and returns on their reinsurance protection program. other major asset classes that are tied to more macroeconomic Repeat sponsors have represented approximately 71% of 2014 and financial market conditions has always been a primary driver cat bond issuance with veteran sponsors Allstate Insurance Group, for investors to allocate funds to insurance risk. More recently, State Farm Mutual Group, Chubb Corp and USAA Insurance Group however, it has been quantitative easing (QE) and the resultant representing major U.S. primary insurers returning to utilize prolonged period of low interest rates available in the fixed-income alternative capital. In some cases, the sponsors have been able market that has pushed more and more investors to seek higher to issue significantly larger deals like Citizens’ Property Insurance yielding asset classes. Corporation’s new Everglades Re bond that doubled in size from

19 Global Reinsurance Guide 2015 Catastrophe Bonds (Non-Life)

($ Bil) Outstanding Issued 25

21.0

20 18.7

15.2 15 14.1 12.4 12.7 11.8 12.3

10 8.4 7.2 7.1 5.9 5.7 5.0 4.6 4.8 5 4.3 3.6 3.7 3.4 3.1 2.7 2.1 1.4 0.8 1.1 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 June Source: Willis Capital Markets & Advisory, Fitch Ratings 2014

Catastrophe Bond Issuances (Non-Life) First-Half 2014 Amount 2014 Sponsor Transaction ($ Mil.) Issue Date Peril Cincinnati Insurance Group Skyline Re Ltd. 100 January U.S. Earthquake and Thunderstorm Munich Reinsurance Group Queen Street IX Re Ltd. 100 February U.S. Named Storm and Australia Cyclone Tokio Marine & Nichido Fire Insurance Kizuna Re II Ltd. 245 March Japan Earthquake Co. Ltd. Chubb Insurance Group East Lane Re VI Ltd. 270 March U.S. Named Storm, EQ, Severe Storm State Farm Group Merna Re V Ltd. 300 March U.S. Earthquake American Strategic Insurance Group Gator Re Ltd. 200 March U.S. Named Storm and Thunderstorm Great American Insurance Group Riverfront Re Ltd. 95 March U.S. Named Storm, EQ, Severe Storm Everest Reinsurance Company Kilimanjaro Re Ltd. 450 April U.S. Named Storm and U.S. Earthquake Assicurazioni Generali S.p.A. Lion I Re Ltd. 141 April Europe Wind Heritage Property and Casualty Citrus Re 200 April U.S. Named Storm Insurance Co. Citizens Property Insurance Everglades Re Ltd. 1500 May U.S. Named Storm American Coastal Insurance Company Armor Re Ltd. 200 May U.S. Named Storm Allstate Insurance Group Sanders Re Ltd. 750 May U.S. Named Storm and U.S. Earthquake Zenkyoren Nakama Re Ltd. 300 May Japan Earthquake Allstate Insurance Group Sanders Re Ltd. 200 May U.S. Named Storm and U.S. Earthquake Sompo Japan and Nipponkoa Insurance Aozora Re Ltd. 100 May Japan Typhoon Company USAA Insurance Group Residential 130 May U.S. Named Storm, EQ, Severe Storm Reinsurance 2014 Ltd. Texas Windstorm Ins. Assoc. (TWIA)/ Alamo Re Ltd. 400 June U.S. Named Storm Hannover Rück SE Source: Fitch Ratings.

Global Reinsurance Guide 2015 20 Alternative Reinsurance 2014 Market Update

the company’s previous issue to $1.5 billion, representing the largest individual cat bond issuance in the market’s history. Hedge Fund-Backed Reinsurers The use of indemnity triggers in cat bond transactions has Capital Start continued to increase in 2014. This is largely tied to increasing Company ($ Mil.) Date Major Investors sophistication of the target investors for cat bond transactions AQR Re Ltd. 260 Jan. 2012 AQR Capital along with an increase in transparency with regards to the sponsor’s Management, LLC own internal underwriting practices, risk aggregations and claims Greenlight 1,185 Apr- Greenlight Capital handling procedures. Thus far in 2014, 77% of catastrophe bonds Capital Re, Ltd. 2006 issued have been with indemnity structures, 23% have been with Hamilton Re, 800 Jul-2012 Two Sigma Investments industry index triggers, with zero deals having been structured Ltd. (formerly LLC, Capital Z Partners with a parametric trigger. S.A.C. Re Ltd.) III LP New sponsors from a variety of geographies and types of business PaCRe, Ltd. 600 Apr- Paulson & Co., Validus have been able to successfully issue their first cat bonds in 2014 as 2012 evidenced by American Strategic Group, Assicurazioni Generali and Third Point 1,543 Jan. 2012 Third Point LLC, Kelso the Texas Windstorm Insurance Association as insurers continued to Reinsurance & Co, Pine Brook Road become more comfortable with the process of structuring a cat bond. Co. Ltd. Partners As the demand for cat bonds has remained strong, yield spreads Watford Re 1,133 Mar. Highbridge Principal have remained low over the past year and may be reaching a floor. Ltd. 2014 Strategies, L.L.C. Coupon rates on cat bonds issued in 2014 have regularly been Note: Capital is most recent public figure available. priced in the bottom of the range that was suggested during the Source: Company press releases and filings. marketing process and in some cases, coming in below the range. Thus far in 2014, cat bond investors have been willing to accept Hamilton Re, Ltd.) to Hamilton Insurance Group, Ltd. Hamilton Re higher levels of risk at lower risk premiums, which have still been is led by industry veteran Brian Duperreault, as CEO, and a group of viewed as attractive compared with other asset classes, given investors, including hedge fund Two Sigma Investments LLC. their diversification benefits relative to traditional investment The sale of SAC Re was triggered as part of the settlement market risks. Munich Reinsurance Company’s pulling of their latest following the insider trading guilty plea by S.A.C. Capital Advisors offering Queen Street X, Ltd. due to weak investor demand linked L.P., the hedge fund that managed SAC Re’s investments. This to very aggressive pricing may be a sign that investors are not event highlights how non-insurance-related risk factors can affect interested in further price declines. reinsurers backed by hedge funds. Hedge fund-backed reinsurers are devised to generally take on less 2014 Issuance Centered in Traditional risk on the underwriting side, having tapped experienced reinsurance Geographic Regions talent to operate the companies, while taking on more risk on the asset side, with a higher double-digit investment return expectation. U.S.-related perils continue to be the main focus for issuance in As previously discussed, these reinsurers can underwrite to higher 2014 as 86% of cat bonds issued in the first six months of the year combined ratios, given higher investment return expectations, included a U.S. peril in its trigger. U.S. named storm risk remained adding pressure to the market pricing environment. by far the leading peril that is included in cat bond transactions, as this risk is the most widely understood by investors and is modeled Another concern that Fitch has for reinsurers that are reliant on at a more granular level than other perils. There also remains a hedge fund returns is their ability to withstand the volatility that substantial amount of risk in the U.S. reinsurance marketplace that has historically been experienced by hedge funds. A huge fall in is available to pass to the capital markets. asset values by a hedge fund could deplete a reinsurers’ capital, putting potential strain on a company if it coincided with unusually Outside of the U.S., the other regions that were included in high claims payouts. transactions during the first half were the two largest non-U.S. regions for historical cat bond issuance, Japan and Europe. As data Fitch believes that other such alternative investment funds may quality and modeling sophistication in these regions continues continue to replicate the hedge fund-driven reinsurance model, to improve, demand for issuance in the area is expected to be as these entities look for a more permanent asset management maintained as investors search for diversification of perils and vehicle and the benefit of float provided by insurance. That being regions. Three cat bonds were issued in 2014 covering risk in Japan, said, not all efforts to start-up a hedge fund-backed reinsurer have with two for earthquake and one specifically for typhoon risk, while been successful, with Pine River Re and Golub Capital Re failing to one bond was issued that covers European Windstorm risk. launch in 2014 as was expected. This may indicate that market conditions have become somewhat less conducive for establishing hedge fund reinsurers. Hedge Fund-Backed Reinsurers The long-term future of this approach ultimately depends on Continue to Take Shape its relative success in generating superior risk-adjusted returns over the market cycle compared with other alternative and more In addition to the formation of Watford Re by ACGL and hedge traditional reinsurance market structures. Furthermore, the ability fund Highbridge (discussed above), the other notable recent of these companies to manage exposure to both underwriting event in the hedge fund-backed reinsurers domain was the sale and asset events as insurance and investment market conditions of hedge fund-backed reinsurer S.A.C. Re, Ltd. (SAC Re; renamed to change will be a critical factor to their future success or failure.

21 Global Reinsurance Guide 2015 Appendix – Terminology

Alternative Reinsurance Market Sidecars Alternative reinsurance is effectively any form of managing and Sidecars are special-purpose reinsurers that provide dedicated transferring (re)insurance risk through the use of the capital collateralized quota-share reinsurance, often for a single ceding markets rather than the traditional reinsurance market. These company that transfers a portion of its underwriting risk (and nontraditional structures commonly include catastrophe bonds related capital investment), and in turn receives a ceding (cat bonds), collateralized quota-share reinsurance vehicles commission. They also can be a source of fee income for the (sidecars) and industry loss warranties (ILWs). reinsurers that underwrite or provide management services to such third-party risk vehicles. Alternatives to traditional reinsurance essentially began following Hurricane Andrew, with the introduction of exchange traded Sidecar vehicles are often established by traditional reinsurers as insurance options in 1992, the first cat bond in 1994 and later a means to tap into the external capacity offered by the capital sidecars in 2001, following the events of Sept. 11, 2001. However, markets from hedge funds, investment banks, private equity the market began to grow significantly following Hurricane and other opportunistic investors and increase the efficiency Katrina in 2005, as (re)insurers were essentially forced to increase and diversification of the company’s reinsurance program. They issuances of catastrophe bonds and expand the use of sidecars in typically have a limited life expectancy and are often wound up order to absorb underwriting capacity as retrocession availability when market conditions deteriorate, after which any remaining became more scarce and expensive. capital funds are returned to investors and the sponsor.

Catastrophe Bonds Industry Loss Warranties Cat bonds are bonds issued by an insurer with a condition that if the ILWs are a type of private reinsurance or derivative contract through issuer suffers a catastrophe loss greater than a specified amount, which one party (often an insurer) will purchase protection based the obligation to pay interest/principal is deferred or forgiven, on the total loss arising from an event to the entire insurance thus effectively prompting a default on the bond. Cat bonds allow industry rather than their own losses. The buyer pays a premium to sponsors, most often a (re)insurer, to transfer a portion of its the company that writes the ILW cover (often a reinsurer or hedge catastrophe risk to the capital markets through securities purchased fund) and in return receives coverage for a specified limit if industry by investors and actively traded in the secondary market. losses exceed the predefined amount under the ILW trigger. Favorably for the sponsor, cat bonds offer collateralized (most often invested in U.S. Treasury Money Market Funds) protection that is locked in at a fixed cost over multiple years (typically two to four years). This allows the (re)insurer to be less subject to changing reinsurance market conditions. For the investor, cat bonds offer a comparatively high yield and an opportunity to diversify their portfolios.

Global Reinsurance Guide 2015 22 Alternative Reinsurance 2014 Market Update

23 Global Reinsurance Guide 2015 Reinsurer Mergers and Acquisitions

Current Environment Favors Increased larger and more diverse organization can increase the chances of surviving considerable industry headwinds. M&A Activity Roadblocks Remain for Deals: The environment appears to Reinsurance Ripe for Consolidation: The reinsurance market support M&A activity, as valuation multiples have changed to be was presumed as a good merger and acquisition (M&A) candidate more in favor of deal-making. However, there are still impediments for the last several years due to the level of undeployed capital that may stand in the way of deals, primarily a lack of willing sellers. and the number of small and midsize companies with limited As such, Fitch expects very few transformational acquisitions. organic growth options. The increasing availability of alternative reinsurance could add to these trends by providing further Acquisition-Related Risks: Recognition of inherent uncertainty sources of capital to the market while potentially reducing growth tied to any large acquisition also leads to fewer consummated opportunities for traditional reinsurers in direct competition with deals. These risks include significant integration challenges; the alternative providers. uncertainty in relation to regulatory initiatives, such as Solvency II, that could affect reinsurer earnings and capital structures; and Consolidation Viewed as Positive for Sector: Fitch Ratings potentially destroying shareholder value by overpaying for an views a certain amount of consolidation as a modest positive acquisition, particularly with the heightened risk of acquiring a for the reinsurance sector, as a reduction in the number of (re) company with inadequate reserves. insurers and associated underwriting capacity would likely ease competitive pressures. However, cedents would be less Reinsurers Seek Diversifying Acquisitions: Several recent able to diversify across reinsurers, with increased reinsurance acquisitions by reinsurance companies of non-reinsurance concentration risk. For the acquirer, a consolidating transaction businesses reflect a reaction to the lack of adequate returns could be a credit positive or negative. on reinsurance capital in an attempt to improve overall future return prospects. These include Arch Capital Group Ltd.’s (ACGL) Aspen Bid Reflects Difficult Conditions: Endurance Specialty movement into the U.S. mortgage insurance market, Validus Holdings Ltd.’s (Endurance) failed bid to buy Aspen Insurance Holdings, Ltd.’s (Validus) pending acquisition of Western World Holdings Ltd. (Aspen) reflects the difficult conditions in the Insurance Group Inc. (Western World), as well as several expansions reinsurance market. Softening reinsurance pricing and broadening into the alternative reinsurance market. of policy terms and conditions demonstrate deterioration in market underwriting discipline that, if unchecked, will result in Diversifying M&A a Credit Negative: Fitch generally views profit erosion for reinsurers below adequate levels. Becoming a diversifying transactions as a credit negative to the acquiring company in the near term. Execution risk is very high, as the acquiring company is entering into an area where it does not have Analysts expertise and the chance of making mistakes is high. Over the long Brian Schneider term, a well-executed and well-priced acquisition that provides +1 312 606-2321 diversification of earnings and business profile would be a credit [email protected] positive to the company. Martyn Street +44 20 3530 1211 M&A Activity Could Increase [email protected] Among Reinsurers Jeremy Graczyk +1 312 368-3208 The reinsurance sector is likely to see increased M&A activity, [email protected] as more stressful market conditions limit organic growth potential. Market consolidation would foster more efficient use of Related Research underwriting capacity and reduce undeployed capital. However, a meaningful decline in the number of reinsurance markets would 2015 Outlook: Global Reinsurance (September 2014) reduce cedents’ ability to diversify risk exposures. Alternative Reinsurance 2014 Market Update (September 2014) Market experts have speculated that the reinsurance market is a Global Reinsurance’s Shifting Landscape (September 2014) strong candidate for consolidation due to the abundant level of Latin American Reinsurance (September 2014) capital and the number of small and midsize companies with limited Global Reinsurers’ Mid-Year 2014 Financial Results (August 2014) organic growth options. However, most recent deals have been Asian Reinsurance Markets (August 2014) small or involved sales of particular operations or business lines that were no longer a strategic fit, in runoff or part of a distressed Related Criteria sale. Fitch expects future M&A activity is likely to take the form of smaller bolt-on acquisitions rather than be transformational, given Insurance Rating Methodology (September 2014) acquisition-related risks.

Global Reinsurance Guide 2015 24 Reinsurer Market Price/Book Value (x) 1.2

1.1

1.0

0.9

0.8

0.7

0.6

0.5 2007 2008 2009 2010 2011 2012 2013 Q214 Source: SNL Financial, company reports, Google Finance.

The heightened availability of alternative reinsurance could fuel deal- firm is heightened under unduly soft market conditions or in making by providing further sources of capital to the market while periods of more volatile loss cost inflation. potentially reducing growth opportunities for traditional reinsurers in direct competition with alternative providers. Many companies have seen their franchise value diminished in recent years as they become Unsolicited Bid for Aspen Reflects marginalized in the face of increased capital market competition and Challenging Market Conditions could thus be viewed as prime acquisition targets. The most interesting M&A event thus far in 2014 didn’t come to Passive underwriting facilities, in which a reinsurer agrees with a fruition, as Endurance ultimately was forced in late July to withdraw broker to automatically take on a fixed proportion of all risks, may its $3.2 billion unsolicited bid to buy fellow Bermuda class of 2001 also create pressure for smaller firms to merge. These facilities put company Aspen. This was not for a lack of effort, as Endurance’s downward pressure on prices and could marginalize some smaller public bid in April was increased in June, but both were rejected. underwriters that would previously have taken on the business This prompted Endurance to resort to several legal maneuvers which is now automatically allocated. over the summer in a last-ditch effort to find enough Aspen Valuation multiples have changed to be more in favor of deal- shareholder support for a sale. making, with companies’ market values recovering to near or The situation highlights that one of the largest impediments to above book value, although overall multiples are down slightly this reinsurer M&A in recent years has been a lack of willing sellers. The year and remain below prefinancial-crisis levels. Improved market approach by Endurance was an uncommon move, as successful prices give higher-valued companies heightened flexibility to fund hostile acquisitions of companies that are not considered to be acquisitions with common stock. For targets, higher acquisition in play are rare in the insurance industry. Had this method been premiums make it more likely that shareholders will support a effective, it could have set the tone for future market activity to proposed purchase. one that legitimized a more hostile approach. Insurance M&A deals present a unique set of risk exposures, Endurance’s acquisition attempt reflects the stressful market including significant integration risk and added legal and conditions that are limiting organic growth potential. The regulatory uncertainty, which is why Fitch typically views growth fundamentals of the global reinsurance sector have deteriorated through acquisition as a negative credit factor in its rating analysis. recently, with declining premium pricing and weakening of terms Solvency II, in particular, creates uncertainty for potential deals, and conditions. Heightened competition is driven in large part by as it is difficult for an acquirer to determine accurately how a the record capitalization levels of the traditional reinsurance sector deal might affect its regulatory solvency. An even greater risk is and the growing capacity provided by the alternative reinsurance the prospect of reducing shareholder value by overpaying for an market. While market consolidation would reduce the level of acquisition by an amount that materially weakens the acquiring undeployed capital, Endurance, Aspen and other small to midsize company. The risk of underestimating loss reserves of an acquired

25 Global Reinsurance Guide 2015 reinsurers must determine how to best adapt to the new world or industry, which is under significant pressure as new underwriting risk becoming irrelevant. capacity from securitization activity and alternative capital providers has led to significant price reductions with no catalyst for a reversal Achieving scale and increased diversity through acquisitions can in sight. While diversification into new business lines or geographic be beneficial in that absolute capital size remains an important markets through acquisitions can provide profitable opportunities, competitive factor in the insurance industry. The recent sizable Fitch views such transactions cautiously as they carry a greater risk life reinsurance acquisitions by SCOR SE are a case in point. of failure, with the acquirer venturing into less-known territory. Capital size is particularly meaningful for reinsurers, given that the purpose of reinsurance largely is to absorb earnings volatility One diversifying transaction was ACGL’s expansion into the U.S. on behalf of clients. A larger reinsurance organization has an mortgage insurance market with its acquisition of CMG Mortgage increased opportunity and a greater financial ability to lead Insurance Co. (CMG) and the operating platform of PMI Mortgage reinsurance programs and thus be in a better position to evaluate Insurance Co. Fitch views this purchase as an opportunity under the and select risks and negotiate pricing and terms and conditions. existing generally favorable mortgage insurance market conditions Importantly, in the current competitive environment, stronger, to provide an additional diversified source of earnings. However, more established reinsurers are maintaining capacity at the it also represents a challenge to generate favorable profitability expense of smaller, weaker players. in a line of business that experienced severe difficulty during the financial crisis, although CMG posted less severe losses reflective However, insurance M&A deals also present a unique set of risk of the higher quality credit union marketplace. Fitch expects exposures. This includes significant execution and integration ACGL’s approach to developing this business will be controlled and risk, which is especially relevant when cultural differences exist prudently managed to the company’s conservative underwriting between buyer and target, as evidenced by the public dispute and risk management standards, using an experienced team to between Endurance and Aspen. There is also a risk that a more operate and manage the business. hostile approach will be viewed unfavorably by key stakeholders, resulting in a damaged franchise value. This would be particularly Another such acquisition is Validus’ announced plan to purchase problematic if the company were to isolate its underwriters, insured Western World, a New Jersey-based privately held property/ clients or independent agent and broker distribution channels. casualty insurer that focuses on casualty risks in the excess and surplus lines market. The acquisition would provide Validus with a U.S. platform from which to distribute specialty short-tail Reinsurers Diversifying primary insurance products. Through a combination of strategic Through Acquisitions acquisitions and organic growth, Validus has expanded quickly into one of the largest global providers of catastrophe and other short- Several acquisitions of interest in 2014 were driven by reinsurers tail reinsurance. However, the company remains significantly looking to diversify from the reinsurance business. This is partially smaller than many of its global competitors in the reinsurance and a function of the competitive market dynamics in the reinsurance primary insurance markets.

Reinsurer M&A Transactions Completed or Announced in 2014 Buyer Target Business Close Date Arch Capital CMG Mortgage U.S. mortgage insurance Jan 2014 White Mountains Star & Shield Florida reciprocal insurance exchange Jan 2014 XL Re Global Ag U.S. crop insurance Feb 2014 Catalina Alea Group Runoff reinsurance Mar 2014 Enstar Torus Insurance Global specialty (re)insurance April 2014 Sompo Japan Canopius Lloyd’s specialty May 2014 GreyCastle XL Life Reinsurance U.K. and Irish runoff life reinsurance Jun 2014 Lennox Investments Southport Re Collateralized reinsurance 2Q14 ACP Re Tower Group Global (re)insurance 3Q14 (Expected) Catalina SPARTA Insurance U.S. specialty program 3Q14 (Expected) Validus Western World U.S. excess and surplus lines 4Q14 (Expected) Banco BTG Pactual Ariel Re Reinsurance and Lloyd’s 2H14 (Expected) Armour Group OneBeacon Runoff business 2H14 (Expected) Allied World RSA Insurance Group Hong Kong and Singapore operations 1H15 (Expected)

M&A - Merger and acquisition. Source: Company data, Fitch.

Global Reinsurance Guide 2015 26 Reinsurer Mergers and Acquisitions

Enstar Group Ltd.’s acquisition of Torus Insurance Holdings Ltd. (Torus), an active global specialty (re)insurer formed in 2008, also was notable. Torus has been challenged to achieve profitability due to an uncompetitively high operating expense structure, and Enstar is in the process of shifting Torus’ strategy to concentrate on profitable lines, reduce costs and improve management. Enstar is a Bermuda-based company whose core business involves acquiring and managing runoff insurance and reinsurance companies and businesses. Recently, Enstar has added active entities, including Atrium Underwriting Group Ltd. late in 2013, that, in addition to Torus, the company anticipates will enhance opportunities available in its core legacy business.

Alternative Reinsurance Provides Opportunities An area that has witnessed an uptick in M&A activity is the convergence between traditional reinsurers and capital markets. One notable example is ACGL’s recent cosponsor (11% ownership interest) of a new Bermuda-domiciled reinsurer, Watford Re Ltd., which is focused on longer-tail, multi-line casualty reinsurance business. These and other structures allow for a more efficient and flexible method for reinsurers to manage capacity. Fitch expects this trend to continue, as most reinsurers have accepted that the dynamics of the reinsurance marketplace have structurally changed and thus are looking for ways to match their client needs to the appropriate capital, be it traditional or nontraditional. Further discussion of the alternative reinsurance market can be found in Fitch’s upcoming report, Alternative Reinsurance 2014 Market Update, to be published in early September and made available at www.fitchratings.com.

27 Global Reinsurance Guide 2015 Asian Reinsurance Markets

Softening Premium Rates with Greater TransAsia Airways plane, and one Air Algerie flight. The losses from each of these incidents are still being calculated but are likely to Foreign Interest cost the (re)insurance industry of at least USD1bn in aggregate. Soft Rates Spur Demand: Premium rates for regional reinsurance Positive Evolution of Regulations: The regulatory environment policies renewed during 2014 have fallen to a plateau. The in the region has been gradually updated as regulators strive softening rates were largely attributable to a decrease in the to improve the overall financial health and risk management frequency and severity of natural catastrophes in the region capabilities of companies in the industry. Fitch Ratings believes since 2011, and plentiful reinsurance capacity through new start- that various regulatory initiatives could indirectly lead to an ups and Asian operations set up by global reinsurers. Several increase in demand for reinsurance in Asia as direct insurers review companies have taken advantage of the current market to expand their risk management strategies and appetite, which could lead their reinsurance coverage at a lower cost. them to transfer more risk to reinsurers. Growth Momentum Lures Interest: There is increasing foreign Data Limitations Pose Constraints: Fitch believes that interest in setting up operations in the region. The growth reinsurers in Asia continue to face the problem of limited momentum of the Asian reinsurance markets is strong, with data availability to more accurately model and manage their increasing risk awareness and continued market demand by the catastrophe risks, while they grapple with the aftermath of the cedants, spurred by frequent occurrences of natural catastrophes catastrophes. Compilation of more comprehensive statistics in the region. Many Asian markets offer vast growth potential, should improve as the markets evolve. including the relatively untapped Chinese and Indonesian markets. Emergence of Catastrophe Bonds: The potential financial impact Solid Reinsurance Business caused by natural catastrophes has led to a review of risk appetite and management strategy for both the insurers and reinsurers. Growth Opportunities Some of the insurers are looking for alternative diversified sources of funding, to reduce their heavy dependence on reinsurers. During The vast growth potential for Asian reinsurance markets has 1H14, several catastrophe bonds were issued in Japan. These cover attracted interest from foreign companies to broaden their various catastrophe risks such as earthquakes and typhoons. operations in the region. Aviation Catastrophes Pose Risks: Aviation reinsurance rates look set to increase during the next renewal period, although the size of the increase is unclear. At least four plane mishaps Fitch views the growth potential of the reinsurance market in have happened so far in 2014, two Malaysian Airlines planes, one Asia as enormous given the relatively low insurance penetration in Asian markets compared with the more established markets of the US and UK. There is increasing risk awareness and continued Analysts demand for reinsurance protection by the direct insurance companies in the region, especially in the wake of multiple natural Siew Wai Wan, CFA catastrophes that have occurred in recent years The growing Asian +65 6796 7217 economies with increasing spending power/wealth affluence of [email protected] the population fuels further demand for insurance protection. Jeffrey Liew Asian economies constituted an important component of the +852 2263 9939 global economy (34.6% of global GDP), with 59.7% of the world’s [email protected] total population in 2013. However, the total insurance penetration rate in Asia, at 5.4% in 2013, was well below that of the more established markets in the world (US: 7.5%; UK: 11.5%). Three of Related Research the most densely populated emerging markets in Asia, China, 2015 Outlook: Global Reinsurance (September 2014) India, and Indonesia, had relatively low penetration rates (from Alternative Reinsurance 2014 Market Update (September 2014) 2.1%-3.9%). These markets, with rising household income and Global Reinsurance’s Shifting Landscape (September 2014) rapid industrialisation, contain 40.5% of the world’s population and Latin American Reinsurance (September 2014) 66.8% of Asia’s population. Reinsurer Mergers and Acquisitions (August 2014) Reinsurance coverage in Asia is insignificant compared with Global Reinsurers’ Mid-Year 2014 Financial Results (August 2014) global reinsurance coverage. Asia and Australia are estimated to contribute about 10%-15% of global reinsurance premiums, Related Criteria according to industry estimates. Insurance Rating Methodology (September 2014)

1 Source: Swiss Re Sigma No 4/2013

Global Reinsurance Guide 2015 28 Foreign Reinsurers Seek Expansion in Fitch believes that Peak Re’s encouraging performance could Asian Region fuel more interest to set up reinsurance operations in the region. The company, which focuses on underwriting property and Many global reinsurers have eyed the under-penetrated Asian casualty reinsurance business across Asia, achieved a net profit of markets. China is one of the highly sought after developing USD102.99m in 2013, its first year of operation. In June 2014, Peak markets in the region. Its vast population of above one billion, Re was granted a licence by the Hong Kong regulatory authority to rising household income, rapid industrialisation coupled underwrite life reinsurance. The company also signed an agreement with gradual market liberalisation, provide attractive growth with MacquarRe, a Sydney-based reinsurance consultancy, during opportunities. Premiums written in the non-life sector in China 2014 to tap into the Australian and New Zealand markets. This is in grew by 17.2% in 2013 and 16.8% during the first five months line with its plan to provide a comprehensive range of reinsurance of 2014, from a year earlier. It was recently reported that Swiss business to its clients to broaden market reach in the region and Reinsurance Company plans to tap growth in China’s (re)insurance raise its competitive edge. market through the acquisition of Sun Alliance Insurance (China) Limited from RSA Group. Elsewhere in the region, Saudi Re obtained regulatory approvals The gap between economic and insured losses from Asian at end-2013 from the Labuan Financial Services Authority and the catastrophes remains wide, suggesting under-insurance in the Saudi Arabian Monetary Authority to set up a branch in Labuan, Asian market. Malaysia to underwrite general reinsurance business. Transatlantic Reinsurance Company, headquartered in New York, established a branch in Singapore in 2013. It is also reported that American International Group (AIG) plans to set up a retakaful business Costliest Catastrophes in 2013 operation in Malaysia in 2014. (Re)takaful business is a form of Countries in the Asia Pacific region are exposed to catastrophes financial protection, similar to insurance. But unlike conventional to different extent. Australia, New Zealand, Japan and China are insurance, (re)takaful firms must comply with Islamic principles markets highly prone to catastrophes such as earthquakes and when carrying out such business. floods. On the other hand, Singapore and Malaysia are relatively catastrophe free. Thailand is no longer classified as a catastrophe Plausible Performance of Peak Re May Prompt free market, given the severity of the prolonged floods in 2H11. Addition of New Capacity Fitch believes that new Asian-based reinsurers are likely to come to The intensity and severity of natural catastrophes in the region in the region gradually to tap the vast reinsurance business potential. 2013 was lower than in 2011. Total economic losses arising from Peak Reinsurance (Peak Re) was established in December 2012 natural catastrophes reached USD62bn in 2013, approximately and was the latest start up added to capacity. The commercial 24% of that in 2011. It is estimated that the total insured losses viability of this latest addition was highly anticipated by many amounted to USD6bn, constituting only about 10% of total industry players. economic losses in 2013. Comparatively, the total insured losses in Europe and North America was about 45% and 59% of total economic losses in 2013 respectively. The wide discrepancy

Figure 1 Details of Major Natural Catastrophes in Asia in 2013 Date Countries affected Event Insured loss (USD) Total damage (USD) 4 Jan - 10 Jan Australia Bushfires 80m 98m 21 Jan - 31 Jan Australia Cyclone Oswald 983m 1.48bn 2 Jul Indonesia (Aceh, Sumatra) Earthquake of Magnitude 6.2 n.a. 113m 7 Aug – 14 Oct China (Liaoning, Jilin, Heilongjiang) Severe floods 406m 4.96bn 13 Aug - 21 Aug Philippines Severe floods 100m 2.19bn 29 Sep - 7 Oct China, Japan Typhoon Fitow 1.13bn 10.3bn 8 Nov - 10 Nov Philippines, Vietnam, China Typhoon Haiyan 1.49bn 12.5bn 15 Oct Philippines (Catigbian) Earthquake of Magnitude 7.2 20m 100m

Source: Swiss Re Sigma 1/2014

2 Source: Swiss re Sigma No 1/2014

29 Global Reinsurance Guide 2015 between the insured and economic losses in Asia indicates that the Malaysian Airlines aircraft, MH17, which was shot down by a region has a lot of catching up in terms of insurance penetration. missile in July 2014 while flying over Ukraine, could register similar losses. In the same month, there were two other plane crashes, a Fitch believes that the continued occurrence of natural TransAsia Airways plane GE222 and Air Algerie flight AH5017. The catastrophes and vast disparity of the insured losses and total losses of the latter two are still being tabulated. economic losses heightens the awareness of the importance of (re)insurance protection and risk management. This will prompt direct insurers to work more closely with the reinsurers to adopt Interest in Alternative Sources of Capital Igniting appropriate risk transfer and capital preservation strategies. in Catastrophe Prone Markets This will act as catalyst for the growth of direct insurance and Fitch observes an emerging trend for insurers to issue catastrophe reinsurance businesses, supported by the increasing affluence bonds, notably in Japan, as an alternative source of direct funding. and stable economic conditions in Asian markets. While this helps to reduce reliance on the reinsurers, the agency thinks that the reinsurers still play a critical role in the insurance Insurers Pick Up Additional Coverage Amid Soft risk transfer mechanism and they are unlikely to be eliminated. The expertise and technical know-how of reinsurers are especially Premium Rates needed to structure risks that are more complex in nature.

The premium rates of reinsurance policies renewed in 2014 During 1H14, three catastrophe bonds were issued in Japan: from were flat/ fell slightly compared to the prior year. Zenkyoren, the largest Japanese Cooperative (USD300m of bonds for Japanese earthquake risks); Sompo Japan Nippon Koa (USD100m of bonds for Typhoon risks), and Tokio Marine (USD245m of bonds The agency expects premium pricing rates in the region to remain for Japanese earthquake risks). These bonds were fully taken up flat or soften slightly in 2014 in the absence of severe natural by the market. If no catastrophe occurs during the duration of catastrophes in 2012/2013. In Japan, the earthquake and wind/ the bonds, the insurer would pay a pre-determined coupon to the flood policies were renewed in April 2014 at 10%-20% discounts in bond holders. However, in the event of a catastrophe, all or part premium rates, reflecting the benign catastrophe environment in of the principal amount would be forsaken by the bondholders for 2013, and healthy reinsurance capacity. In Australia the renewals of the insurer to pay the catastrophe related claims. main property catastrophe policies took place in July 2014. Those policies renewed in January 2014 were generally offered at 5%- 10% discounts. The full impact of the premium price negotiations Update on Thai Reinsurance Market for the July renewals is not yet known, but Fitch expects some rate After 2011 Thai Floods declines, as the reinsurance pricing cycle stays at the trough. Thailand experienced one of the most severe and prolonged The cheaper reinsurance rates are welcomed by the direct floods, which affected the country’s 65 provinces in 2H11. insurers and, some took the opportunity to purchase additional Insured losses and economic losses are estimated at USD16.2bn reinsurance covers to better equip themselves for the next Asian and USD49.6bn respectively, resulting in the largest flood loss natural calamity. For instance, it was reported that Insurance event since 1970. The majority of the insured losses were paid in Australia Group (IAG) added an extra AUD600m to its reinsurance 2012/2013. According to the latest information from the Office of protection, from AUD5bn to AUD5.6bn in 2014. New Zealand’s Insurance Commission (OIC), 93.4% of the total claims have been government-owned Earthquake Commission raised its reinsurance paid to date. capacity in June 2014 by about 38% to NZD4.5bn (USD3.9bn) from NZD3.25bn to take advantage of the softer premium rates. Premium rates on natural catastrophe policies in Thailand rose in 2012/2013 following the 2011 floods. Event limits were imposed, Fitch observes that reinsurers are gradually reducing their with reinsurers generally limiting the level of flood coverage to less participation in proportional reinsurance, while increasing their than 100% of total loss. The premium rates have since fallen close non-proportional business. Under the latter, reinsurers would only to pre-flood levels given the lack of severe floods in 2012/2013, be affected should the direct cedants or insurance companies’ as well as the availability of reinsurance capacity in the region. insured losses exceed a certain predetermined level, as opposed to However, event limits remain as an underwriting term/condition as taking a proportional share of the losses incurred by the cedants. a consequence of enhanced risk management by the reinsurers. Expectation of Aviation Rate Increase Following Heat is on Political Violence Cover Recent Plane Mishaps Fitch thinks that an emerging key growth driver for the Thai Fitch believes that aviation reinsurance rates are likely to harden (re)insurance market is political violence cover. The prolonged during the next renewal period although the extent of the likely anti-government protest from late 2013, which led to the increases is still unclear. This mainly results from several back- introduction of martial law and the coup in May 2014, has to-back plane mishaps in 2014. However, it is unlikely that this resulted in a number of deaths and over a hundred injured. The series of incidents would rattle the reinsurance sector. Based on financial impact from the protest is estimated by the Tourism industry practice, the aviation risks are typically spread out among Authority of Thailand to exceed USD1bn. GDP contracted by a consortium of players, with none of them taking an excessive 0.6% in 1H14 from a year earlier. share in a single risk. Premium rates on political violence policies remain high as a A Malaysian Airlines aircraft, MH370, which disappeared in the result of the political instability in Thailand. According to Muang Indian Ocean in March 2014, is likely to incur insurance claims Thai Insurance, one of the major insurers in Thailand who offers of USD400m-USD500m based on industry estimates. Another this type of insurance, demand for political violence insurance

Global Reinsurance Guide 2015 30 Asian Reinsurance Markets

has increased substantially in the past three years. The company’s fall with softening premium rates in the market, as policyholders premium income from political violence insurance is expected at have easier access to affordable policies outside NCIF. THB300m (USD9.25m) in 2013, up from THB200m and THB140m In China, the China Insurance Regulatory Commission is keen in 2012 and 2011 respectively. to establish natural catastrophe insurance schemes that cover specific regions within the China market. In July 2014, Shenzhen Implementation of Regulatory rolled out a government-funded catastrophe insurance policy with PICC Property and Casualty Co Ltd to cover the claims of all Initiatives a Credit Positive citizens in the region resulting from various catastrophes such as earthquakes, typhoons, and tsunamis. The government will Regulatory initiatives lead to a rethink of risk management/ also set up a catastrophe fund in Shenzhen to supplement the appetite and could possibly spur demand for reinsurance. insurance policy.

Fitch views positively the various regulatory initiatives that have been implemented to boost the overall financial health and transparency of (re)insurance markets. These regulations are likely to propel the demand for technical expertise, risk transfer, and reinsurance capacity by direct insurers to meet the higher regulatory requirements.

Raising the Regulatory Capital Standards In Indonesia, reinsurers will be required to meet the minimum regulatory capital requirement of IDR200bn by end-2014, from IDR150bn in 2012 and IDR100bn in 2010. Fitch does not envisage the rated reinsurers in Indonesia having problems meeting the higher regulatory capital requirement by the stipulated deadline. In China, the insurance regulator is planning to introduce a risk- based capital framework (RBC), China Risk-Oriented Solvency System (C-ROSS), in 2014. While the new capital regime will affect individual insurers’ capital adequacy, its impact on the capital requirement for the market as a whole is uncertain. Fitch believes that as property lines will attract higher risk charges under the proposed framework, direct insurers will employ reinsurance as a means to transfer their underwriting risk for property business and reduce the strain on the capital requirements. This implies that the demand for property reinsurance will remain strong. Based on the proposed risk charge for motor insurance, the required capital for underwriting motor business is likely to decrease. Consequently, the agency believes that the demand for motor reinsurance is likely to fall. Since 2013, the Australian Prudential Regulation Authority’s RBC regime has required each insurer to set aside a certain amount of capital to adequately cover its net retention based on a single large 1-in-200-year catastrophic event, or accumulated from a series of smaller loss events. This additional capital component introduced by the regulator highlights the critical need for insurers to set aside sufficient capital resources to mitigate the financial impact of unexpected catastrophes.

Formulation of Catastrophe Funds and Policy In Thailand the government set up the National Catastrophe Insurance Fund (NCIF) in 2012 to improve the industry’s financial buffer to better cope with future catastrophes. The fund acts as a reinsurer, offering coverage for damages caused by three natural disasters: floods, earthquakes, and damaging winds, for households, SMEs, and industry sectors. The objective is to provide sufficient reinsurance capacity at affordable premium rates, and to provide easy access to catastrophe insurance to households and businesses. NCIF had a sum insured of THB81.3bn as of 9 April 2013. Fitch thinks the amount of sum insured via NCIF is likely to

31 Global Reinsurance Guide 2015 Appendix

Figure 2 Fitch’s Ratings on Select Asian Reinsurers Insurer financial Name Country strength rating Rating outlook Malaysia Reinsurance Berhad Malaysia A Stable MNRB Retakaful Berhad Malaysia BBB+ Stable PT Tugu Reasuransi Indonesia Indonesia A(idn) Stable PT Asuransi MAIPARK Indonesia Indonesia BBB+(idn) Stable Taiping Reinsurance Co. Ltd Hong Kong A Stable SCOR Reinsurance Co Asia Ltd Hong Kong A+ Stable SCOR Reinsurance Asia-Pacific Pte Ltd Singapore A+ Stable Source: Fitch

Figure 4 Statistics of Selected Asian Reinsurers Gross premiums NPW/SH equity NPW/GPW ROE (ie. net income/ SH equity/ (USDm) Loss ratio (%) Combined ratio (%) (%) (retention ratio) (%) SH equity) (%) total asset (%) Name of reinsurer 2012 2013 2012 2013 2012 2013 Name of reinsurer 2012 2013 2012 2013 2012 2013 2012 2013 ACR Capital Holdings 751 765 107 73 134 102 ACR Capital Holdings 92 49 67 51 -25.0 7.0 23.5 31.3 Central Reinsurance Corporation 495 521 70.2 64.3 102.6 98.2 Central Reinsurance Corporation 167.7 163.2 93.3 94.2 8.5 8.1 24.9 27.4 China Reinsurance Group Corporation 9,516 10,817 45.2 47.7 78.2 81.0 China Reinsurance Group Corporation 128.5 139.1 95.9 94.7 5.2 7.4 29.9 29.7 General Insurance Corporation of India1 2,677 2,779 123.6 82.1 140.9 104.1 General Insurance Corporation of India1 163.4 142.6 92.2 91.3 -32.1 24.3 14.3 16.1 Korean Reinsurance Company1 5,012 4,126 79.7 78.6 97.5 96.8 Korean Reinsurance Company1 265.0 199.7 66.3 63.4 3.0 2.9 19.3 19.0 Labuan Reinsurance Ltd 214 n.a. 67.2 n.a. 109.3 n.a. Labuan Reinsurance Ltd 127.1 n.a. 83.2 n.a. 0.4 n.a. 22.4 n.a. PT Asuransi MAIPARK Indonesia (BBB+(idn)/ 15 16 0.8 2.2 62.8 76.9 PT Asuransi MAIPARK Indonesia (BBB+(idn)/ 56.3 46.8 68.1 52.5 19.8 19.5 62.2 64.1 Stable) Stable) Malaysian Reinsurance Berhad1 (A/Stable) 374 414 61.9 58.6 96.0 93.8 Malaysian Reinsurance Berhad1 (A/Stable) 99.1 104.2 83.5 85.5 11.7 11.8 41.4 40.5 National Reinsurance Corporation of the 74 58 108.5 79.6 177.3 172.1 National Reinsurance Corporation of the 13.1 14.4 25.7 32.0 0.6 0.3 38.0 39.0 Philippines Philippines Singapore Reinsurance Corporation Limited 107 112 68.6 61.5 109.8 95.9 Singapore Reinsurance Corporation Limited 23.1 23.4 37.1 37.3 5.4 9.2 30.3 31.2 Taiping Reinsurance Company Limited (A/ 443 482 76.5 63.1 106.2 95.4 Taiping Reinsurance Company Limited (A/ 100.5 87.0 89.5 90.7 3.7 10.4 34.1 38.5 Stable) Stable) Thai Reinsurance Public Co., Ltd 191.4 180.9 169.9 136.1 220.8 180.1 Thai Reinsurance Public Co., Ltd 153.5 196.2 85.6 93.8 -124.4 -99.0 10.4 10.1 The Toa Reinsurance Company, Limited1 1,921 1,831 97.5 108.0 126.9 136.8 The Toa Reinsurance Company, Limited1 79.1 74.3 84.2 76.0 -7.1 2.5 34.1 37.2 PT Tugu Reasuransi Indonesia (A(idn)/Stable) 71 86 64.6 68.2 98.4 96.4 PT Tugu Reasuransi Indonesia (A(idn)/Stable) 239.4 342.8 82.2 83.5 19.2 25.6 23.1 16.9 1 Financial year ended 31 March. Source: Company reports, Fitch’s calculations

Global Reinsurance Guide 2015 32 Asian Reinsurance Markets

Figure 3 Insurance Penetration Data for 2013 Insurance Insurance Insurance penetration penetration Insurance per per capita Life Non-Life life (USD non-life (USD capita life (USD non-life (USD premiums premiums premiums as premiums as % premiums as % premiums as % Population Country (USDm) (USDm) % of GDP) of GDP) of population) of population) (m) Japan 422,733 108,773 8.8 2.3 3,346 861 126.3 PR China 152,121 125,844 1.6 1.4 110 91 1,380.8 South Korea 91,204 54,223 7.5 4.4 1,816 1,079 50.2 India 52,174 13,401 3.1 0.8 41 11 1,265 Taiwan 75,013 15,964 14.5 3.1 3,204 682 23.4 Hong Kong 32,059 4,016 11.7 1.5 4,445 557 7.2 Singapore 15,092 2,870 4.4 1.6 2,388 863 5.4 Thailand 14,798 6,663 3.8 1.7 214 96 69.3 Malaysia 9,985 5,161 3.2 1.7 341 176 29.3 Indonesia 14,141 4,254 1.6 0.5 59 18 240.0 Philippines 4,060 1,233 1.5 0.5 41 12 98.7 Vietnam 984 1,131 0.6 0.7 11 12 91.7 Sri Lanka 333 442 0.5 0.7 16 21 21.3 Asia total 898,413 380,366 3.8 1.6 213 91 4,215.4 Australia 45,641 32,667 3.0 2.1 2,056 1,472 22.2 United States 532,858 726,397 3.2 4.3 1,684 2,296 316.4 Europe 946,727 684,972 4.0 2.8 1,076 758 814.2 World 2,608,091 2,032,850 3.5 2.8 366 285 7,121.4 Source: Swiss Re, Sigma No 3/2014

Figure 4 Statistics of Selected Asian Reinsurers Gross premiums NPW/SH equity NPW/GPW ROE (ie. net income/ SH equity/ (USDm) Loss ratio (%) Combined ratio (%) (%) (retention ratio) (%) SH equity) (%) total asset (%) Name of reinsurer 2012 2013 2012 2013 2012 2013 Name of reinsurer 2012 2013 2012 2013 2012 2013 2012 2013 ACR Capital Holdings 751 765 107 73 134 102 ACR Capital Holdings 92 49 67 51 -25.0 7.0 23.5 31.3 Central Reinsurance Corporation 495 521 70.2 64.3 102.6 98.2 Central Reinsurance Corporation 167.7 163.2 93.3 94.2 8.5 8.1 24.9 27.4 China Reinsurance Group Corporation 9,516 10,817 45.2 47.7 78.2 81.0 China Reinsurance Group Corporation 128.5 139.1 95.9 94.7 5.2 7.4 29.9 29.7 General Insurance Corporation of India1 2,677 2,779 123.6 82.1 140.9 104.1 General Insurance Corporation of India1 163.4 142.6 92.2 91.3 -32.1 24.3 14.3 16.1 Korean Reinsurance Company1 5,012 4,126 79.7 78.6 97.5 96.8 Korean Reinsurance Company1 265.0 199.7 66.3 63.4 3.0 2.9 19.3 19.0 Labuan Reinsurance Ltd 214 n.a. 67.2 n.a. 109.3 n.a. Labuan Reinsurance Ltd 127.1 n.a. 83.2 n.a. 0.4 n.a. 22.4 n.a. PT Asuransi MAIPARK Indonesia (BBB+(idn)/ 15 16 0.8 2.2 62.8 76.9 PT Asuransi MAIPARK Indonesia (BBB+(idn)/ 56.3 46.8 68.1 52.5 19.8 19.5 62.2 64.1 Stable) Stable) Malaysian Reinsurance Berhad1 (A/Stable) 374 414 61.9 58.6 96.0 93.8 Malaysian Reinsurance Berhad1 (A/Stable) 99.1 104.2 83.5 85.5 11.7 11.8 41.4 40.5 National Reinsurance Corporation of the 74 58 108.5 79.6 177.3 172.1 National Reinsurance Corporation of the 13.1 14.4 25.7 32.0 0.6 0.3 38.0 39.0 Philippines Philippines Singapore Reinsurance Corporation Limited 107 112 68.6 61.5 109.8 95.9 Singapore Reinsurance Corporation Limited 23.1 23.4 37.1 37.3 5.4 9.2 30.3 31.2 Taiping Reinsurance Company Limited (A/ 443 482 76.5 63.1 106.2 95.4 Taiping Reinsurance Company Limited (A/ 100.5 87.0 89.5 90.7 3.7 10.4 34.1 38.5 Stable) Stable) Thai Reinsurance Public Co., Ltd 191.4 180.9 169.9 136.1 220.8 180.1 Thai Reinsurance Public Co., Ltd 153.5 196.2 85.6 93.8 -124.4 -99.0 10.4 10.1 The Toa Reinsurance Company, Limited1 1,921 1,831 97.5 108.0 126.9 136.8 The Toa Reinsurance Company, Limited1 79.1 74.3 84.2 76.0 -7.1 2.5 34.1 37.2 PT Tugu Reasuransi Indonesia (A(idn)/Stable) 71 86 64.6 68.2 98.4 96.4 PT Tugu Reasuransi Indonesia (A(idn)/Stable) 239.4 342.8 82.2 83.5 19.2 25.6 23.1 16.9 1 Financial year ended 31 March. Source: Company reports, Fitch’s calculations

33 Global Reinsurance Guide 2015 Latin American Reinsurance Markets

Diversity and Growth Opportunities in Latin America presents ample opportunities for continued growth, both in GWP and ceded written premiums, with deeper an Improved Regulatory Environment insurance penetration and increased underwriting sophistication, emphasizing the important role of reinsurers in this process. Higher Reinsurance Capacity: In 2012 and 2013 the number of natural disasters in Latin America and globally was lower than Regulatory Development in Progress: Over the past decade, in 2010 and 2011, resulting in a global surplus of reinsurance some of Latin America’s main regulators have worked gradually capacity offered to insurance companies. The higher capacity toward international accounting standards and risk control and the soft cycle of reinsurance rates have enhanced insurance regulations, inspired by Solvency II, which provides a framework companies’ underwriting capacities, negotiation positions toward for greater sophistication in the region’s insurance industry. reinsurance fees, and reduced founding costs. However, these regulations include higher capital requirements, strengthening the key financial role of reinsurers, especially in the Premiums Concentrated in Major Economies: Along with transition to full adoption of the new regulatory requirements. their large population and GDP, Brazil and Mexico concentrate the bulk of Latin America’s gross written premiums (GWP) at 61% Limited Number of Latin Reinsurers: The number of Latin reinsurers combined. However, the ceded premiums breakdown is more has been limited (fewer than 15), as a consequence of ample capital widespread, with Mexico and Brazil totaling 50%, while Venezuela, requirements for reinsurance entities, geographical ability to disperse Chile and Colombia have an important participation in terms of the risk, and higher sovereign risk of most of the host countries. ceded premiums, at a combined 39%. The small number of Latin reinsurers has mainly focused on captive reinsurance programs through the strong relationship with related Uneven Insurance Development in the Region: GWP breakdown insurance entities, with a niche business approach. varies significantly country by country, showing large gaps in development and sophistication of each insurance market, although all are in developmental stages. Overall, GWP are concentrated in auto Premiums Concentrated in insurance, health and traditional life insurance, whose development is mainly boosted by massive distribution channels, especially in Larger Economies those countries that achieved higher levels of insurance penetration. The Latin American insurance market has shown increased business Meanwhile, factors such as financial stability and economic growth depth in recent years, though significant gaps remain in business allow further development in insurance and reinsurance. sophistication among countries. In 2013, total GWP in Latin America Low Coverage and Growth Opportunities: Although levels reached USD152 billion, maintaining a sustained average growth rate of insurance coverage in Latin America have grown steadily, a of 9% in the last five years, higher than the average increase in GDP of significant gap still remains compared with developed countries. 7% annually in the same period. GWP’s growth has been extended to the bulk of life and non-life companies; nevertheless, the breakdown Analysts of GWP remains concentrated on high retention lines such as auto insurance, traditional life and health insurance, which together account Santiago Recalde M. for 64% of GWP. +56 (2) 2499-3327 [email protected] Carolina Alvarez GWP by Country +56 (2) 2499-3321 (USD 152 Bil.) [email protected] Other Rodrigo Salas 18% +56 (2) 2499-3309 [email protected]

Related Research Colombia 2015 Outlook: Global Reinsurance (September 2014) 6% Brazil 45% Alternative Reinsurance 2014 Market Update (September 2014) Global Reinsurance’s Shifting Landscape (September 2014) Chile Reinsurer Mergers and Acquisitions (August 2014) 7% Global Reinsurers’ Mid-Year 2014 Financial Results (August 2014) Asian Reinsurance Markets (August 2014)

Venezuela 8% Related Criteria Mexico Insurance Rating Methodology (September 2014) 16% Source: Regulators

Global Reinsurance Guide 2015 34 There is significant dispersion in the premiums breakdown by country, The bulk of ceded premiums are underwritten in property (32%) and as Brazil (45%) and Mexico (16%) account the majority of GWP in the technical insurance lines (12%), consistent with the needs of equity region, which is consistent with their importance in the regional protection to severity claims for companies operating in undeveloped economy. In 2013, ceded premiums reached USD18.6 billion and insurance markets or in territories with a high risk of disasters, such as nonproportional reinsurance fees were USD900 million, altogether the Pacific Coast or the Caribbean. concentrating for 12% of GWP, still trailing developed countries’ Even though Brazil has the largest GWP in the region, its lower cession cession ratios, which are roughly 20%–25%. levels resulted in a higher ceded premium dispersion in the region. The The high retention level in Latin America is mainly due to greater ceded premium breakdown by country presents a less concentrated activity in bounded exposures associated with individual risks, such profile, including Mexico (30%), Brazil (20%), Venezuela (17%), Chile as auto insurance, personal injuries, life (excluding retirement and (11%) and Colombia (11%), which represent 89% of the total. The pensions), health and massive insurance products. The insurance lines different weight between GWP and ceded premiums country by with a higher percentage of ceded premiums are property, engineering country resulted from different business breakdown, equity capacity, and technical risks, with a cession ratio of 50% average. Retained market sophistication and catastrophic exposures requirements of exposure is limited, considering adequate reinsurance protection, each country. mainly through facultative and non-proportional coverage.

GWP Breakdown Insurance Density (Total = USD 152,1 Bil)

Others USD anual High (4 countries) Medium (6 countries) 8% Auto Low (6 countries) Latam 24% 500.0

Technical 450.0 11% 400.0 350.0 300.0 250.0 Pension 200.0 17% 150.0 100.0 Life 50.0 21% Health .0 19% 2008 2009 2010 2011 2012 2013 Source: Regulators Source: Regulators

Insurance Penetration GWP and Ceded Premiums

% GDP High (4 countries) Medium (6 countries) (USD Bil.) Gross Written Premiums Ceded Premium Low (6 countries) Latam 160 05% 05% 140

04% Millions 120 04% 100 03% 03% 80 02% 60 02% 40 01% 20 01% 00% 0 2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 Source: Regulators Source: Regulators

35 Global Reinsurance Guide 2015 Region With Ample Opportunities In 2013, the amount of ceded premiums received by reinsurers reached USD16.3 billion, and the nonproportional reinsurance for Growth USD900 million. On the other hand, expenses of paid fees by GWP’s growth has been accompanied by favorable economic reinsurers reached USD1.9billion (11.7% of total ceded premiums), development in most countries in the region, which has increased and ceded claims USD4 billion (ceded loss ratio of 25%), presenting insurance penetration and density to an average of 2.6% of GDP a final technical profit of USD11.1 billion. (as of December 2013) and insurance premiums per capita to USD267 annually, excluding Puerto Rico, Uruguay and Paraguay. Reinsurance Operational Income Breakdown The average penetration rate reflects disparate realities by country, (USD Bil.) 2009 2013 as Brazil (above 3%) and Chile (above 4%) have penetration rates 20.0 higher than Latin America`s average, and density of USD670 and USD350, respectively, while 11 of 16 countries have penetration rates below 2.2% of GDP. Those countries with higher insurance 15.0 penetration and density also have advanced development in several insurance lines, especially lines linked to asset management or annuities. 10.0 The most significant variables that Fitch Ratings has identified in the development of the region’s insurance industry are: positive 5.0 and continuous economic growth rates; enhanced banking penetration, which increases the accessibility to insurance products; social mobility; and higher income per capita. .0 Latin America has a large gap on penetration and insurance density compared with developed countries (the U.S. and EU -5.0 ratios are above 8% of GDP and annual premiums per capita average of USD4,000). Fitch believes the insurance industry in Latin America has attractive development potential in the short -10.0 and medium term with ample space for further growth, both gross Ceded Non Reinsurance Ceded Reinsurance and ceded premiums. Premiums proportional Fees Claims Profit reinsurance Source: Regulators Reinsurance Underwriting Performance in Latin America Few Disaster Events in 2013 The performance has shown a positive trend from 2009 to 2013, Several statistics show an increase in the worldwide average driven by a higher level of ceded premiums, bounded reinsurance number of disasters per year, especially a higher frequency of commission expenses and lower loss ratios, in part due to a natural disasters, which many experts attribute largely to the lower number of disaster events and the low level of insurance effects of global warming. Latin America recorded its peak of penetration in catastrophic areas. catastrophic events in 2010 and 2011. By 2013 the economic cost of catastrophes in Latin America was Underwritting Premiums and GDP - USD9 billion, which represented 6% of the worldwide economic Latin America cost, reaching an insurance coverage ratio of 22% (insured losses to total economic losses), lower than the worldwide insurance GWP (LHS) Retained Premiums (LHS) GDP (RHS) coverage of 32%. The coverage ratio is lower in rural areas, which (USD Bil.) (USD Bil.) are often strongly affected by disasters. 160 7,000 Fitch also foresees ample room to enhance insurance coverage 140 6,000 for catastrophic events in Latin America, which are generally absorbed by extraordinary government funding processes and the 120 Thousands 5,000 implementation of government reconstruction programs tends to be slow. From 2009 to 2013, the insurance coverage ratio has 100 4,000 increased in Latin America from 9% to 22%, but remains below the worldwide coverage ratio of 32% in 2013. 80 3,000 The Brazilian drought in 2014 has been by far the year’s largest 60 disaster in Latin America. The other major disaster in Latin America 2,000 during 2014 was a magnitude-6.9 earthquake on July 7 in Mexico’s 40 Chiapas state, near Guatemala’s border, which caused over USD25 million in economic losses and led to more than 20,000 claims. 20 1,000 The drought in Brazil was among the three most costly natural 0 0 disasters worldwide in the first half of 2014, resulting in USD4.3 2008 2009 2010 2011 2012 2013 billion in economic losses. Source: World Bank, Regulators

Global Reinsurance Guide 2015 36 Latin American Reinsurance Markets

In Fitch’s view, these markets are likely to experience growth Major Latin American Disasters in 2013 and intensifying competition — especially Brazil, given its larger Insured Total regional size — and therefore have the opportunity for greater Countries Losses Losses penetration, sophistication and insurance coverage. Regulatory Date Affected Event (USD Mil.) (USD Bil.) changes require greater sophistication in risk management and Sept. 13 Mexico Hurricane 947 4.35 capital requirements, which could cause mergers and acquisitions Manuel and increased premium concentration. April 2-4 Argentina Flood 163 1.3 Limited Number of Latin Sept. 12 Mexico Hurricane 153 1.53 Ingrid American Reinsurers Source: Swiss Re – Sigma 2013. Traditionally, Latin American reinsurers have had limited operations, especially regionally and worldwide. Most Latin Improving Regulatory Framework American reinsurers are structured under a captive profile, linked to niche segments, especially in Brazil, Colombia and Insurance regulations in various Latin American countries have Panama. The region faces a significant challenge to move toward shown an Insurance regulations in various Latin American the development of a global reinsurance industry, especially countries have shown an improving trend. Countries with more considering such factors as strengthening regulatory frameworks, sophisticated insurance industries (Mexico, Colombia, Chile, creditworthiness of countries, and financial, economic and Peru, Brazil and Costa Rica) have promoted the adaption of IFRS political stability of the host countries. accounting policies and principles of Solvency II, in line with the implementation of these criteria and deadlines set by the Latin There are fewer than 15 Latin American reinsurance companies, American association of regulators –‘Asociación de Supervisores of which only Reaseguradora Patria S.A. in Mexico and QBE del de Seguros de América Latina’, for 2019. Istmo Re in Colombia have a comprehensive regional profile; the rest operates as captive reinsurers of their related insurance Latin American insurance regulation has tended to open the companies, focused on niche businesses and presenting a group reinsurance market to foreign competitors, as is the case in Brazil, profile risk. Other companies such as Instituto de Resseguro do which used to operate as a captive benefitting from government Brasil and Instituto Nacional de Seguros in Costa Rica, although protection, and now is more competitive for international reinsurers. maintaining a strong position within their markets, are challenged given the recent opening of the reinsurance market. Number of Annual Catastrophes In recent years a more active reinsurance business has been developing, mainly in Colombia, Brazil, Venezuela and Panama. No Nº Worldwide Disasters Nº Latam Disasters Although the companies have stated that they intend to expand 450.0 their businesses under a multiproduct profile, especially in Brazil, they still have a captive mono-producer focus on segments such as surety, oil and energy. The credit ratings of Latin American 400.0 reinsurers are mostly above investment grade, benefiting mainly from captivity with related companies and their financial solvency. Fitch estimates once the new regulatory framework 350.0 is fully implemented, entities will develop in a sound operating environment, favoring attractive GWP growth rates as well as 300.0 ceded premiums, emphasizing the reinsurance potential growth in Brazil since the opening of its reinsurance market.

250.0

200.0

150.0

100.0

50.0

.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Fuente: Swiss Re

37 Global Reinsurance Guide 2015 Appendix

Overview Gross Written Premiums Breakdown by Country (USD Mil.) (%) Non Ceded GWP Ceded Proportional GWP Premiums (USD Premium Reinsurance Cesion Cesion Breakdown Breakdown millions) (USD Mil.) (USD Mil.) life non-life life/non-life life/non-life Argentina 8,773 884 NA 4 16 48/52 19/81 Bolivia 418 178 6 24 49 32/68 — Brazil 69,810 3,012 NA 1 11 58/42 9/91 Chile 11,769 1,589 183 2 45 68/32 9/91 Colombia 10,149 1,730 242 7 31 58/42 23/77 Costa Rica 1,036 NA NA - - 51/49 — Dominican 745 30 NA 19 11 29/71 42/58 Ecuador 1,659 874 51 33 60 28/72 17/83 El Salvador 541 194 NA 25 47 53/47 38/62 Guatemala 683 206 NA 18 46 46/54 25/75 Honduras 367 NA NA - - 49/51 — Mexico 27,638 4,933 291 5 38 60/40 15/85 Nicaragua 157 47 NA 36 33 30/70 32/68 Panama 1,159 584 30 22 59 40/60 20/80 Peru 3,279 764 NA 9 41 56/44 23/77 Venezuela 14,011 1,472 199 9 20 52/48 33/67 GWP – Gross written premiums. Source: Superintendencies of Insurance

Selected Latin American Reinsurers Company Country IFS International IFS National Segment Black Gold Re Ltd. Colombia BBB+, Stable AAA(col), Stable Energy Jmalucelli Resseguradora S.A. Brazil — AA-(bra), Stable Surety Maxseguros EPM Ltda. Colombia BBB, Stable — Energy Reaseguradora Patria S.A. Mexico A‒, Stable AAA(mex), Stable Composite Mortgage Credit Reinsurance Panama — A+(pan), Stable Credit QBE del Istmo Colombia — AA(col), Stable Composite Americana de Reaseguro Venezuela — A-(ven), Stable Composite Reasegura Delta Venezuela — A-(ven), Stable Composite Provincial de Reaseguro Venezuela B–, Negative A-(ven), Stable Composite IFS: Insurer Financial Strength Source: Fitch Ratings

Global Reinsurance Guide 2015 38 Latin American Reinsurance Markets

39 Global Reinsurance Guide 2015 Global Reinsurers’ Mid-Year 2014 Financial Results

Underwriting Results Profitable, but Figure 1 Pressured as Capital Remains Strong Largest Insured Natural Catastrophe Non-Life Results Deteriorate: Non-life reinsurers’ underwriting Events, H114 profits were lower in 1H14 because of increased non-catastrophe Economic Insured property losses and a higher underlying run-rate loss ratio. Results loss loss were still profitable though because of continued manageable Date Event Location (USDbn) (USDbn) catastrophe-related losses and sustained favourable loss reserve Feb Winter Japan 5.0 >2.5 development. The non-life global reinsurers that Fitch Ratings damage tracks achieved a reinsurance underwriting combined ratio of June Storms, Western 3.1 2.5 87.4% in 1H14, a deterioration from 85.9% in 1H13 and 85.5% hail Europe in 2013. Jan Winter US 2.5 1.7 Capital Growth Improves: Shareholders’ equity showed a solid damage 13.9% increase over 1H13 and growth of 5.2% since year-end 2013. The adverse changes in the unrealised investment gain/loss May Severe US 2.0 1.6 position on fixed maturities during 2013 have largely reversed or storm turned favourable for non-life reinsurers in 1H14, relieving some of Apr/May Severe US 1.7 1.1 the pressure from anaemic premium growth. storm Life Reinsurers’ Income Rebounds: Life reinsurance operations Jan/Feb Storms, UK 1.3 1.1 monitored by Fitch experienced a 27.0% jump in pre-tax income, floods even as growth in net premiums earned declined from 5.8% in Source: Munich Re NatCatService 2013 to 3.2% year-on-year in 1H14. Though individual results were mixed, a confluence of factors including lower claim costs and Catastrophes Losses Manageable: The (re)insurance industry higher realized and unrealized returns contributed to the rebound experienced manageable and below-average natural catastrophe from year-end. losses of USD17bn in 1H14, down from USD21bn in 1H13, and below the 10-year average (2004-2013) for the first half-year of USD25bn in insured losses. The majority of losses in 1H14, listed in Figure 1, were from winter storms in Japan and the US, severe Analysts thunderstorms and hail in Western Europe, as well as from US severe thunderstorm activity and flooding and winter storms in Brian Schneider the UK. +1 312 606-2321 [email protected] Favourable Reserve Development Persists: Reserve releases remained almost constant from year-end 2013 to 1H14, benefiting Martyn Street the combined ratio by 6.1% for each period. Although Fitch +44 20 3530 1211 believes that the surplus held within non-life reinsurance industry [email protected] loss reserves remains adequate, releases are expected to decline. Jeremy Graczyk Continued dwindling in the release of excess reserves from prior +1 312 368-3208 favourable pricing cycles will put pressure on future profitability. [email protected] Reinsurance Sector Outlook Negative: Fitch’s global reinsurance sector outlook is negative, as the fundamentals of the reinsurance Related Research sector have deteriorated with declining premium pricing and weakening of terms and conditions across a wide range of lines. 2015 Outlook: Global Reinsurance (September 2014) Fitch views current market conditions as unlikely to improve in the Alternative Reinsurance 2014 Market Update (September 2014) near term given the competition in the reinsurance market. Global Reinsurance’s Shifting Landscape (September 2014) Latin American Reinsurance (September 2014) Reinsurer Mergers and Acquisitions (August 2014) 1H14 Financial Results Asian Reinsurance Markets (August 2014) Non-Life Underwriting Performance Favourable Non-life reinsurers’ underwriting results slightly deteriorated in Related Criteria 1H14 but remained profitable as catastrophe losses continued to Insurance Rating Methodology (September 2014) run below the average trend. The weaker results partly reflected

Global Reinsurance Guide 2015 40 an increase in non-catastrophe property losses that hit several Figure 2 reinsurers. They also reflected a reduction in property catastrophe 1H14 Non-Life Reinsurance Results business written by traditional reinsurers and a shift by reinsurers from excess of loss business into quota share because of the (USDm) 1H14 1H13 pressure on excess of loss premium rates pushing prices down Net premiums written 47,093 45,074 to inadequate levels. Quota share reinsurance business carries a Combined ratio (%) 87.4 85.9 higher, but less volatile, average loss ratio than excess of loss and Shareholders’ equity (including 442,126 388,013 property catastrophe business. Berkshire Hathaway) Ironically, the favourable underwriting results posted by the Note: The above results include data only for those companies that had reported industry since the record catastrophe loss year in 2011 has both 1H14 and 1H13 results on a comparable basis at this report’s publication fostered the current challenging reinsurance environment. date. shareholders’ equity is organisation-wide equity and includes equity that Reinsurers’ profitable results are promoting product innovation supports operations other than non-life reinsurance operations and attracting more capital to the sector from new sources, Source: Individual company data including private equity firms, hedge funds and pension plans. This increased supply of capital has created excess underwriting capacity in the reinsurance market, leading to price competition and falling reinsurance rates. The group of reinsurers that Fitch tracks generated a calendar- Figure 3 year reinsurance combined ratio of 87.4% in 1H14, up from 85.9% Reinsurer Common Share a year earlier and 85.5% at year-end. Fifteen of the 22 reinsurers in the group reported a higher reinsurance combined ratio in 1H14 Repurchase Activity than in 2013, though all but one of them came in below 100%. (USDm) 1H14 1H13 The group’s 1H14 results included a modest 0.3% reduction in ACE Ltd 557 212 prior-accident-year reserve development from a year earlier and Alleghany Corporation 160 40 this was unchanged since year-end, with favourable reserves Allied World Assurance Company 138 83 providing a mid-single-digit benefit to the calendar-year combined Holdings Ltd. ratio. The profitable underwriting results reflect continued underwriting discipline in the sector, as loss cost trends on most Arch Capital Group Ltd. 0 56 lines of business are about in line with earned pricing trends. This Aspen Insurance Holdings Ltd. 31 240 will be imperative given the current competition in pricing. AXIS Capital Holdings Ltd. 318 341 Non-life reinsurers in aggregate achieved reinsurance net Berkshire Hathaway Inc. 0 0 premiums written (NPW) growth of approximately 4.5% over 1H13, Endurance Specialty Holdings Ltd. 0 15 but after adjusting for foreign-currency translations only managed 2.6% growth. Fitch’s opinion is that this is largely due to flat or Everest Re Group, Ltd. 325 450 declining prices in both property and casualty reinsurance lines. Montpelier Re Holding Ltd. 94 115 Expansion into various specialty lines was partly offset by declines RenaissanceRe Holdings Ltd. 315 122 in property catastrophe reinsurance business as prices continue PartnerRe Ltd. 316 496 to drop, with increased competition from the growing alternative reinsurance market. Platinum Underwriters Holdings, Ltd. 111 224 Shareholders’ equity grew 5.2% in 1H14 from year-end 2013 for Validus Holdings, Ltd. 197 357 this group of reinsurers that had reported (5.1% assuming constant White Mountains Insurance Group, Ltd. 26 80 exchange rates), which was an improvement from a 5.2% decline Markel Corporation 17 41 for 1H13 over year-end 2012 (excluding Berkshire Hathaway). Fairfax Financial Holdings Limited 20 11 Solid earnings and unrealized gains on fixed-income securities drove the reversal in trend, along with share repurchases dropping XL Group plc 352 375 by roughly USD282m yoy for a subgroup comprised of 18 US and Total 2,976 3,258 Canadian reinsurers. Dividends per share largely remained the Source: Company reports same but were slightly down by 0.5% for this same group.

41 Global Reinsurance Guide 2015 Life Premiums Grow; Profits Recover commercial buildings collapsed due to the heavy snow loads, and The group of life reinsurance operations monitored by Fitch wind gusts up to hurricane force caused widespread power outages. reported a moderate increase in net premiums earned in 1H14 Western Europe experienced the second largest 1H14 event with from a year earlier mainly due to foreign-currency appreciation. In an estimated USD2.5bn insured loss from severe thunderstorms US dollar terms, net premiums earned increased by 3.2% relative to in June that produced tennis-ball sized hail and caused extensive 1H13 after the effects of foreign currency translation, and by 0.9% flooding, resulting in considerable property damage and holding the exchange rate constant. Three of the eight reinsurers agricultural losses. While the most significant damage occurred in who reported experienced a drop in total net premiums earned from Germany, the storms also hit Belgium, France and the Netherlands. a year earlier, excluding XL Group plc, whose run-off life reinsurance subsidiary was recently sold to GreyCastle Holdings Ltd. Severe winter storms in the US caused USD1.7bn of insured losses in the first week of January as the polar vortex pushed below freezing temperatures into every state of the country, a rare Figure 4 event. The significant snowfall and record severe cold conditions 1H14 Life Reinsurance Results resulted in increased claims for both personal and commercial (USDm) 1H14 1H13 lines insurers from roof collapses, power failures, frozen and burst pipes, auto accidents and business interruption. Net premiums earned 27,009 26,171 Pre-tax operating income 1,850 1,457 Third-quarter catastrophe activity started quickly as the first Atlantic hurricane of 2014, Arthur, made landfall on 3 July 2014 as a category Source: Individual company data 2 hurricane on the barrier islands of North Carolina, the earliest hurricane ever to make landfall in the state. The storm gradually The 1H14 pre-tax income of the life reinsurance operations tracked weakened as it travelled northeast, bringing heavy rains and wind, by Fitch increased by 27% in US dollar terms compared with a year and is estimated to have resulted in a relatively minor USD250m earlier after several reinsurers ran across problems in group risk of insured losses. This result continues the current trend of a business in the Australian market in 2013. Reinsurance Group of major hurricane (category 3-5) not making landfall in the US since America’s pre-tax income more than doubled from the prior year Hurricane Wilma hit Florida in 2005, representing the longest period after discontinuing writing new business in the Australian group between US major hurricane landfalls since the 1860s. total and permanent disability market. The group’s shareholders’ Experts continue to predict average to below-average Atlantic equity (excluding Berkshire Hathaway) increased by 2.6% from year- hurricane frequency this season relative to long-term results, end 2013 as these reinsurers also benefited from higher earnings, as a number of environmental forces that serve to stifle the unrealized bond gains, and foreign-currency exchange gains. development of tropical storms appear more prevalent in 2014 than in many recent years. However, there is always the potential Sector Performance Highlights for significant catastrophe losses during the peak period of hurricane formation from mid-August to mid-October. 1H14 Catastrophe Losses Continue to be Manageable Reserve Redundancies Steady but Expected Worldwide insured natural catastrophe losses in 1H14 were to Decline manageable for the (re)insurance industry at USD17bn, according Reinsurers continue to report favourable prior-accident-year to a review published by Munich Re’s NatCatService, down from reserve development, with 2013 being the eighth consecutive USD21.1bn in 1H13. The 1H14 total was below the USD24.9bn year of overall favourable development, and continuing through (original value) 10-year average insured losses for the first-half the first six months of 2014. Most reinsurers are reporting a mid- periods from 2004 to 2013, but above the 30-year average of first- single-digit percentage-point benefit on the combined ratio, with half periods (1984-2013) of USD14.7bn (original value). several recording a double-digit favourable impact in both 2013 and 1H14. This level of positive development has persisted longer The largest 1H14 industry loss was from heavy snowstorms in Japan than Fitch had expected. It is driven in part by loss cost trends that in February, with Munich Re estimating more than USD2.5bn of have generally been more benign relative to initial assumptions by insured industry losses. These were largely business interruption the industry, which proved to be conservative. losses as several auto manufacturing plants were forced to suspend operations due to the extreme conditions. Residential and

Figure 5 Calendar- and Accident-Year Combined Ratio Comparison 1H14 1H13 2013 2012 2011 2010 2009 Calendar-year combined ratio (%) 85.9 87.0 88.3 93.2 103.6 92.4 88.9 Accident-year combined ratio (%) 92.0 93.4 94.4 99.7 110.5 99.8 94.3 Difference (pp) 6.1 6.4 6.1 6.5 6.9 7.5 5.4

Data is from 17 (re)insurance organisations in North America with significant reinsurance operations Source: SNL financial

Global Reinsurance Guide 2015 42 Global Reinsurers’ Mid-Year 2013 Financial Results

Fitch expects that overall favourable reserve development from prior years will decline going forward, adding pressure to run-rate profitability. In several cases reinsurers have reported reserve deficiencies in certain product lines, particularly longer-tail classes, such as casualty reinsurance. Although favourable reserve development is masking weaker underwriting performance, Fitch does not believe that a reduction in reserve adequacy alone will promote a hardening in prices. Fitch believes that the greatest threat to maintaining adequate loss reserves is an unexpected shift in inflation/interest rates, or loss cost factors that more specifically influence insurance claims’ costs, such as medical costs, litigation settlements or social inflation.

Figure 6 Reserve Development of Net Earned Premiums, North American (Re)insurers 8

7

6

5

4

3

2

1

0 2006 2007 2008 2009 2010 2011 2012 2013 1H14 Note: Positive values are favorable development; GAAP Source: SNL financial. data is from 17 (re)insurance organizations in North America with significant reinsurance operations

43 Global Reinsurance Guide 2015 Appendix A

Figure 7 Data on Select Non-Life Reinsurance Operations Net premiums written (USDm) Combined ratio (%) Shareholders’ equity (USDm) IFS Rating 1H14 1H13 2013 2012 1H14 1H13 2013 2012 1H14 1H13 2013 2012 ACE Limited AA 586 571 991 1,025 ACE Limited 71.6 64.8 65.9 77.4 30,325 27,295 28,825 27,531 Alleghany Corporationa A+ 1,770 1,709 3,248 2,841 Alleghany Corporationa 89.9 88.6 89.8 90.9 7,407 6,498 6,948 6,404 Allied World Assurance Holdings Ltd. A+ 703 678 893 748 Allied World Assurance Holdings Ltd. 79.2 77.7 75.8 95.1 3,683 3,373 3,520 3,326 Arch Capital Group Ltd. A+ 735 713 1,403 1,227 Arch Capital Group Ltd. 74.3 70.2 69.8 80.2 7,022 5,234 5,647 5,169 Aspen Insurance Holdings Ltd. NR 730 689 1,082 1,157 Aspen Insurance Holdings Ltd. 74.1 84.0 76.4 85.4 3,554 3,235 3,350 3,488 AXIS Capital Holdings Limited A+ 1,667 1,572 2,115 1,815 AXIS Capital Holdings Limited 80.6 80.4 82.8 89.4 6,009 5,562 5,868 5,780 Berkshire Hathaway Inc. AA+ NR NR 7,339 9,668 Berkshire Hathaway Inc. 87.6 77.5 83.0 92.8 234,005 202,016 221,890 187,647 DEVK Rueckversicherungs AG A+ NR NR 274 227 DEVK Rueckversicherungs AG NR NR 99.5 90.6 NR NR 1,394 1,279 Echo Rueckversicherungs AG A− NR NR 53 42 Echo Rueckversicherungs AG NR NR 83.7 87.5 NR NR 72 69 Endurance Specialty Holdings Ltd. NR 788 777 1,116 1,087 Endurance Specialty Holdings Ltd. 76.1 81.8 76.8 94.7 3,116 2,736 2,887 2,711 Everest Re Group, Ltd. NR 1,904 1,860 3,900 3,229 Everest Re Group, Ltd. 79.4 80.8 76.3 90.1 7,323 6,623 6,968 6,733 Fairfax Financial Holdings Limited NR 1,439 1,296 2,723 2,891 Fairfax Financial Holdings Limited 88.2 86.4 85.4 90.7 9,484 8,587 8,461 8,890 Hannover Re AG AA− 5,320 4,829 9,249 8,918 Hannover Re AG 95.3 94.6 95.1 96.0 9,682 8,106 8,996 8,799 IRB-Brasil Resseguros S.A. NR NR 659 1,392 1,316 IRB-Brasil Resseguros S.A. NR 115.8 89.1 112.4 NR 1,085 1,130 1,232 Lloyd’s of London AA− NR 6,752 10,760 11,176 Lloyd’s of London NR 83.5 80.5 91.0 NR 30,641 33,788 31,121 Mapfre SA A− NR NR 2,364 1,905 Mapfre SA NR NR 96.5 97.0 NR NR 1,391 1,269 Markel Corporationb A 689 471 739 845 Markel Corporationb 96.7 91.7 97.8 89.6 7,143 6,321 6,674 6,728 Montpelier Re Holdings Ltd. A 442 424 603 616 Montpelier Re Holdings Ltd. 63.8 65.4 56.1 81.0 1,923 1,669 1,887 1,629 Munich Reinsurance Company AA− 11,136 10,619 21,726 21,112 Munich Reinsurance Company 94.2 92.5 92.1 91.2 37,880 33,363 36,129 35,938 PartnerRe Ltd. AA− 2,564 2,463 4,427 3,768 PartnerRe Ltd. 87.8 90.0 85.3 87.8 6,957 6,415 6,766 6,933 Platinum Underwriters Holdings Ltd NR 256 281 567 565 Platinum Underwriters Holdings Ltd 63.6 60.8 62.6 62.5 1,778 1,747 1,747 1,895 Reaseguradora Patria, S.A. A− NR 39 84 86 Reaseguradora Patria, S.A. NR 101.2 112.3 101.3 NR 119 119 120 RenaissanceRe Holdings Ltd. A+ 665 875 1,002 968 RenaissanceRe Holdings Ltd. 46.0 41.0 32.6 49.2 3,836 3,572 3,904 3,507 SCOR S.E. A+ 2,911 2,710 5,740 5,412 SCOR S.E. 90.6 94.1 92.6 93.1 7,046 6,161 6,860 6,300 SIGNAL IDUNA Rueckversicherungs AG A− 61 63 169 162 SIGNAL IDUNA Rueckversicherungs AG 108.6 105.1 99.5 99.3 182 142 182 150 Swiss Reinsurance Company Ltd. A+ 10,038 9,639 16,157 12,407 Swiss Reinsurance Company Ltd. 86.1 84.8 83.3 80.7 33,655 30,135 32,977 34,026 Validus Holdings Ltdc A 941 1,031 1,163 1,265 Validus Holdings Ltdc 49.5 62.7 59.8 84.1 4,352 4,046 4,202 4,455 White Mountains Insurance Group Ltd. A 521 539 877 948 White Mountains Insurance Group Ltd. 77.3 79.7 82.1 90.3 4,356 3,939 4,156 3,982 XL Group plc A+ 1,229 1,264 1,750 1,885 XL Group plc 76.0 77.3 81.4 86.9 11,409 11,237 11,349 11,856 Totald 47,093 45,074 103,905 99,309 Totald 87.4 85.9 85.5 89.5 442,126 388,013 458,085 418,968 NR: Not reported at publication date Combined ratio: Net losses and loss-adjustment expenses divided by net premiums earned plus underwriting expenses divided by net premiums earned Shareholders’ equity is organisation-wide equity and therefore depends on the company’s reporting practices; includes equity that supports operations other than property/casualty reinsurance operations a Pro forma for Alleghany/Transatlantic merger; 2012 excludes Transatlantic from 1 January 2012 through the acquisition date of 6 March 2012 b Pro forma for Markel/Alterra merger; 1H13 and 2013 excludes Alterra reinsurance from 1 April 2013 through the acquisition date of 1 May 2013; 1H13 and 2013 combined ratio excludes transaction/acquisition-related costs c Pro forma for Validus/Flagstone merger; 2012 excludes Flagstone from 1 October 2012 through the acquisition date of 30 November 2012 d To aid comparability, totals for H1 exclude Lloyd’s, IRB-Brasil and Reaseguradora Patria as 1H14 was not reported at publication date Source: Company annual reports, financial supplements and SEC filings

Global Reinsurance Guide 2015 44 Global Reinsurers’ Mid-Year 2013 Financial Results

Figure 7 Data on Select Non-Life Reinsurance Operations Net premiums written (USDm) Combined ratio (%) Shareholders’ equity (USDm) IFS Rating 1H14 1H13 2013 2012 1H14 1H13 2013 2012 1H14 1H13 2013 2012 ACE Limited AA 586 571 991 1,025 ACE Limited 71.6 64.8 65.9 77.4 30,325 27,295 28,825 27,531 Alleghany Corporationa A+ 1,770 1,709 3,248 2,841 Alleghany Corporationa 89.9 88.6 89.8 90.9 7,407 6,498 6,948 6,404 Allied World Assurance Holdings Ltd. A+ 703 678 893 748 Allied World Assurance Holdings Ltd. 79.2 77.7 75.8 95.1 3,683 3,373 3,520 3,326 Arch Capital Group Ltd. A+ 735 713 1,403 1,227 Arch Capital Group Ltd. 74.3 70.2 69.8 80.2 7,022 5,234 5,647 5,169 Aspen Insurance Holdings Ltd. NR 730 689 1,082 1,157 Aspen Insurance Holdings Ltd. 74.1 84.0 76.4 85.4 3,554 3,235 3,350 3,488 AXIS Capital Holdings Limited A+ 1,667 1,572 2,115 1,815 AXIS Capital Holdings Limited 80.6 80.4 82.8 89.4 6,009 5,562 5,868 5,780 Berkshire Hathaway Inc. AA+ NR NR 7,339 9,668 Berkshire Hathaway Inc. 87.6 77.5 83.0 92.8 234,005 202,016 221,890 187,647 DEVK Rueckversicherungs AG A+ NR NR 274 227 DEVK Rueckversicherungs AG NR NR 99.5 90.6 NR NR 1,394 1,279 Echo Rueckversicherungs AG A− NR NR 53 42 Echo Rueckversicherungs AG NR NR 83.7 87.5 NR NR 72 69 Endurance Specialty Holdings Ltd. NR 788 777 1,116 1,087 Endurance Specialty Holdings Ltd. 76.1 81.8 76.8 94.7 3,116 2,736 2,887 2,711 Everest Re Group, Ltd. NR 1,904 1,860 3,900 3,229 Everest Re Group, Ltd. 79.4 80.8 76.3 90.1 7,323 6,623 6,968 6,733 Fairfax Financial Holdings Limited NR 1,439 1,296 2,723 2,891 Fairfax Financial Holdings Limited 88.2 86.4 85.4 90.7 9,484 8,587 8,461 8,890 Hannover Re AG AA− 5,320 4,829 9,249 8,918 Hannover Re AG 95.3 94.6 95.1 96.0 9,682 8,106 8,996 8,799 IRB-Brasil Resseguros S.A. NR NR 659 1,392 1,316 IRB-Brasil Resseguros S.A. NR 115.8 89.1 112.4 NR 1,085 1,130 1,232 Lloyd’s of London AA− NR 6,752 10,760 11,176 Lloyd’s of London NR 83.5 80.5 91.0 NR 30,641 33,788 31,121 Mapfre SA A− NR NR 2,364 1,905 Mapfre SA NR NR 96.5 97.0 NR NR 1,391 1,269 Markel Corporationb A 689 471 739 845 Markel Corporationb 96.7 91.7 97.8 89.6 7,143 6,321 6,674 6,728 Montpelier Re Holdings Ltd. A 442 424 603 616 Montpelier Re Holdings Ltd. 63.8 65.4 56.1 81.0 1,923 1,669 1,887 1,629 Munich Reinsurance Company AA− 11,136 10,619 21,726 21,112 Munich Reinsurance Company 94.2 92.5 92.1 91.2 37,880 33,363 36,129 35,938 PartnerRe Ltd. AA− 2,564 2,463 4,427 3,768 PartnerRe Ltd. 87.8 90.0 85.3 87.8 6,957 6,415 6,766 6,933 Platinum Underwriters Holdings Ltd NR 256 281 567 565 Platinum Underwriters Holdings Ltd 63.6 60.8 62.6 62.5 1,778 1,747 1,747 1,895 Reaseguradora Patria, S.A. A− NR 39 84 86 Reaseguradora Patria, S.A. NR 101.2 112.3 101.3 NR 119 119 120 RenaissanceRe Holdings Ltd. A+ 665 875 1,002 968 RenaissanceRe Holdings Ltd. 46.0 41.0 32.6 49.2 3,836 3,572 3,904 3,507 SCOR S.E. A+ 2,911 2,710 5,740 5,412 SCOR S.E. 90.6 94.1 92.6 93.1 7,046 6,161 6,860 6,300 SIGNAL IDUNA Rueckversicherungs AG A− 61 63 169 162 SIGNAL IDUNA Rueckversicherungs AG 108.6 105.1 99.5 99.3 182 142 182 150 Swiss Reinsurance Company Ltd. A+ 10,038 9,639 16,157 12,407 Swiss Reinsurance Company Ltd. 86.1 84.8 83.3 80.7 33,655 30,135 32,977 34,026 Validus Holdings Ltdc A 941 1,031 1,163 1,265 Validus Holdings Ltdc 49.5 62.7 59.8 84.1 4,352 4,046 4,202 4,455 White Mountains Insurance Group Ltd. A 521 539 877 948 White Mountains Insurance Group Ltd. 77.3 79.7 82.1 90.3 4,356 3,939 4,156 3,982 XL Group plc A+ 1,229 1,264 1,750 1,885 XL Group plc 76.0 77.3 81.4 86.9 11,409 11,237 11,349 11,856 Totald 47,093 45,074 103,905 99,309 Totald 87.4 85.9 85.5 89.5 442,126 388,013 458,085 418,968 NR: Not reported at publication date Combined ratio: Net losses and loss-adjustment expenses divided by net premiums earned plus underwriting expenses divided by net premiums earned Shareholders’ equity is organisation-wide equity and therefore depends on the company’s reporting practices; includes equity that supports operations other than property/casualty reinsurance operations a Pro forma for Alleghany/Transatlantic merger; 2012 excludes Transatlantic from 1 January 2012 through the acquisition date of 6 March 2012 b Pro forma for Markel/Alterra merger; 1H13 and 2013 excludes Alterra reinsurance from 1 April 2013 through the acquisition date of 1 May 2013; 1H13 and 2013 combined ratio excludes transaction/acquisition-related costs c Pro forma for Validus/Flagstone merger; 2012 excludes Flagstone from 1 October 2012 through the acquisition date of 30 November 2012 d To aid comparability, totals for H1 exclude Lloyd’s, IRB-Brasil and Reaseguradora Patria as 1H14 was not reported at publication date Source: Company annual reports, financial supplements and SEC filings

45 Global Reinsurance Guide 2015 Appendix B

Figure 8 Data on Select Life Reinsurance Operations Net premiums earned Pre-tax operating income/(loss) Shareholders’ equity (USDm) IFS Rating 1H14 1H13 2013 2012 1H14 1H13 2013 2012 1H14 2013 2012 Berkshire Hathaway Inc. AA+ 2,872 3,054 6,286 5,799 Berkshire Hathaway Inc. NR NR NR NR 234,005 221,890 187,647 Hannover Re AG AA− 3,386 3,651 7,128 6,984 Hannover Re AG 212 175 200 375 9,682 8,996 8,799 Mapfre Re A− NR NR 462 413 Mapfre Re NR NR 26 36 NR 1,391 1,269 Munich Reinsurance Company AA− 6,489 6,999 13,797 13,758 Munich Reinsurance Company 436 415 733 925 37,880 36,129 35,938 PartnerRe Ltd. AA− 573 456 957 795 PartnerRe Ltd. NR NR NR NR 6,957 6,766 6,933 Reinsurance Group of America Inc. A+ 4,284 4,015 8,254 7,907 Reinsurance Group of America Inc. 500 204 635 919 6,689 5,936 6,910 SCOR S.E. A+ 3,730 3,076 6,397 5,581 SCOR S.E. 152 140 270 275 7,046 6,860 6,300 Swiss Reinsurance Company Ltd. A+ 5,541 4,782 9,967 9,050 Swiss Reinsurance Company Ltd. 550 522 592 885 33,655 32,977 34,026 XL Group plc A+ 135 139 295 324 XL Group plc NR NR NR NR 11,409 11,349 11,856 Total 27,009 26,171 53,544 50,612 Total 1,850 1,457 2,457 3,416 347,323 332,294 299,679 NR: Not reported at publication date. shareholders’ equity is organisation-wide equity and therefore depends on the company’s reporting practices; may include equity that supports operations other than life reinsurance operations Source: Company annual reports, financial supplements and SEC filings

Global Reinsurance Guide 2015 46 Global Reinsurers’ Mid-Year 2013 Financial Results

Figure 8 Data on Select Life Reinsurance Operations Net premiums earned Pre-tax operating income/(loss) Shareholders’ equity (USDm) IFS Rating 1H14 1H13 2013 2012 1H14 1H13 2013 2012 1H14 2013 2012 Berkshire Hathaway Inc. AA+ 2,872 3,054 6,286 5,799 Berkshire Hathaway Inc. NR NR NR NR 234,005 221,890 187,647 Hannover Re AG AA− 3,386 3,651 7,128 6,984 Hannover Re AG 212 175 200 375 9,682 8,996 8,799 Mapfre Re A− NR NR 462 413 Mapfre Re NR NR 26 36 NR 1,391 1,269 Munich Reinsurance Company AA− 6,489 6,999 13,797 13,758 Munich Reinsurance Company 436 415 733 925 37,880 36,129 35,938 PartnerRe Ltd. AA− 573 456 957 795 PartnerRe Ltd. NR NR NR NR 6,957 6,766 6,933 Reinsurance Group of America Inc. A+ 4,284 4,015 8,254 7,907 Reinsurance Group of America Inc. 500 204 635 919 6,689 5,936 6,910 SCOR S.E. A+ 3,730 3,076 6,397 5,581 SCOR S.E. 152 140 270 275 7,046 6,860 6,300 Swiss Reinsurance Company Ltd. A+ 5,541 4,782 9,967 9,050 Swiss Reinsurance Company Ltd. 550 522 592 885 33,655 32,977 34,026 XL Group plc A+ 135 139 295 324 XL Group plc NR NR NR NR 11,409 11,349 11,856 Total 27,009 26,171 53,544 50,612 Total 1,850 1,457 2,457 3,416 347,323 332,294 299,679 NR: Not reported at publication date. shareholders’ equity is organisation-wide equity and therefore depends on the company’s reporting practices; may include equity that supports operations other than life reinsurance operations Source: Company annual reports, financial supplements and SEC filings

47 Global Reinsurance Guide 2015 Summary of Company Reports

Global Reinsurance Guide 2015 48 49 Global Reinsurance Guide 2015 Insurance

Property/Casualty Insurers / U.S. Alleghany Corporation And Insurance Subsidiaries Update

Ratings Key Rating Drivers Insurance Long-Term Issuer Default Rating A− Strong Earnings with Transatlantic: Alleghany Corporation (Alleghany) posted net earnings Senior Unsecured Notes BBB Transatlantic Holdings, Inc. of $354 million in the first six months of 2014, compared to $310 million in first-half 2013 and Long-Term Issuer Default Rating A− $629 million for full year 2013. These favorableProperty/Casualty results are driven by Insurerssolid underwriting / U.S. Senior Unsecured Notes BBB+ performance in both its reinsurance and insurance segments, with manageable catastrophe Transatlantic Reinsurance AlleghanyCompany Corporationlosses and favorable loss reserve development at Transatlantic Holdings, Inc. (Transatlantic) Fair American Insurance and and RSUI Group, Inc. (RSUI). AndReinsuranceInsurance Company Subsidiaries UpdateInsurer Financial Strength A+ Combined Ratios Remain Favorable: Alleghany reported a six-month 2014 consolidated RSUI Indemnity Company combined ratio of 89.4%, which included 2.2 points for catastrophe losses and 4.7 points of Covington Specialty Insurance RatingsCompany favorableKey Rating reserve Drivers development. This compares to a 2013 combined ratio of 90.1%, which Landmark American Insurance Long-Term Issuer Default Rating A− included 3.6 points for catastrophe losses and 4.8 points of favorable reserve development. Company Strong Earnings with Transatlantic: Alleghany Corporation (Alleghany) posted net earnings Senior Unsecured Notes BBB Insurer Financial Strength A Transatlantic Holdings, Inc. ofConservative $354 million Capitalizationin the first six :monthsFitch Ratings of 2014, believes compared Alleghanyto $310 utilizesmillion ain reasonable first-half 201 amount3 and Long-Term Issuer Default Rating A− of$629 operating million leveragefor full yearcompared 2013. withThese its (re)insurerfavorable peers,results withare netdriven premiums by solid written underwriting to total Rating Outlooks Senior Unsecured Notes BBB+ shareholders’performance inequity both of its 0. reinsurance6x in 2013. Tandotal GAAPinsurance stockholders’ segments, equity with manageableof $7.4 billion catastropheat June 30, TransatlanticLong-Term Issuer Reinsurance Default Rating Stable InsurerCompany Financial Strength Stable 201losses4, isand up favorablefrom $6. 9lossbillion reserve at Dec. dev 31,elopment 2013, atas Trfavorableansatlantic net Holdings, income andInc. an(Transatlantic) increase in Fair American Insurance and unrealizedand RSUI Group,investment Inc. (RSUI).gains was partially offset by share repurchases. Reinsurance Company Financial Data Insurer Financial Strength A+ CombinedHigher Casualty Ratios ReserveRemain FavorableRisk: Fitch: Alleghanyviews Alleghany’s reported aexposure six-month to 2014potential consolidated adverse Alleghany Corporation RSUI Indemnity Company combineddevelopment ratio as of being 89.4 %,higher which than included compan 2ies.2 pointsthat focus for catastrophe more on property losses businessand 4.7 pointbecauses of Covington($ Mil.) Specialty Insurance12/31/1 3 6/30/14 CompanyTotal Equity 6,948 7,407 favorablethe duration reserve on casualty development reserves. This is comparativelycompares to long.a 2013 However, combined Fitch ratio recognizes of 90.1%,this which risk LandmarkTotal Debt American Insurance1,794 1,786 includedappears 3.6to pointshave beenfor catastrophe conservatively losses manageand 4.8 dpoints, supported of favorable by the reserve fact development.Alleghany’s loss CompanyTotal Assets 23,361 23,842 Operating Revenue 4,784 2,446 reserves have consistently developed favorably. Insurer Financial Strength A Fitch Ratings believes Alleghany utilizes a reasonable amount Net Earnings 629 354 Conservative Capitalization: Combined Ratio (%) 90.1 89.4 ofReasonable operating leverageFinancial compared Leverage withand its Coverage(re)insurer: peers,Alleghany with’s netfinancial premiums leverage written ratio to totalwas Rating Outlooks ROAE (%) 9.4 9.9 shareholders’19.8% at June equity 30, of201 0.46x, whichin 2013 Fitch. Total considers GAAP stockholders’ reasonable equityfor the of rating$7.4 billion category at June, down 30, Source:Long-Term Alleghany Issuer DefaultCorporation Rating. Stable Insurer Financial Strength Stable 201slightly4, is from up 2from0.4% $6. at9 Dec.billion 31 ,at 201 Dec.3. Operating 31, 2013 ,earnings as favorable-based net interest income coverage and an wa increases a strong in unrealized8.7x in both investment the first half gains of 2014was andpartially in 2013. offset by share repurchases. Related Research Financial Data 2015 Outlook: Global Reinsurance Higher Casualty Reserve Risk: Fitch views Alleghany’s exposure to potential adverse Alleghany(September Corporation 2014) Rating Sensitivities development as being higher than companies that focus more on property business because ($Alternative Mil.) Reinsurance 122014/31 /1Market3 6Update/30/14 Downgrade Triggers: Key rating triggers that could result in a downgrade include significant RelatedTotal(September Equity Criteria 2014) 6,948 7,407 the duration on casualty reserves is comparatively long. However, Fitch recognizes this risk Total Debt 1,794 1,786 Global Reinsurance’s Shifting Landscape adverseappears lossto have reserve been development conservatively; movement manage tod, materiallysupported belowby the-average fact Alleghany’s underwriting loss or TotalInsurance Assets Rating Methodology23,361 23,842 ((SeptemberNovember 2013 2014)) Operating Revenue 4,784 2,446 operatingreserves have performance consistently; sizable developed deterioration favorably in .subsidiary capitalization that caused net written NetLatin Earnings American Reinsurance 629 354 premiums-to-surplus to exceed 1.0x for reinsurance operations and 1.2x for insurance Analysts(September 2014) Combined Ratio (%) 90.1 89.4 operationsReasonable; financial Financial leverage Leverage maintainedand Coverage above : 25%Alleghany; run-rate’s financial operating leverage earnings ratio-based was BrianROAEReinsurer C. (%) Schneider, Mergers andCPA, Acquisitions CPCU,9.4 ARe 9.9 19.8% at June 30, 2014, which Fitch considers reasonable for the rating category, down +1 312 606-2321 Source:(August Alleghany2014) Corporation. interest and preferred dividend coverage of less than 7.0x; significant acquisitions that reduce [email protected] slightly from 20.4% at Dec. 31, 2013. Operating earnings-based interest coverage was a strong Global Reinsurers’ Mid-Year 2014 Financial the company’s financial flexibility; and a substantial decline in the holding company’s cash JamesRelatedResults B. (August Auden, Research 2014) CFA position.8.7x in both the first half of 2014 and in 2013. +1Asian 312 Reinsurance 368-3146 Markets [email protected] (August 2014) UpgradeRating SensitivitiesTriggers: Key rating triggers that could lead to an upgrade over the long term include continued favorable underwriting results in line with higher rated P/C (re)insurer peers; material Related Criteria Downgrade Triggers: Key rating triggers that could result in a downgrade include significant Related Criteria Insurance Rating Methodology improvement in key financial metrics (e.g. net premiums written to equity) to more Insurance Rating Methodology adverse loss reserve development; movement to materially below-average underwriting or (September 2014) overcapitalized levels; and enhanced competitive positioning while maintaining strong (November 2013) operating performance; sizable deterioration in subsidiary capitalization that caused net written profitability with low earnings volatility. In addition, the ratings of its subsidiary, RSUI, could be premiums-to-surplus to exceed 1.0x for reinsurance operations and 1.2x for insurance Analysts upgraded should Fitch consider the ratings core relative to Transatlantic. operations; financial leverage maintained above 25%; run-rate operating earnings-based Brian C. Schneider, CPA, CPCU, ARe +1 312 606-2321 interest and preferred dividend coverage of less than 7.0x; significant acquisitions that reduce www.fitchratings.com March 6, 2014 [email protected] the company’s financial flexibility; and a substantial decline in the holding company’s cash James B. Auden, CFA position. +1 312 368-3146 [email protected] Upgrade Triggers: Key rating triggers that could lead to an upgrade over the long term include continued favorable underwriting results in line with higher rated P/C (re)insurer peers; material improvement in key financial metrics (e.g. net premiums written to equity) to more overcapitalizedThe ratings abovelevels; were unsolicited and enhanced and have beencompetitive provided by positioningFitch as a service while to investors.maintaining strong The issuer did not participate in the rating process, or provide additional information, beyond the issuer’s profitabilityavailable public with disclosure.low earnings volatility. In addition, the ratings of its subsidiary, RSUI, could be upgraded should Fitch consider the ratings core relative to Transatlantic.

www.fitchratings.com March 6, 2014 Global Reinsurance Guide 2015 50 InsuranceInsurance

Property/Casualty Insurers / U.S.A. Arch Capital Group Ltd. Insurance And Insurance Company Subsidiaries Property/Casualty Insurers / U.S.A. Update Arch Capital Group Ltd. Key Rating Drivers RatingsAnd Insurance Company Subsidiaries Long-Term Issuer Default Rating A Consistently Strong Profitability: Fitch Ratings views Arch Capital Group Ltd.’s (ACGL) Update − Senior Unsecured A profitability as strong, characterized by low and stable combined ratios and high returns on Preferred Stock BBB Arch Capital Group (U.S.) Inc. capital. The company’s earnings are exposed to potential volatility from large catastrophes, Ratings Key Rating Drivers Senior Unsecured A− although, favorably, ACGL has posted an underwriting profit and overall net income in every Long-Term Issuer Default Rating A Arch Reinsurance Company yearConsistently of its 12- yearStrong operating Profitability: history. ACGLFitch ’Ratingss GAAP viewscombined Arch ratio Capital was Group85.7% inLtd.’s the first(ACGL) half − ArchSenior Reinsurance Unsecured Europe A profitability as strong, characterized by low and stable combined ratios and high returns on UnderwritingPreferred Stock Limited BBB of 2014, compared with 85.9% for full-year 2013. Arch InsuranceCapital Group Company (U.S.) Inc. capital. The company’s earnings are exposed to potential volatility from large catastrophes, ACGL’s financial leverage ratio is modest at SeniorArch Excess Unsecured and Surplus Insurance A− althoughFavorable, favorably, Financial ACGL Leverage has postedand Coverage: an underwriting profit and overall net income in every Company Arch Reinsurance Company year12.8 %of asits of12 June-year 30, op erating2014, down history. from ACGL 13.8%’s GAAP at year combined-end 2013. ratio This was decline 85.7% reflects in the growth first half in Arch ReinsuranceSpecialty Insurance Europe Company capital from net earnings and unrealized investment gains. Operating earnings-based interest UnderwritingArch Indemnity Limited Insurance Company of 2014, compared with 85.9% for full-year 2013. Arch Insurance Company (Europe) and preferred dividend coverage was a strong 9.4x through the first half of 2014, down from ArchLimited Excess and Surplus Insurance 14.3xFavorable in 2013. Financial This drop Leverage reflects andadditional Coverage: interestACGL expense’s financial on $500 leverage million ratioof debt is modestissued forat Insurer Financial Strength A+ Company the12. 8purchase% as of June of CMG 30, Mortgage2014, down Insurance from 13.8% Company at year (CMG).-end 2013. This decline reflects growth in Arch Specialty Insurance Company Rating Outlooks capital from net earnings and unrealized investment gains. Operating earnings-based interest Arch Indemnity Insurance Company Watford Re Provides Alternative Vehicle: ACGL owns 11% of Watford Re Ltd., which was ArchLong- TermInsurance Issuer Company Default Rating (Europe)Positive and preferred dividend coverage was a strong 9.4x through the first half of 2014, down from LimitedInsurer Financial Strength Positive launched14.3x in 2013. in March This 2014drop . reflectsIt provides additional ACGL interesta more expensepermanent on sidecar$500 million vehicle of debtthat generatesissued for Insurer Financial Strength A+ anthe additionalpurchase ofdiversified CMG Mortgage source ofInsurance revenue Company through fee (CMG). income for its underwriting expertise or Financial Data Rating Outlooks from premiums by participating on Watford Re’s business, which is primarily multi-line casualty Arch Capital Group Ltd. Watford Re Provides Alternative Vehicle: ACGL owns 11% of Watford Re Ltd., which was Long-Term Issuer Default Rating Positive risk. Fitch does not believe Watford Re’s operations present meaningful additional risk or ($ Mil.) 12/31/13 6/30/14 Insurer Financial Strength Positive launched in March 2014. It provides ACGL a more permanent sidecar vehicle that generates Total Equity 5,647 7,022 volatility to ACGL’s overall profile. Total Debt 900 900 an additional diversified source of revenue through fee income for its underwriting expertise or TotalFinancial Assets Data 19,566 22,574 fromU.S. premiumsMortgage byInsurance participating Expansion: on WatfordACGL Re’s’ sbusiness, entrance which into theis primarily U.S. mortgage multi-line insurance casualty Operating Revenue 3,456 1,926 Arch Capital Group Ltd. risk.market Fitch through does thenot Januarybelieve Watford2014 acquisition Re’s operations of CMG present and the meaningful operating additionalplatform ofrisk PMI or ($Net Mil.) Income 12/31/16883 6/30380/14 Mortgage Insurance Co. offers an opportunity for an additional diversified source of earnings. TotalCombin Equityed Ratio (%) 5,64785.9 7,02285.7 volatility to ACGL’s overall profile. TotalROAE Debt (%) 13.5900 13.5900 However, it also represents a challenge in generating favorable profitability in a line of business Total Assets 19,566 22,574 U.S.that experiencedMortgage Insurancesevere difficulty Expansion: during theACGL financial’s entrance crisis. into the U.S. mortgage insurance RelatedOperating RevenueResearch 3,456 1,926 Related Research market through the January 2014 acquisition of CMG and the operating platform of PMI Net Income 688 380 2015Fitch Outlook:Affirms GlobalArch ReinsuranceCapital’s Ratings; Mortgage Insurance Co. offers an opportunity for an additional diversified source of earnings. OutlookCombined Re Ratiomains (%) Positive (August85.9 2014) 85.7 Rating Sensitivities (September 2014) GlobalROAE (%)Reinsurers’ Mid-Year13.5 2014 13.5 However, it also represents a challenge in generating favorable profitability in a line of business Alternative Reinsurance 2014 Market Update Financial Results (August 2014) thatUpgrade experienced Triggers: severeKey difficultyrating triggers during that the couldfinancial result crisis. in an upgrade include continued growth (September 2014) GlobalRelated Reinsurers’ Research 2013 Financial in equity into a larger market position and size/scale, while maintaining favorable run-rate GlobalResults Reinsurance’s (April 2014) Shifting Landscape Fitch Affirms Arch Capital’s Ratings; earnings and low volatility, with a combined ratio in the low 90s. Successfully integrating the (SeptemberBermudaOutlook Re mains 2014)2014 Positive Market(August Update 2014) Rating Sensitivities Latin(JanuaryGlobal American 2014)Reinsurers’ Reinsurance Mid-Year 2014 U.S. mortgage insurance operations and Watford Re platform, with exposure growth prudently (September2014Financial ResultsOutlook: 2014) (August Property/Casualty 2014) Upgrademanaged ,Triggers:would beKey viewed rating favorably triggers thatby Fitch. could Otherresult upgradein an upgrade triggers include include continued maintaining growth a ReinsurerInsurance Mergers(December and 2013) Acquisitions Global Reinsurers’ 2013 Financial ratioin equity of net into premiums a larger written market to positionequity of and 0.8x size/scale, or lower; awhile financial maintaining leverage favorable ratio at orrun below-rate ResultsAlternative (April 2014)Reinsurance 2013 (August 2014) earnings and low volatility, with a combined ratio in the low 90s. Successfully integrating the GlobalMarketBermuda Reinsurers’Update 2014 (September Mid-YearMarket 2013) 2014 Update Financial 20%; and operating earnings-based interest and preferred dividend coverage of at least 10x. Results(January (August 2014) 2014) FitchU.S. ’mortgages evolving insurance view of negative operations fundamental and Watford trends Re platform,in the reins withurance exposure sector growth could prudently result in Asian2014Related ReinsuranceOutlook: Criteria Markets Property/Casualty managed, would be viewed favorably by Fitch. Other upgrade triggers include maintaining a Insurance (December 2013) an affirmation and return to a stable outlook. (AugustInsurance 2014) Rating Methodology ratio of net premiums written to equity of 0.8x or lower; a financial leverage ratio at or below Alternative(November 2013)Reinsurance 2013 Market Update (September 2013) Downgrade20%; and operating Triggers: earningsKey rating-based triggers interest that and could preferred result dividendin a downgrade coverage include of at leasta sizable 10x. Related Criteria adverse prior-year reserve development that causes Fitch to question ACGL’s better than peer InsuranceAnalysts Rating Methodology Fitch’s evolving view of negative fundamental trends in the reinsurance sector could result in RelatedBrian C. Schneider, Criteria CPA, CPCU, ARe underwriting results and lower than peer underwriting volatility. In addition, increases in (September+1 312 606- 23212014) an affirmation and return to a stable outlook. Insurance Rating Methodology underwriting leverage above a 1.0x net premiums written-to-equity ratio or a financial leverage [email protected](November 2013) Downgrade Triggers: Key rating triggers that could result in a downgrade include a sizable Martha M. Butler, CFA ratio above 25% could generate negative rating pressure. +1Analysts 312 368-3191 adverse prior-year reserve development that causes Fitch to question ACGL’s better than peer [email protected] Brian C. Schneider, CPA, CPCU, ARe underwriting results and lower than peer underwriting volatility. In addition, increases in +1 312 606-2321 [email protected] underwriting leverage above a 1.0x net premiums written-to-equity ratio or a financial leverage www.fitchratings.comMartha M. Butler, CFA ratio above 25% could generate negative rating pressure. August 26, 2014 +1 312 368-3191 [email protected] www.fitchratings.com August 26, 2014

The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

51 Global Reinsurance Guide 2015 Insurance

Property/Casualty Insurers/Bermuda AXIS Capital Holdings, Ltd. And Subsidiaries Update Insurance Ratings Key Rating Drivers

Security Class Rating Solid Capitalization: Fitch Ratings views AXISProperty/Casualty Capital Holdings, Ltd.’s Insurers(AXIS) capitalization/Bermuda as Long-Term Issuer Default Rating A solid with operating leverage (as measured by prior 12 months net premiums written to Senior Unsecured A– shareholders’ equity) of 0.67x as of June 30, 2014. The company's shareholders' equity PreferredAXIS Stock CapitalBBB Holdings, Ltd. And Subsidiaries increased by 2.4% to $6.0 billion as of June 30, 2014, as net income and unrealized AXIS Insurance Co. investment gains were partially offset by share repurchases and dividends. AXIS’s financial AXISUpdate Reinsurance Company leverage remains moderate at 20.2% as of June 30, 2014. AXIS Specialty Limited AXIS Surplus Insurance Co. AXIS Specialty Insurance Co. Historically Strong Underwriting Results: AXIS has demonstrated solid underwriting results Ratings Key Rating Drivers Insurer Financial Strength A+ with a 10-year average combined ratio of 89.6% from 2004–2013. The company reported a Security Class Rating Solid91.3%Capitalization: combined ratioFitch for theRatings first halfviews of AXIS2014 Capita(includingl Holdings, 2.6pp relatedLtd.’s (AXIS) to catastrophe capitalization losses as RatingLong-Term Outlook Issuer Default Rating A solidand 6 .with7pp ofoperating favorable leverage reserve development)(as measured. Thisby prior is in line12 monthswith a combined net premiums ratio of written 91.0% toin Senior Unsecured A– Stable shareholders’2013 (including equity) 5.4pp of related0.67x asto ofcatastropheJune 30, 201losses4. The and company's 5.9pp of shareholders' favorable reserve equity Preferred Stock BBB increaseddevelopment). by 2.4% to $6.0 billion as of June 30, 2014, as net income and unrealized Financial Data AXIS Insurance Co. investment gains were partially offset by share repurchases and dividends. AXIS’s financial AXIS Reinsurance Company Diverse Premium Base: Premium diversification allows AXIS to compete effectively in various AXIS Capital Holdings, Ltd. leverage remains moderate at 20.2% as of June 30, 2014. AXIS Specialty Limited AXIS($ Mil .Surplus) Insurance12/31/13Co. 6/30/14 market conditions and also reduces its exposure to any one segment or product. The company TotalAXIS EquitySpecialty Insurance5,868Co. 6,009 Historicallyreported net writtenStrongpremium Underwriting growth Results: of 4% duringAXIS the has first demonstrated half of 2014 solid and 18%underwriting during full results year TotalInsurer Debt Financial Strength 996 A+1,490 with2013, a largely10-year driven average by growth combined in its rationew businessof 89.6% lines:from accident2004–201 & 3health. The andcompany agriculture. reported a Total Assets 19,635 21,446 91.3% combined ratio for the first half of 2014 (including 2.6pp related to catastrophe losses Operating Revenue 4,121 2,149 Catastrophe Exposure in Line with Peers: Fitch views AXIS’s catastrophe exposure as NetRating Income Outlook 684 328 and 6.7pp of favorable reserve development). This is in line with a combined ratio of 91.0% in CombinedStable Ratio 91.0 91.3 2013significant (including, but in line5.4 withpp peerrelated companies to catastrophe in similar lineslosses of businessand 5.9pp and somewhatof favorable mitigated reserve by ROAE (%) 13.1 12.5 development).its reinsurance programs. Among other measures, the company manages its enterprisewide Source:Financial SEC Datafilings. exposure to catastrophic events by zone and return period, such that a 1-in-250-year single event Diverse Premium Base: Premium diversification allows AXIS to compete effectively in various AXIS Capital Holdings, Ltd. within a single zone is estimated at no more than 25% of prior quarter-end common stockholders’ Related Research market conditions and also reduces its exposure to any one segment or product. The company 2015Related($ Mil Outlook:.) Research Global Reinsurance12/31/13 6/30/14 equity. Total Equity 5,868 6,009 (September 2014) reported net written premium growth of 4% during the first half of 2014 and 18% during full year Total Debt 996 1,490 Reserve Development Likely to Moderate: AXIS's history of favorable reserve development Alternative Reinsurance 2014 Market Update 2013, largely driven by growth in its new business lines: accident & health and agriculture. Total Assets 19,635 21,446 (September 2014) has benefited earnings; however, Fitch expects favorable development to diminish going Operating Revenue 4,121 2,149 Global Reinsurance’s Shifting Landscape forwardCatastrophe as underwriting Exposure experience in Line with from Peers:recent softFitch marketviews accident AXIS’s yearscatastrophe mature. exposure The agency as RelatedNet Income Criteria 684 328 (SeptemberCombined Ratio 2014) 91.0 91.3 significant, but in line with peer companies in similar lines of business and somewhat mitigated by Insurance Rating Methodology continues to view AXIS’s reserves as modestly redundant. Latin American Reinsurance (NovemberROAE (%) 2013) 13.1 12.5 its reinsurance programs. Among other measures, the company manages its enterprisewide (September 2014) Source: SEC filings. exposure to catastrophic events by zone and return period, such that a 1-in-250-year single event Reinsurer Mergers and Acquisitions Rating Sensitivities (August 2014) within a single zone is estimated at no more than 25% of prior quarter-end common stockholders’ GlobalRelatedAnalysts Reinsurers’ Research Mid-Year 2014 Financial Factorsequity. Supporting a Downgrade: Factors that could lead to a downgrade include a ResultsBrian C. (August Schneider, 2014) CPA, CPCU, ARe significant loss of capital resulting from a major catastrophic event that is worse than +1 312 606-2321 AXIS's history of favorable reserve development [email protected] Reinsurance Markets expectationsReserve Development or industry andLikely peer to companyModerate results;: an inability to raise capital following a large (August 2014) Doug M. Pawlowski, CFA losshas eventbenefited; a failure earnings;to maintain however, an underwritingFitch expects profit favorable for an developmentextended period; to diminishan increase going in +1 312 368-2054 forward as underwriting experience from recent soft market accident years mature. The agency [email protected] CriteriaCriteria operating leverage above a 1.0x net written premiums-to-equity ratio; significant reserve InsuranceInsurance RatingRating Methodology Methodology continuesdeficiencies; to viewGAAP AXIS’s fixed reserves-charge ascoverage modestly (including redundant preferred. dividends) below 7.0x for a (November 2013) (September 2014) sustained period; or financial leverage above 25%. Rating Sensitivities Factors Supporting an Upgrade: Factors that could lead to an upgrade include a significant Analysts Factorsincrease Supportingin capital that a meaningfullyDowngrade: reducesFactors operatingthat could leverage lead to and a downgradereduced exposure include toa Brian C. Schneider, CPA, CPCU, ARe significant loss of capital resulting from a major catastrophic event that is worse than +1 312 606-2321 catastrophe losses. However, given publicly traded companies' sensitivity around managing [email protected] expectationscapital, Fitch believesor industry the and company peer company is unlikely results; to move an towardinability this to raiselevel capitalof overcapitalization following a large. Doug M. Pawlowski, CFA loss event; a failure to maintain an underwriting profit for an extended period; an increase in +1 312 368-2054 [email protected] operating leverage above a 1.0x net written premiums-to-equity ratio; significant reserve deficiencies; GAAP fixed-charge coverage (including preferred dividends) below 7.0x for a www.fitchratings.com April 3, 2014 sustained period; or financial leverage above 25%.

Factors Supporting an Upgrade: Factors that could lead to an upgrade include a significant increase in capital that meaningfully reduces operating leverage and reduced exposure to catastrophe losses. However, given publicly traded companies' sensitivity around managing capital, Fitch believes the company is unlikely to move toward this level of overcapitalization. The ratings above were unsolicited and have been provided by Fitch as a service to investors. The issuer did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure. www.fitchratings.com April 3, 2014

Global Reinsurance Guide 2015 52 InsuranceInsurance Property/CasualtyInsurance Insurers / U.S.A. Berkshire Hathaway Inc. And Insurance Subsidiaries Property/Casualty Insurers / U.S.A. BerkshireUpdate Report Hathaway Inc. And Insurance SubsidiariesKey Rating Drivers Ratings Update Report Security Class Rating Strong Capital Profile: Berkshire Hathaway Inc.’s (BRK) capitalization remains a key credit Long-Term Issuer Default AA− characteristic at both the insurance operating subsidiaries and at the holding company level. Key Rating Drivers RatingsSenior Unsecured Debt A+ Capitalization was “extremely strong” at BRK’s consolidated insurance operations, measured F1+ Commercial Paper by Fitch Ratings’ Prism capital model at year-end 2013. At the holding company level, the Security Class Rating Strong Capital Profile: Berkshire Hathaway Inc.’s (BRK) capitalization remains a key credit LongInsurance-Term SubsidiariesIssuer Default AA− characteristicfinancial leverage at both rat iothe was insurance 14% at oper Juneating 30, subsidiaries 2014 and wasand atcalculated the holding to includecompany holding level. SeniorInsurer UnsecuredFinancial Strength Debt A+AA+ Capitalizationcompany debt, was insurance “extremely debt sandtrong” finance at BRK’s segment consolidated debt guaranteed insurance by theoperations, holding company. measured F1+ Commercial Paper by Fitch Ratings’ Prism capital model at year-end 2013. At the holding company level, the Solid Insurance Operating Performance: BRK has a unique insurance franchise with major RatingInsurance Outlook Subsidiaries fpositionsinancial lineveragereinsurance ratio andwas personal 14% at autoJune lines. 30, The2014 consolidatedand was calculated insurance to operations include holdinghave a Insurer Financial Strength AA+ company debt, insurance debt and finance segment debt guaranteed by the holding company. Stable history of sizeable underwriting profits, for example, the statutory underwriting combined ratio Solidaveraged Insurance 92.1% Operatingover the Performance:five-year periodBRK betweenhas a unique 2009 insurance−2013. Return franchise on with averag majore Rating Outlook positionspolicyholders’ in reinsurance surplus over and the personal same five auto-year lines. period The wasconsolidated nearly 9%. insurance operations have a Financial Data history of sizeable underwriting profits, for example, the statutory underwriting combined ratio Stable Excellent Financial Flexibility and Liquidity: Fitch views BRK’s liquidity and financial ($ Mil.) 6/30/14 averaged 92.1% over the five-year period between 2009−2013. Return on average Net Income 11,231 flexibility as very strong. BRK consistently reports solid operating cash flow, maintains a large policyholders’ surplus over the same five-year period was nearly 9%. Stockholders’ Equity 236,760 and liquid investment portfolio and has excellent access to capital market. At June 30, 2014, Financial Data Debt and Hybrids 74,087 ExcellentBRK had approximately Financial Flexibility $55 billion and of cash Liquidity: and equivalentsFitch views on a consolidatedBRK’s liquidity basis and that financial is held ($ Mil.) 6/30/14 Return on Equity (%) 9.8 Net Income 11,231 flexibilityprimarily withinas very the strong. insurance BRK operations. consistently reports solid operating cash flow, maintains a large Stockholders’Note: Consolidated Equity GAAP; six months236,760 and liquid investment portfolio and has excellent access to capital market. At June 30, 2014, ended June 30, 2014. ROE annualized. Material Risk Exposures: BRK’s $119 billion common stock holdings and $32 billion notional value Debt and Hybrids 74,087 Source: SNL Financial. inBRK equity had indexapproximately put options $55 represent billion of greatercash and exposure equivalents to equity on a market consolidated movements basis thanthat ispeers. held Return on Equity (%) 9.8 Concentrationprimarily within risk the exists insurance since operations.more than one -half of BRK’s common stocks were invested in four Related Research Note: Consolidated GAAP; six months companies, American Express Co., Wells Fargo & Co., International Business Machines Corp. and 2015ended Outlook: June 30, Global 2014. ReinsuranceROE annualized. Material Risk Exposures: BRK’s $119 billion common stock holdings and $32 billion notional value Source: SNL Financial. The Coca-Cola Co. Layered on top of investment risk is exposure to catastrophe losses, risks (SeptemberRelated Research 2014) in equity index put options represent greater exposure to equity market movements than peers. Alternative Reinsurance 2014 Market Update related to the company’s acquisition strategy as well as key man risk with CEO Warren Buffett. Fitch Rates Berkshire Hathaway Concentration risk exists since more than one-half of BRK’s common stocks were invested in four (SeptemberSenior Debt Issue2014) ‘A+’ (August 2014) companies, American Express Co., Wells Fargo & Co., International Business Machines Corp. and Global Reinsurance’s Shifting Landscape 2014 Outlook: Property/Casualty RatingThe Coca Sensitivities-Cola Co. Layered on top of investment risk is exposure to catastrophe losses, risks (SeptemberInsuranceRelated (DecemberResearch 2014) 2013) Latin American Reinsurance related to the company’s acquisition strategy as well as key man risk with CEO Warren Buffett. 2014Fitch Outlook:Rates Berkshire Global ReinsurersHathaway Deterioration in Key Insurance Subsidiaries: A decline in the credit quality of key insurance (September(AugustSenior Debt 2013) Issue2014) ‘A+’ (August 2014) subsidiaries below the ‘AA+’ rating measured by Fitch’s judgment of capitalization, a total Reinsurer2014 Outlook: Mergers andProperty/Casualty Acquisitions (AugustInsurance 2014) (December 2013) financingRating Sensitivitiesand commitment ratio greater than 1.5x, net leverage (excluding affiliated Global2014 Reinsurers’Outlook: Global Mid-Year Reinsurers 2014 Financial Deteriorationinvestments) greater in Key than Insurance 3.5x or Subsidiaries:a sharp and persistentA decline reduction in the credit in underwriting quality of key profits insurance could Results(August (August2013) 2014) lead to a downgrade. Asian Reinsurance Markets subsidiaries below the ‘AA+’ rating measured by Fitch’s judgment of capitalization, a total (August 2014) financing and commitment ratio greater than 1.5x, net leverage (excluding affiliated A Change in Leverage: A run-rate debt-to-total capital ratio from the holding company or insuranceinvestments) and greater finance than debt 3.5x guaranteed or a sharp by andthe holdingpersistent company reduction greater in underwriting than 25% couldprofits lead could to Related Criteria lead to a downgrade. InsuranceAnalysts Rating Methodology a downgrade. Conversely, a commitment to lower debt-to-tangible capital ratios attributed to (SeptemberDouglas M. Pawlowski,2014) CFA theA Change holding incompany, Leverage insurance: A run -rateand financedebt-to- totaloperations capital could ratio leadfrom tothe an holding upgrade. company However,or +1 312 368-2054 [email protected] Fitchinsurance believes and thatfinance this debtwould guaranteed likely require by the scalingholding backcompany of the greater finance than operations. 25% could lead to a downgrade. Conversely, a commitment to lower debt-to-tangible capital ratios attributed to AnalystsChristopher A. Grimes, CFA Reduced Holding Company Cash: Acquisitions or other actions that reduce consolidated Douglas+1 312 368 M.- Pawlowski,3268 CFA the holding company, insurance and finance operations could lead to an upgrade. However, [email protected] 312 368-2054 cash holdings below $10 billion or approximately 5x consolidated interest expense could lead [email protected] toFitch a downgrade. believes that this would likely require the scaling back of the finance operations. Christopher A. Grimes, CFA Reduced Holding Company Cash: Acquisitions or other actions that reduce consolidated +1 312 368-3268 Increased Leveraged Equity Exposure: Material increase in leveraged equity market [email protected] exposurecash holdings, such below as its $10equity billion index or put app derivativeroximately portfolio 5x consolidated, could lead interest to a downgrade. expense could lead to a downgrade.

Increased Leveraged Equity Exposure: Material increase in leveraged equity market www.fitchratings.com exposure, such as its equity index put derivative portfolio, could lead to a downgrade.August 20, 2014 www.fitchratings.com August 20, 2014

The ratings above were unsolicited and have been provided by Fitch as a service to investors. The issuer did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.

53 Global Reinsurance Guide 2015 Insurance

InsuranceGermany xx

Hannover Rueck SE Germany xx FullUpdate Rating Report Hannover Rueck SE

FullRatings Rating Report Key Rating Drivers Insurer Financial Strength AA- Long-Term Foreign-Currency IDR AA- Reduced Financial Leverage: Hannover Rueck SE’s (Hannover Re) financial leverage

RatingsSubordinated Debt A Keydeclined Rating to 19 .8Drivers% in 1H 14 as the company redeemed in full amount the EUR750m Insurer Financial Strength A A- subordinated bond issue in February 2014. The reinsurer’s fixed charge coverage is expected Long-Term Foreign-Currency IDR AA- Reduced Financial Leverage: Hannover Rueck SE’s (Hannover Re) financial leverage E+S Rueckversicherung AG to improve for end-2014 as the amount of interest paid reduces. The five-year average for fixed SubordinatedInsurer Financial Debt Strength A A- declined to 19.8% in 1H14 as the company redeemed in full amount the EUR750m charge coverage ratio is 11.6x, which remains supportive of the rating. Sovereign Risk subordinated bond issue in February 2014. The reinsurer’s fixed charge coverage is expected E+SLong -RueckversicherungTerm Foreign-Currency IDRAG AAA Strongto improve Capitalisation: for end-2014 asHannover the amount Re’s of capital interest adequacy, paid reduces. as measuredThe five-year by Fitchaverage Ratings for fixed, is InsurerLong-Term Financial Local -StrengthCurrency IDR AAAAA- considered to be very strong and a positive rating factor. The reinsurer has organically grown charge coverage ratio is 11.6x, which remains supportive of the rating. its shareholders’ equity to EUR6.5bn at end-2013 from EUR3.3bn at end-2008, supported by OutlooksSovereign Risk Long-Term Foreign-Currency IDR AAA strongStrong and Capitalisation: consistent levels Hannover of retained Re’s capitalearnings adequacy,. Quality isas marginallymeasured reducedby Fitch byRatings a higher, is LongInsurer-Term Financial Local -StrengthCurrency IDR AAAStable considered to be very strong and a positive rating factor. The reinsurer has organically grown level of hybrid debt present within the reinsurer’s capital structure. This is mitigated by what the Long-Term Foreign-Currency IDR Stable its shareholders’ equity to EUR6.5bn at end-2013 from EUR3.3bn at end-2008, supported by Outlooks agency considers to be a less volatile mix of business relative to peers. strong and consistent levels of retained earnings. Quality is marginally reduced by a higher Insurer Financial Strength Stable Solidlevel of and hybrid Consisten debt presentt Earnings: within theIn 2013 reinsurer’s Hannover capital Re structure.’s earnings This remained is mitigated strong by, driven what the by Long-Term Foreign-Currency IDR Stable very strong performance of its non-life reinsurance segment; the company reported net income agency considers to be a less volatile mix of business relative to peers. of EUR895m (2012: EUR850m). Fitch views positively the stability of Hannover Re’s earnings generationSolid and Consistenin recent yearst Earnings: and believes In 2013 that Hannover this reflects Re ’sthe earnings diversified remained nature ofstrong the reinsurer’s, driven by businessvery strong profile performance, as well as of itsits prudennon-lifet investmentreinsurance strategy. segment; the company reported net income Financial Data of EUR895m (2012: EUR850m). Fitch views positively the stability of Hannover Re’s earnings generationLower Volatility in recent Versus years Peers: and believes The Fitch that-calculated this reflects 2013 the diversifiedcombined rationature improved of the reinsurer’s to 94.4% Hannover Re business(2012: 95.7 profile%) despite, as well major as its losses pruden whicht investment came at strategy. EUR578m , below company’s expectations. 31 Dec 13 31 Dec 12 Financial Data Catastrophe losses accounted for 8.4pp (2012: 7.0pp) of the company’s reported combined Lower Volatility Versus Peers: The Fitch-calculated 2013 combined ratio improved to 94.4% Total assets (EURbn) 53.9 54.8 ratio. The volatility of the combined ratio also remained lower than peers, which in Fitch’s view Hannover Re (2012: 95.7%) despite major losses which came at EUR578m, below company’s expectations. Total equity (EURbn) 6.5 6.7 reflects Hannover Re’s selective underwriting approach and focus on preserving margins rather 31 Dec 13 31 Dec 12 Catastrophe losses accounted for 8.4pp (2012: 7.0pp) of the company’s reported combined than on strong growth. Net income (EURm) 895 850 ratio. The volatility of the combined ratio also remained lower than peers, which in Fitch’s view CombinedTotal assets ratio (EUR – P&Cbn) 53.9 54.8 94.4 95.7 Developing Life & Health Business: In 2013 the life & health segment delivered lower net TotalRI (%) equity (EURbn) 6.5 6.7 reflects Hannover Re’s selective underwriting approach and focus on preserving margins rather Return on equity (after 15.0 15.4 thanincome on strongof EUR16 growth.1m (2012: EUR227m) mainly due to reserve strengthening required for its tax)Net income(%) (EURm) 895 850 Australian disability business. The life & health reinsurance business continues to grow, Combined ratio – P&C 94.4 95.7 Developing Life & Health Business: In 2013 the life & health segment delivered lower net RI (%) although the segment’s contribution to Hannover Re’s profits remains modest. In the medium RelatedReturn on equityResearch (after 15.0 15.4 income of EUR161m (2012: EUR227m) mainly due to reserve strengthening required for its 2015tax) (%) Outlook: Global Reinsurance term, the contribution made by this segment is expected to increase, reflecting the reinsurer’s Australian disability business. The life & health reinsurance business continues to grow, (September 2014) higher premium growth target of 5%-7%. Alternative Reinsurance 2014 Market Update although the segment’s contribution to Hannover Re’s profits remains modest. In the medium (September 2014) term,Strong the Global contribution Franchise: made byHannover this segment Re isis expectedone of a toselect increase, band reflecting of global the reinsurance reinsurer’s Global Reinsurance’s Shifting Landscape highercompanies premium with growththe financial target strength of 5%-7%. to provide underwriting capacity across a broad range of (September 2014) underwriting classes and geographical markets. This is expected to provide a good degree of Latin American Reinsurance Strong Global Franchise: Hannover Re is one of a select band of global reinsurance (September 2014) resilience to a protracted period of price softening, should this occur. Hannover Re maintains a companies with the financial strength to provide underwriting capacity across a broad range of Reinsurer Mergers and Acquisitions strong position in the property & casualty (P&C) reinsurance market and a strengthening (August 2014) underwritingposition in life classes & health and reinsurance. geographic al markets. This is expected to provide a good degree of RelatedGlobal Reinsurers’ Research Mid-Year 2014 Financial resilience to a protracted period of price softening, should this occur. Hannover Re maintains a Results (August 2014) Global Reinsurers' 2013 Financial Results strongRating position Sensitivities in the property & casualty (P&C) reinsurance market and a strengthening Asian Reinsurance Markets (April 2014) position in life & health reinsurance. (August 2014) Upgrade Unlikely: An upgrade is considered unlikely in the near-term, but could be achieved RelatedHurricane SeasonResearch 2014: A Desk Reference for Insurance Investors (May 2014) Ratingover the longer Sensitivities-term if financial leverage declines to 15%, the combined ratio remains below RelatedGlobal Reinsurers' Criteria 2013 Financial Results (April 2014) 93% and capitalisation remains very strong. Insurance Rating Methodology Upgrade Unlikely: An upgrade is considered unlikely in the near-term, but could be achieved Analysts(SeptemberHurricane Season 2014) 2014: A Desk Reference for Insurance Investors (May 2014) Downgradeover the longer Triggers-term if: Hannoverfinancial leverage Re’s ratings declines could to be 15%, downgraded the combined if its n etratio financial remains leverage below Martyn Street +44 20 3530 1211 is93% consistently and capitalisation above 25 remains%; its fixed very charge strong. coverage is consistently below 9x; and its combined [email protected] Analysts ratio is consistently above 100%. Downgrade Triggers: Hannover Re’s ratings could be downgraded if its net financial leverage Harish Gohil Martyn Street +44 20 3530 12111257 is consistently above 25%; its fixed charge coverage is consistently below 9x; and its combined [email protected] [email protected] ratio is consistently above 100%.

www.fitchratings.comHarish Gohil 1 September 201422 August 2014 +44 20 3530 1257 [email protected] The ratings above were unsolicited and have been provided by Fitch as a service to investors. The issuer did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure. www.fitchratings.com 1 September 201422 August 2014

Global Reinsurance Guide 2015 54 Insurance

Reinsurers / United Kingdom

InsuranceInsurance Lloyd’s of London

Full Rating Report Reinsurers / United Kingdom

Ratings Key Rating Drivers Lloyd’sLloyd’s of London of London Insurer Financial Strength Rating AA− Disciplined Underwriting Approach: Underwriting conditions across several major UpdateFull Rating Report The Society of Lloyd’s (re)insurance classes are deteriorating, making continued underwriting discipline by market Long-Term IDR A+ participants important. The diversity provided by Lloyd’s of London’s (Lloyd’s) (re)insurance Subordinated debt A− Ratings Keyportfolio, Rating by line Drivers of business and geographically, is expected to be resilient to a protracted Lloyd’sLloyd’s ofInsurance London Company (China) period of price softening, should this occur. InsurerLtd Financial Strength Rating AA− Disciplined Underwriting Approach: Underwriting conditions across several major Insurer Financial Strength Rating AA− PMD’s Market Oversight Positive: Fitch Ratings views the Performance Management The Society of Lloyd’s (re)insurance classes are deteriorating, making continued underwriting discipline by market LongOutlooks-Term IDR A+ participantsDirectorate’s important (PMD) market. The diversityoversight provided as key inby the Lloyd’ reductions of London’s in cross -cycle(Lloyd’s) earnings (re)insurance volatility Subordinated debt A− Insurer Financial Strength Ratings Stable portfolio,since it wasby lineestablished of business in 2003. and geographically,Processes including is expected business to planbe r esilienreviewst to and a protractedsyndicate Lloyd’sLong-Term Insurance IDR Company (China)Stable benchmarking have helped the Corporation of Lloyd’s and syndicates improve key aspects of period of price softening, should this occur. Ltd underwriting, including pricing, reserving, claims management, risk-adjusted capital setting and InsurerFinancial Financial Data Strength Rating AA− PMD’scatastrophe Market modelling Oversight techniques. Positive : Fitch Ratings views the Performance Management OutlooksLloyd’s of London Directorate’s (PMD) market oversight as key in the reduction in cross-cycle earnings volatility 2013 2012 Good Performance Versus Peers: Lloyd’s has achieved marginally reduced cross-cycle Insurer Financial Strength Ratings Stable since it was established in 2003. Processes including business plan reviews and syndicate LongTotal- Termassets IDR (GBPm) 76,579 Stable78,091 benchmarkingearnings volatility have i nhelped the context the Corporation of the wider of Lloyd’s industry and, bothsyndicates in absolute improv eterms key aspectsand when of Total liabilities (GBPm) 56,193 58,791 compared with peers. Fitch believes this is a direct result of the measures introduced by PMD Gross written premiums 26,106 25,500 underwriting, including pricing, reserving, claims management, risk-adjusted capital setting and Financial Data (GBPm) catastropheand other Corporation modelling techniques.departments. Pre-tax profit (GBPm) 3,205 2,771 Lloyd’s of London Combined ratio (%) 86.8 91.1 Continued Favourable Reserve Development: The work undertaken by the PMD has Return on capital (%) 20116.23 20114.82 Good Performance Versus Peers: Lloyd’s has achieved marginally reduced cross-cycle provided Fitch with increased confidence that, on an aggregate basis, prior underwriting years Total assets (GBPm) 76,579 78,091 earnings volatility in the context of the wider industry, both in absolute terms and when Total liabilities (GBPm) 56,193 58,791 comparedwill develop with favourably peers. Fitch in the believes next two this years is a. Ofdirect the resultseven of main the businessmeasures classes, introduced casualty by PMD and Gross written premiums 26,106 25,500 (GBPm) andmotor other reserves Corporation are the departments. agency’s key focus. Pre-tax profit (GBPm) 3,205 2,771 Combined ratio (%) 86.8 91.1 ContinuedExtensive FinancialFavourable Flexibility: Reserve TheDevelopment: variety of fundingThe work sources undertaken for the bycentral the PMDfund (seehas Return on capital (%) 16.2 14.8 providedAppendix Fitch B: Glossary with increased) gives confidenceLloyd’s significant that, on financialan aggregate flexibility basis,, being prior abunderwritingle to raise yearsfunds willboth develop internally favourably – through in thecontributions, next two years levies. Of and the synd sevenicate main loans business – and classes,externally casualty through and the Related Research motorcapital reserves markets. are the agency’s key focus. 2015 Outlook: Global Reinsurance (September 2014) ExtensiveStrong Capitalisation Financial Flexibility:: Fitch expects The varietycapitalisation of funding to support sources the for rating, the c entralassuming fund fut(seeure Alternative Reinsurance 2014 Market Update losses fall within limits expected by Lloyd’s. The three-layered capital structure at Lloyd’s – (September 2014) Appendix B: Glossary) gives Lloyd’s significant financial flexibility, being able to raise funds Global Reinsurance’s Shifting Landscape bothsyndicates’ internally premium – through trust contributions, funds, members’ levies fandunds synd at Lloyd’sicate loans and –the and central externally fund through– remained the (September 2014) capitalstrong markets.in 2013, helped by reduced large loss activity during the year. Latin American Reinsurance (September 2014) StrongRating Capitalisation Sensitivities: Fitch expects capitalisation to support the rating, assuming future Reinsurer Mergers and Acquisitions losses fall within limits expected by Lloyd’s. The three-layered capital structure at Lloyd’s – (August 2014) Upgrade Unlikely: An upgrade is unlikely in the near to medium term, as credit metrics are not syndicates’ premium trust funds, members’ funds at Lloyd’s and the central fund – remained Global Reinsurers’ Mid-Year 2014 Financial expected to strengthen significantly over the rating horizon. Results (August 2014) strong in 2013, helped by reduced large loss activity during the year. Asian Reinsurance Markets Underwriting Deterioration/Increased Leverage: A downgrade may occur if the normalised (AugustRelated 2014) Research Ratingcombined Sensitivities ratio remains above 97% or if leverage, as measured by net premiums written to Hurricane Season 2014: A Desk Reference Upgradeequity, rises Unlikely above: An1.2x upgrade. is unlikely in the near to medium term, as credit metrics are not Relatedfor Insurance Criteria Investors (May 2014) InsuranceUK Non-Life: Rating London Methodology Market Comment expected to strengthen significantly over the rating horizon. (September(May 2014) 2014) Global Reinsurers' 2013 Financial Results Underwriting Deterioration/Increased Leverage: A downgrade may occur if the normalised Related(April 2014) Research combined ratio remains above 97% or if leverage, as measured by net premiums written to

Hurricane Season 2014: A Desk Reference equity, rises above 1.2x. for Insurance Investors (May 2014) Analysts UK Non-Life: London Market Comment (MayMartyn 2014) Street Global+44 20 Reinsurers' 3530 1211 2013 Financial Results ([email protected] 2014)

Anna Bender +44 20 3530 1671 [email protected]

Martyn Street +44www.fitchratings.com 20 3530 1211 31 July 2014 [email protected]

Anna Bender +44 20 3530 1671 [email protected]

www.fitchratings.com 31 July 2014

The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

55 Global Reinsurance Guide 2015 Insurance

Reinsurers / Germany

Insurance Munich Reinsurance Company

And Subsidiaries Reinsurers / Germany Update Munich Reinsurance Company Ratings Key Rating Drivers AndInsurer FinancialSubsidiaries Strength Rating AA− Long-Term Foreign-Currency IDR AA− Consistently Strong Group Earnings: Munich Reinsurance Company’s ability to generate Update Subordinated Debt A strong and consistent earnings is underpinned by the significant scale, dominant market Senior Unsecured Debt A+ position and diversity of the (re)insurance operating companies that form the Munich Re group. (Issued by Munich Reinsurance RatingsAmerica Corporation) Fitch Ratings expects Munich Re’s core reinsurance business to drive the company’s Key Rating Drivers Insurer Financial Strength Rating AA− profitability in the medium term, with its ERGO-branded primary insurance operations providing OutlooksLong-Term Foreign -Currency IDR AA− Consistently Strong Group Earnings: Munich Reinsurance Company’s ability to generate some diversification in earnings and business lines. InsurerSubordinated Financial Debt Strength Rating StableA strong and consistent earnings is underpinned by the significant scale, dominant market Long-Term Foreign-Currency IDR Stable Senior Unsecured Debt A+ positionReinsurance and diversity Underwriting of the (re)insuranceVolatile: Despite operating the diversity companies of operating that form companies, the Munich past Re groupgroup. ( Issued by Munich Reinsurance America Corporation) resultsFitch Ratings have been expects volatil Muniche because Re’s of corethe significantreinsurance scale business of the propertyto drive andthe catastrophecompany’s Financial Data profitability(P&C) reinsurance in the medium segment. term P&, withC reinsurance its ERGO-branded contributed primary over insurance 70% of operationsgroup net providprofitsing in Munich Reinsurance Company Outlooks some2013 (2012:diversif ication81%). inUnderwriting earnings and performance business line compareds. with a peer group of Fitch’s rated 31 Dec 31 Dec Insurer Financial Strength Rating Stable 13 12 reinsurance universe is viewed as a key factor in determining the future direction of the rating. Long-Term Foreign-Currency IDR Stable Reinsurance Underwriting Volatile: Despite the diversity of operating companies, past group Total assets (EURm) 254,288 258,416 Total equity (EURm) 26,226 27,439 resultsCapitalisati haveon been Very volatil Stronge because: Fitch ofregards the significant Munich Re'sscale capitalisation of the property as veryand catastrophestrong and FinancialGross written Data premiums 51,060 51,969 commensurate with the ratings. While the reinsurer’s IFRS equity is sensitive to interest rate- (EURm) (P&C) reinsurance segment. P&C reinsurance contributed over 70% of group net profits in NetMunich income Reinsurance (EURm) Company3,342 3,204 2013induced (2012: movements 81%). Underwritingin the market performance value of its comparedfixed-interest with investment a peer group portfolio, of Fitch’s the agency rated Reinsurance combined 31 92.1Dec 31 9Dec1.0 considers that such sensitivity on an economic value basis would be reduced by offsetting ratio (%) 13 12 reinsurance universe is viewed as a key factor in determining the future direction of the rating. Primary insurance 97.2 98.7 Total assets (EURm) 254,288 258,416 movements in the value of liabilities. Strong capitalisation enables the reinsurer to provide combined ratio (%) Fitch regards Munich Re's capitalisation as very strong and Total equity (EURm) 26,226 27,439 Capitalisatiunderwritingon capacity Very onStrong a continuous: and large scale basis, should it wish to do so. Gross written premiums 51,060 51,969 commensurate with the ratings. While the reinsurer’s IFRS equity is sensitive to interest rate- (EURm) Munich Re’s primary life and international primary non-life Net income (EURm) 3,342 3,204 inducedPrimary movementsOperations inin theTransition: market value of its fixed-interest investment portfolio, the agency Reinsurance combined 92.1 91.0 operationsconsiders thatare improvsuch sensitivitying. Over theon anmedium economic term, valueearnings basis contributions would be fromreduced these by operations offsetting ratio (%) Primary insurance 97.2 98.7 movementsare expected in to theform value a more of significantliabilities. partStrong of overallcapitalisation group earnings enables. the reinsurer to provide combined ratio (%) underwritingLeverage and capacity Coverage on a continuous Adequate and: Fitch large views scale Munich basis, sho Re'suld financialit wish to debtdo so leverage. as Related Research Primarycommensurate Operations with thein Transition: ratings, standing Munich atRe’s 16% primary at end life- 2013.and international The agency primary expects non that-life 2015 Outlook: Global Reinsurance operationsleverage will are remain improv withining. Overan acceptable the medium range term, for earnings the ratings contributions in the medium from term. these Asset operations risk is (September 2014) low to moderate with little exposure to equities and alternative investments, and credit risk is Alternative Reinsurance 2014 Market Update are expected to form a more significant part of overall group earnings. moderate. (September 2014) Leverage and Coverage Adequate: Fitch views Munich Re's financial debt leverage as Global Reinsurance’s Shifting Landscape Limited Retrocession, Manageable Exposure: Munich Re uses limited retrocession (September 2014) commensurate with the ratings, standing at 16% at end-2013. The agency expects that Latin American Reinsurance leveragecoverage will and remain other withinforms an of acceptablerisk mitigation, range leaving for the ratingsnet losses in the near medium to gross term. losses. Asset riskFitch is (September 2014) lowconsiders to moderate catastrophe with littlerisk exposure asto reasonableequities and given alternative the highly investments, diversified and portfolio credit and risk the is Reinsurer Mergers and Acquisitions moderategroup's strong. capital position. When catastrophe losses are close to the historical average, the (August 2014) majority of profits are generated from P&C reinsurance operations, benefiting from overall solid Global Reinsurers’ Mid-Year 2014 Financial Limited Retrocession, Manageable Exposure: Munich Re uses limited retrocession Results (August 2014) margins within its catastrophe book. coverage and other forms of risk mitigation, leaving net losses near to gross losses. Fitch Asian Reinsurance Markets (August 2014) Ratingconsiders Sensitivitcatastrophe riskies exposure as reasonable given the highly diversified portfolio and the group's strong capital position. When catastrophe losses are close to the historical average, the Improved Profitability: Munich Re’s ratings could be upgraded if the reinsurer improves Related Criteria majority of profits are generated from P&C reinsurance operations, benefiting from overall solid Insurance Rating Methodology profitability on a sustainable basis to a return on equity of 10% or above and a multi-year margins within its catastrophe book. Related(September Research 2014) average combined ratio of 96% or lower, provided the capital base remains strong on a risk- xxx adjusted basis. Rating Sensitivities Analysts ImprovedWeakened ProfitabilityCapitalisation: Munich: The keyRe ’ratings ratings triggers could that be could upgraded result ifin thea downgrade reinsurer includeimproves a Martyn Street profitabilitysustained material on a sustainable drop in the basis company to a ’returns risk- adjustedon equity capital of 10% position or above measured and a multiby Fitch’s-year +44 20 3530 1211 [email protected] Research riskaverage-based combined capital assessment,ratio of 96% aor multilower,-year provided average the combinedcapital base ratio remains of 102% strong or above,on a risk or- xxx strongadjusted underperformance basis. relative to peers. Harish Gohil +44 20 3530 1257 [email protected] Weakened Capitalisation: The key rating triggers that could result in a downgrade include a

Martyn Street sustained material drop in the company’s risk-adjusted capital position measured by Fitch’s www.fitchratings.com+44 20 3530 1211 1 September 2014 [email protected] risk -based capital assessment, a multi-year average combined ratio of 102% or above, or strong underperformance relative to peers. Harish Gohil +44 20 3530 1257 [email protected]

www.fitchratings.com 1 September 2014

The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Global Reinsurance Guide 2015 56 InsuranceInsurance

Life Insurers / U.S.A. Reinsurance Group of America, Inc. And Subsidiary Update

Ratings Key Rating Drivers Reinsurance Group of America, Inc. Leading North American Life Reinsurer: Reinsurance Group of America (RGA) is the largest Long-Term IDR A− Senior Debt BBB+ provider of individual and group life reinsurance in North America, and is one of the leading life Junior Subordinated Debt BBB− and health reinsurers in the world. RGA has retained its market share, despite an overall

RGA Reinsurance Co. decline in new business assumed in the U.S. Insurer Financial Strength A+ Pressure on Profitability: Fitch Ratings continues to view RGA’s run-rate profitability as good IDR – Issuer Default Rating. and generally in line with rating expectations. However, Fitch anticipates growth in profitability Rating Outlook over the medium term will be constrained by competitive challenges in the company’s core U.S. Stable traditional business, higher mortality and morbidity in select markets, and ongoing low interest rates. Operating earnings improved in the first half of 2014. As a result, GAAP operating GAAP Financial Data earnings-based interest coverage increased to 7.3x. Reinsurance Group of America, Inc. Elevated Financial Leverage: Fitch views RGA’s financial leverage as at the high end of ($ Mil.) 6/30/14 Shareholders’ Equity 6,689 rating expectations following its third-quarter 2013 issuance of $400 million of senior notes. The Total Debt 2,215 financial leverage ratio was approximately 30% at June 30, 2014. The total financing and Net Income 335 commitments (TFC) ratio is also relatively high at 1.0x. Return on Equity (%) 12.9 Risk-Based Capital (%) 365 Rapid Growth of Asset-Intensive Business: RGA has experienced rapid growth in total Note: Risk-based capital ratio is as of Dec. 31, 2013. assets over the past few years. Fitch has some concern that contraction in RGA’s core U.S. Source: RGA Statistical Supplement and traditional market has caused it to look for growth in asset-intensive businesses, which Fitch SEC filings, Fitch. views as riskier and outside the company’s core competence of managing mortality risk. Fitch will closely monitor growth in this area. Asset leverage — GAAP assets in relation to adjusted Related Research equity — was 8x at June 30, 2014. 2015Rela Outlook:ted Research Global Reinsurance (SeptemberU.S. Life 2014)Insurance Statutory Adequate Risk-Adjusted Capitalization: Fitch views the statutory capitalization of RGA AlternativeDividend ReinsuranceCapacity 2014(Improved Market Update Reinsurance Company (RGA Reinsurance) as adequate, although the company relies on support (SeptemberStatutory Dividend 2014) Capacity a Credit Positive) (June 2014) Global Reinsurance’s Shifting Landscape from its parent and the use of captives to maintain target capital levels. Fitch estimates RGA 2013 GAAP Results — U.S. Life (September 2014) Insurance (May 2014) Reinsurance’s RBC ratio was 365% at year-end 2013, up slightly from 360% at year-end 2012. Latin American Reinsurance 2014 Outlook: U.S. Life Insurance (September(Improved 2014)Credit Fundamentals) Macroeconomic Uncertainty: Uncertain monetary policy and ongoing discord among Reinsurer(December Mergers 2013) and Acquisitions government officials pose risks to the economy and credit outlook, and could have a material (August 2014) negative effect on RGA’s earnings and capital in a severe, albeit unexpected, scenario. Global Reinsurers’ Mid-Year 2014 Financial Results (August 2014) AsianRelated Reinsurance Criteria Markets Rating Sensitivities (AugustInsurance 2014) Rating Methodology (November 2013) Downgrade Triggers: Key rating triggers that could result in a downgrade include Related Criteria deterioration in the Asia Pacific segment or a loss in another segment that prevents a recovery Insurance Rating Methodology in GAAP earnings to 2012 levels within the next 12–18 months; GAAP interest coverage (September 2014) maintained below 7x; RBC of RGA Reinsurance dropping well below 300% on a sustained basis; holding company financial leverage above 30%; TFC maintained well above 1x; and Analysts GAAP asset leverage of 10x or higher. Tana M. Higman +1 312 368-3122 Upgrade Triggers: Key rating triggers that could result in an upgrade include RBC of RGA [email protected] Reinsurance of 400% or more on a sustained basis; financial leverage (excluding collateral Douglas L. Meyer, CFA financing) maintained in the 15% range; a TFC ratio of 0.6x or below on a sustained basis; +1 312 368-2061 [email protected] GAAP interest coverage of 10x or more; and GAAP asset leverage below 6x. www.fitchratings.com August 14, 2014

The ratings above were unsolicited and have been provided by Fitch as a service to investors. The issuer did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.

57 Global Reinsurance Guide 2015 Insurance ReinsurersInsurance/ Bermuda RenaissanceRe Holdings Ltd. And Subsidiaries Reinsurers / Bermuda RenaissanceReUpdate Holdings Ltd. And Subsidiaries Key Rating Drivers RatingsUpdate Long-Term Issuer Default Rating A Competitive Position Remains Strong: RenaissanceRe Holdings Ltd. (RNR) has a Senior Unsecured Notes A− leadership position in the property catastrophe reinsurance market derived largely from the Preferred Stock BBB company’Key Ratings ability Drivers to provide consistent capacity in the marketplace and technical proficiency in Ratings RenRe North America Holdings Inc. underwriting and pricing catastrophe-related risks. Fitch Ratings views RNR’s property Long-Term Issuer Default Rating A Competitive Position Remains Strong: RenaissanceRe Holdings Ltd. (RNR) has a Senior Unsecured Notes A− Senior Unsecured Notes A− catastropheleadership position underwriters in the as property having acatastrophe demonstrated reinsurance record of succemarketss. derived largely from the Renaissance Reinsurance Ltd. Preferred Stock BBB company’s ability to provide consistent capacity in the marketplace and technical proficiency in Insurer Financial Strength A+ Pricing Under Pressure: RNR’s ratings reflect Fitch’s negative sector outlook on global RenRe North America Holdings Inc. underwriting and pricing catastrophe-related risks. Fitch Ratings views RNR’s property Rating Outlooks reinsurance. The sector’s fundamentals have deteriorated, with declining premium pricing and Senior Unsecured Notes A− catastrophe underwriters as having a demonstrated record of success. RenaissanceLong-Term Issuer Reinsurance Default RatingLtd. Stable weakening of terms and conditions — particularly for property catastrophe risk, RNR’s core line Insurer Financial Strength StableA+ ofPricing business Under, with Pressure:approximatelyRNR 72%’s ratings of gross reflect premiums Fitch’ swritten negative in 2013. sector RNR outlook has respondedon global byreinsurance reducing .itsThe risksector’s exposure. fundamentals Fitch expects have RNR deteriorated to maintain, with its declininghistorically premium strong underwriting pricing and FinancialRating Outlook Data s Long-Term Issuer Default Rating Stable disciplineweakening should of terms market and conditions continue— particularlyto deteriorate. for property catastrophe risk, RNR’s core line RenaissanceRe Holdings Ltd. Insurer Financial Strength Stable of business, with approximately 72% of gross premiums written in 2013. RNR has responded ($ Mil.) 12/31/13 6/30/14 Profitable, but Volatile, Underwriting Results: Fitch views RNR’s year-to-year underwriting Total Equity and Minority by reducing its risk exposure. Fitch expects RNR to maintain its historically strong underwriting FinancialInterest Data 5,004 4,860 profitability as volatile, but the effect of this volatility on the company’s ratings is mitigated discipline should market conditions continue to deteriorate. RenaissanceReTotal Debt Holdings Ltd.249 249 somewhat by low average combined ratios over extended periods. This is an important factor Total Assets 8,179 8,516 ($ Mil.) 12/31/13 6/30/14 Operating Revenue 1,345 633 supportingProfitable, thebut company Volatile’,s Underwritingratings and is evidenceResults: ofFitch RNR’s views underwriting RNR’s year expertise.-to-year underwriting Total Equity and Minority InterestNet Income 5,004666 4,860272 profitability as volatile, but the effect of this volatility on the company’s ratings is mitigated Combined Ratio (%) 43.8 54.1 Favorable 10-Year Underwriting Results: RNR’s average GAAP calendar-year combined Total Debt 249 249 somewhat by low average combined ratios over extended periods. This is an important factor TotalROAE Assets (%) 8,17920.1 8,51615.7 ratio over the most recent 10-year period (2004–2013) was favorable, though volatile, at 74.8%, supporting the company’s ratings and is evidence of RNR’s underwriting expertise. Source:Operating RenaissanceR Revenue e Holdings1,345 Ltd. 633 with a standard deviation of 34.4%. The average combined ratio for the catastrophe Net Income 666 272 Combined Ratio (%) 43.8 54.1 reinsuranceFavorable 10segment-Year Underwritingwas 69.9% with Results: a standardRNR deviation’s average of 60.1%. GAAP calendar-year combined RelatedROAE (%) Research 20.1 15.7 ratio over the most recent 10-year period (2004–2013) was favorable, though volatile, at 74.8%, Reasonable Leverage and Capitalization: RNR uses a reasonable amount of operating Source:FitchRelated Affirms RenaissanceR Research RenaissanceRe’se Holdings Ratings; Ltd. Outlook Stable (August 2014) with a standard deviation of 34.4%. The average combined ratio for the catastrophe 2015 Outlook: Global Reinsurance leverage, with a ratio of net premiums written to shareholders’ equity of 0.2x−0.3x in recent Global Reinsurers’ 2013 Financial reinsurance segment was 69.9% with a standard deviation of 60.1%. (September 2014) periods. RNR’s financial leverage ratio is very modest at 8.8% as of June 30, 2014. RNR’s RelatedResults (April Research 2014) Alternative Reinsurance 2014 Market Update FitchBermuda Affirms 2014RenaissanceRe’s Market Ratings;Update GAAPReasonable operating Leverage earnings and-based Capitalization: interest and RNRpreferusesred dividenda reasonab coveragele amount has beenof operating strong, (September 2014) Outlook(January Stable 2014) (August 2014) leverageaveraging, with11.1x a fromratio 2009 of netto premiums2013, with written16.6x in to first shareholders-half 2014. ’ equity of 0.2x−0.3x in recent Global Reinsurance’s Shifting Landscape 2014 Outlook: U.S. Property/Casualty Global Reinsurers’ 2013 Financial periods. RNR’s financial leverage ratio is very modest at 8.8% as of June 30, 2014. RNR’s ResultsInsurance(September (April (December 2014) 2014) 2013) Latin American Reinsurance BermudaAlternative Reinsurance2014 Market 2013 UpdateMarket GAAPRating operating Sensitivities earnings-based interest and preferred dividend coverage has been strong, (JanuaryUpdate(September (Convergence2014) 2014) Here to Stay) (September 2013) averaging 11.1x from 2009 to 2013, with 16.6x in first-half 2014. 2014Reinsurer Outlook: MergersU.S. andProperty/Casualty Acquisitions Downgrade Triggers: Key rating triggers that could lead to a downgrade include continued Insurance2014(August Outlook: 2014) (December Global 2013) Reinsurance (August 2013) deterioration in market conditions that impairs RNR’s leading position in the property Global Reinsurers’ Mid-Year 2014 Financial Alternative Reinsurance 2013 Market Ratingcatastrophe Sensitivities reinsurance market and results in a weakening of RNR's historically strong UpdateResults (August(Convergence 2014) Here to Stay) (September 2013) RelatedAsian Reinsurance Criteria Markets Downgradeprofitability, as Triggers: demonstratedKey ratingby sustained triggers combined that could ratios lead aboveto a downgrade 80% and returns include on continued common 2014(August Outlook: 2014) Global Reinsurance equity below 13%. Others include material weakening in balance sheet strength, as measured Insurance(August 2013) Rating Methodology deterioration in market conditions that impairs RNR’s leading position in the property (November 2013) catastropheby net premiums reinsurance written tomarket shareholders and result’ equitys in above a weakening 0.5x or equity of RNR's-credit historicallyadjusted financial strong Related Criteria profitability,leverage above as demonstrated 25%; or a catastrophe by sustained event combined loss that ratios is 25% above or more 80% of and shareholders returns on’ equity.common RelatedInsurance RatingCriteria Methodology equity below 13%. Others include material weakening in balance sheet strength, as measured AnalystsInsurance(September 2014)Rating Methodology Upgrade Triggers: Fitch considers a rating upgrade unlikely in the near term due to the Brian(November C. Schneider, 2013) CPA, CPCU, ARe by net premiums written to shareholders’ equity above 0.5x or equity-credit adjusted financial +1 312 606-2321 earnings and capital volatility inherent in the company’s property catastrophe reinsurance focus. leverage above 25%; or a catastrophe event loss that is 25% or more of shareholders’ equity. [email protected] Key rating triggers that could lead to an upgrade over the long term include continued favorable GregoryAnalysts W. Dickerson underwritingUpgrade Triggers: results relativeFitch considers to other aproperty rating upgradecatastrophe unlikely reinsurers in the andnear comparablyterm due torated the +1Brian 212 C. 908 Schneider,-0220 CPA, CPCU, ARe [email protected]+1 312 606-2321 property/casualtyearnings and capital (re)insurer volatility inherentpeers; improvement in the company in ’RNRs property’s competitive catastrophe position reinsurance in profitable focus. [email protected] marketKey rating segments triggers thatoutside could leadof property to an upgrade catastrophe over the reinlongsurance, term include including continued its favorablespecialty Gregory W. Dickerson reinsuranceunderwriting andresults Lloyd's relativeof London to otherbusiness property; and catastrophe material risk reinsurers-adjusted capitaland comparably growth. rated +1 212 908-0220 [email protected] property/casualty (re)insurer peers; improvement in RNR’s competitive position in profitable www.fitchratings.com market segments outside of property catastrophe reinsurance, includingAugust its 12,specialty 2014 reinsurance and Lloyd's of London business; and material risk-adjusted capital growth. www.fitchratings.com August 12, 2014

The ratings above were unsolicited and have been provided by Fitch as a service to investors.

Global Reinsurance Guide 2015 58 Insurance

France

SCOR S.E. Full Rating Report InsuranceInsurance

Ratings Key Rating Drivers France Insurer Financial Strength Rating A+

Long-Term Foreign-Currency IDR A+ Solid Risk Profile: SCOR S.E.‟s ratings reflect the group‟s strong solvency and good financial Senior Unsecured Debt A+ Junior Subordinated Debt A- leverage in relation to its risk profile. SCOR benefits from significant business and risk SCOR S.E. See Appendix C for additional ratings diversification. The ratings also take into account the group‟s consistent and comprehensive FullUpdate Rating Report strategy, solid business position and strong profitability. Outlooks Consistent Strategy: SCOR‟s management team has implemented a consistent strategy Insurer Financial Strength Rating Positive Ratings Long-Term Foreign-Currency IDR Positive sinceKey Rating2002. Thanks Drivers to both internal and external growth, the group‟s activities are well Insurer Financial Strength Rating A+ balanced between life and non-life reinsurance, and within each of these business lines. This Long-Term Foreign-Currency IDR A+ Solid Risk Profile: SCOR S.E.‟s ratings reflect the group‟s strong solvency and good financial FinancialSenior Unsecured Data Debt A+ brings considerable diversification, with a favourable impact on the group‟s risk profile. In Junior Subordinated Debt A- leverageaddition, SCOR‟sin relation integration to its riskof acquired profile. operationsSCOR benefits has been from well significant managed business and continues and risk to SCOR S.E. diversification. The ratings also take into account the group‟s consistent and comprehensive See Appendix C for additional 31ratings Dec 31 Dec deliver synergies. (EURm) 12 13 strategy, solid business position and strong profitability. OutlooksNet earned premiums 8,399 9,066 Strong Solvency: SCOR‟s capital position has strengthened in the past five years and its 22% Total assets 31,268 33,021 financialConsistent leverage Strategy: ratio SCOR‟sis in line management with current team rating hass. However,implemented the aTotal consistent Financing strategy and NetInsurer income Financial Strength Rating 418 Positive549 AdjustedLong-Term equity Foreign -Currency IDR4,8 10 Positive4,980 Commitmentssince 2002. Thanks (TFC) toratio, both a internalcomprehensive and external measure growth, of debtthe -relatedgroup‟s leverageactivities includingare well

essentiallybalanced between all financing life and activities non-life remains reinsurance, above andaverage within at each1.0x. ofSCOR‟s these businesscapital adequacy lines. This is Financial Data expectedbrings consi to stabilisederable atdiversification, its current strong with levela favourable or improve impact, as future on theretained group‟s earnings risk profile. are likely In SCOR S.E. toaddition, compensate SCOR‟s for integrationincreased capitalof acquired requirements operations, largely has beenrelating well to managedorganic growth. and continues to 31 Dec 31 Dec deliver synergies. (EURm) 12 13 Improved Business Position: Fitch considers that SCOR‟s business position has improved as Net earned premiums 8,399 9,066 aStrong result Solvencyof the integr: SCOR‟sation ofcapital acquired position operations has strengthened and organic in thegrowth past. fiveThis years is based and itson 22% the Total assets 31,268 33,021 financial leverage ratio is in line with current ratings. However, the Total Financing and Net income 418 549 group‟s solid financial strength and its ability to offer reinsurance solutions in selected countries Adjusted equity 4,810 4,980 andCommitments business lines.(TFC) Inratio, line awith comprehensive its risk appetite measure framework, of debt Fitch-related expects leverage the grouincludingp to

strengthenessentially allits financingbusiness positionactivities in remains areas whereabove it average can apply at 1.0x.its expertise SCOR‟s in capital addition adequacy to its risk is- takingexpected capacity. to stabilise at its current strong level or improve, as future retained earnings are likely to compensate for increased capital requirements, largely relating to organic growth. Related Research Improving Profitability: SCOR‟s profitability has improved over recent years. However, 2015 Outlook: Global Reinsurance cImprovedompetitive Business underwriting Position conditions: Fitch considers in a number that SCOR‟s of business business linesposition and has exposure improved asto (September 2014) catastrophesa result of the could integr challengeation of theacquired group‟s operations ability to achieveand organic significant growth earnings. This is improvement based on the in Alternative Reinsurance 2014 Market Update group‟s solid financial strength and its ability to offer reinsurance solutions in selected countries (September 2014) the short and medium term. In addition, low interest rates continue to depress investment Global Reinsurance’s Shifting Landscape returnsand business. lines. In line with its risk appetite framework, Fitch expects the group to (September 2014) strengthen its business position in areas where it can apply its expertise in addition to its risk- Latin American Reinsurance takingRating capacity. Sensitivities (September 2014) Reinsurer Mergers and Acquisitions ImprovingStrengthened Profitability Profitability: SCOR‟s: A rating profitability upgrade could has beimproved triggered over by a sustainedrecent years track. However,record of (August 2014) cprofitability,ompetitive demonstratedunderwriting byconditions a combined in ratioa number and fixed of charge business coverage lines ratioand consistent exposure with to Global Reinsurers’ Mid-Year 2014 Financial levels reported at end-2013. Results (August 2014) catastrophes could challenge the group‟s ability to achieve significant earnings improvement in Asian Reinsurance Markets the Very short Strong and Capitalmedium Adequacy:term. In addition, Alternatively, low interest an upgrade rates continuecould result to depressfrom maintaining investment a (August 2014) returnsfinal Prism. Factor-Based Model score consistent with a „AA‟ category rating, or from the TFC Related Criteria Ratingratio falling Sensitivities below 0.8x. Insurance Rating Methodology Related Research (September 2014) Strengthened Profitability: A rating upgrade could be triggered by a sustained track record of 2014 Outlook: Global Reinsurance (August 2013) profitability, demonstrated by a combined ratio and fixed charge coverage ratio consistent with levels reported at end-2013. Analysts Very Strong Capital Adequacy: Alternatively, an upgrade could result from maintaining a Marc-Philippe Juilliard +33 1 44 29 91 37 final Prism Factor-Based Model score consistent with a „AA‟ category rating, or from the TFC [email protected] ratio falling below 0.8x.

RelatedMartyn Street Research +44 20 3530 1211 [email protected] Outlook: Global Reinsurance (August 2013) www.fitchratings.com 1 September 2014 Analysts Marc-Philippe Juilliard +33 1 44 29 91 37 [email protected]

Martyn Street +44 20 3530 1211 [email protected]

www.fitchratings.com 1 September 2014

The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

59 Global Reinsurance Guide 2015 Insurance

Switzerland

Swiss Reinsurance Company Ltd Full Rating Report Insurance Ratings Insurer Financial Strength Rating A+ Key Rating Drivers Long-Term Foreign-Currency IDR A+ Switzerland Improving Leverage Profile: The continued run-off of Swiss Re’s credit derivatives portfolio Senior unsecured debt A+ and a reduction in operational debt, both served to improve the reinsurer’s leverage profile. Subordinated debt A− Fitch’s total financing and commitments (TFC) ratio reduced to 0.8x at 1H14 (1H13: 1.3x), SwissOutlooks Reinsurancewhich Company falls within an acceptable Ltd range for the reinsurer’s financial profile. The TFC ratio FullUpdateInsurer RatingFinancial Strength Report Rating Positive captures most forms of financial commitments, including financial debt, operational debt, Long-Term Foreign-Currency IDR Positive securitisations, certain derivative exposures and other debt-like commitments.

FinancialRatings Data Capitalisation Very Strong: Fitch views capitalisation as being very strong, despite a marginal Key Rating Drivers SwissInsurer FinancialReinsurance Strength Company Rating A+ Ltd decrease in coverage following the expiry of the 20% retrocession quota share agreement at Long-Term Foreign-Currency IDR A+ 31 Dec 31 Dec theImproving end of Leverage 2012. As Profile: a consequence, The continued Swiss run-off Re’s riskof Swiss exposure Re’s tocredit single derivati loss ves events portfolio has USD (bn) 13 12 Senior unsecured debt A+ andincreased a reduction although in the operational agency considers debt, both this served to rem toain improve within acceptable the reinsurer’s bounds. leverage profile. TotalSubordinated assets debt 213.5 A− 221.5 Total equity 33.0 34.0 Fitch’sImproving total Earnings financing andConsistency: commitments Swiss (TFC) Re ratio earnings reduced generation to 0.8x is at expected 1H14 (1H13: to remain 1.3x), Pre-tax profit 4.8 5.5 which falls within an acceptable range for the reinsurer’s financial profile. The TFC ratio OutlooksNet income 4.2 4.4 strong despite the current headwinds faced within certain parts of the reinsurance market. The InsurerCombined Financial ratio – StrengthP&C Rating83.3 Positive80.7 captures most forms of financial commitments, including financial debt, operational debt, RI (%) property and casualty (P&C) reinsurance segment is expected to remain as the core earnings Long-Term Foreign-Currency IDR Positive securitisations, certain derivative exposures and other debt-like commitments. Return on equity (%) 13.7 13.4 generator with the product diversity and strong franchise presence within the P&C reinsurance

Financial Data Capitalisationsegment being viewedVery Strong: favourably. Fitch views capitalisation as being very strong, despite a marginal Swiss Reinsurance Company Ltd decreaseP&C Reinsurance in coverage Portfolio following Rebalanced: the expiry ofThe the weight 20% retrocessionof casualty businessquota share within agreement Swiss Re’s at 31 Dec 31 Dec thereinsurance end of 2012.portfolio As continues a consequence, to grow, Swisspartly dri Re’sven risk by the exposure changing to singleattractiveness loss events between has USD (bn) 13 12 increasedmargins for although property the and agency casualty considers lines. this Fitch to rem expeaincts within continued acceptable earnings bounds. strain created by Total assets 213.5 221.5 Total equity 33.0 34.0 Improvingdeclining property Earnings premium Consistency: rates in mature Swiss Repeak-zon earningse geographies generation to is be expected partially to offset remain by Pre-tax profit 4.8 5.5 Net income 4.2 4.4 stronghigher margindespite businessthe current written headwinds in emerging faced market within ccertainountries. parts of the reinsurance market. The Combined ratio – P&C 83.3 80.7 RI (%) Resolutionproperty and of casualty YRT Business: (P&C) reinsurance Improvement segment in the is performanceexpected to remainof the lifeas theand corehea lthearnings (L&H) Return on equity (%) 13.7 13.4 generator with the product diversity and strong franchise presence within the P&C reinsurance segment continues, with the reinsurer committed to meeting a 10-12% ROE target for 2015. Rebalancingsegment being of viewedthe L&H favourably. investment portfolio is at an advanced stage, seeing a marginal rise in Related Research P&Crisk assets.Reinsurance Fitch continues Portfolio toRebalanced: closely monitor The proweightgress of incasualty improving business the performance within Swiss of Re’s the 2015 Outlook: Global Reinsurance reinsurancelegacy US term portfolio book, continues especially to with grow, regard partly to yearldriveny renewableby the changing term (YRT) attractiveness policies. Abetween charge (September 2014) of USD500m during 2014 is expected although the final cost and timing remain uncertain. Alternative Reinsurance 2014 Market Update margins for property and casualty lines. Fitch expects continued earnings strain created by (September 2014) Moderatedeclining property Investment premium Risk: rates Fitch in considers mature peak-zon Swiss Re’se geographies investment to portfolio be partially to b e offset of high by Global Reinsurance’s Shifting Landscape higher margin business written in emerging market countries. (September 2014) quality and moderately low risk. The portfolio weighting of corporate bonds and equities has Latin American Reinsurance increasedResolution at ofthe YRT expense Business: of government Improvement bonds. in Overathe performancell, the risk profile of the of life the and portfolio health remains (L&H) (September 2014) withinsegment rating continues, tolerances with the and reinsurer has been committed significantly to meeting reduced a 10-12% since 2008, ROE target when for sizeable 2015. Reinsurer Mergers and Acquisitions exposureRebalancing to bothof the structured L&H investment mortgage- portfolio and asset-bacis at an advancedked securities stage, causedseeing amajor marginal volatility rise in (August 2014) Global Reinsurers’ Mid-Year 2014 Financial therisk reinsurer’s assets. Fitch reported continues results. to closely monitor progress in improving the performance of the Results (August 2014) legacyRating US Sensitivities term book, especially with regard to yearly renewable term (YRT) policies. A charge Asian Reinsurance Markets of USD500m during 2014 is expected although the final cost and timing remain uncertain. (August 2014) Upgrade: The key rating drivers that could result in an upgrade include: maintenance of TFC Moderate Investment Risk: Fitch considers Swiss Re’s investment portfolio to be of high Related CriteriaResearch ratio below 0.8x, with other credit metrics remaining close to current levels; reduced financial Global Reinsurance Guide 2014 quality and moderately low risk. The portfolio weighting of corporate bonds and equities has leverage under 25%; and maintenance of Swiss solvency test (SST) capitalisation above Insurance(September Rating 2013) Methodology (September 2014) increased at the expense of government bonds. Overall, the risk profile of the portfolio remains German Flood Claims May Hit EUR3bn; 200%. Credit Impact Limited (June 2013) within rating tolerances and has been significantly reduced since 2008, when sizeable exposureDowngrade: to both The structured key rating mortgage- drivers thatand couldasset-bac resultked in securities a downgrade caused include: major volatility a marked in Analysts theincrease reinsurer’s in the reportedTFC ratio results. above 2.0x; increased financial leverage above 35%; deterioration in Martyn Street +44 20 3530 1211 SST capitalisation below 175%, for example due to large losses eroding capital, excessive [email protected] growth;Rating weaker Sensitivities underwriting profitability relative to similarly rated peers.

Brian Schneider Upgrade: The key rating drivers that could result in an upgrade include: maintenance of TFC +1 212 606 2321 [email protected] Research ratio below 0.8x, with other credit metrics remaining close to current levels; reduced financial

Global Reinsurance Guide 2014 leverage under 25%; and maintenance of Swiss solvency test (SST) capitalisation above (September 2013) www.fitchratings.com 21 August 2014 German Flood Claims May Hit EUR3bn; 200%. Credit Impact Limited (June 2013) Downgrade: The key rating drivers that could result in a downgrade include: a marked Analysts increase in the TFC ratio above 2.0x; increased financial leverage above 35%; deterioration in Martyn Street +44 20 3530 1211 SST capitalisation below 175%, for example due to large losses eroding capital, excessive [email protected] growth; weaker underwriting profitability relative to similarly rated peers.

Brian Schneider +1 212 606 2321 [email protected]

www.fitchratings.com 21 August 2014 The ratings above were unsolicited and have been provided by Fitch as a service to investors. The issuer did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.

Global Reinsurance Guide 2015 60 InsuranceInsurance Insurance Reinsurers/Bermuda Validus Holdings, Ltd. Reinsurers/Bermuda ValidusAnd Validus Holdings, Reinsurance Ltd. Ltd. Update And Validus Reinsurance Ltd. Update Key Rating Drivers Ratings KeyOperating Rating Performance Drivers Is Strong: Validus Holdings, Ltd.’s (Validus) ratings reflect its solid Security Class Rating operating performance and internal capital generation since its inception in late 2005. Validus RatingsLong-Term Issuer Default Rating A– Operating Performance Is Strong: Validus Holdings, Ltd.’s (Validus) ratings reflect its solid Sr. Unsecured Notes BBB+ reported $316 million of net earnings in the first half of 2014, fueled by a strong combined ratio Security Class Rating operating performance and internal capital generation since its inception in late 2005. Validus LongJunior-Term Subordinated Issuer Default Debt Rating ABBB– – of 68.5% that benefited from the absence of large catastrophe events. Sr. Unsecured Notes BBB+ reported $316 million of net earnings in the first half of 2014, fueled by a strong combined ratio Validus Reinsurance Ltd. Negative Sector Outlook: Validus’ ratings also reflect Fitch's negative sector outlook on JuniorInsurer Subordinated Financial Strength Debt BBBA – of 68.5% that benefited from the absence of large catastrophe events. global reinsurance, as the fundamentals of the reinsurance sector have deteriorated with Validus Reinsurance Ltd. Negativedeclining premiumSector Outlook:pricing andValidus’ weakening ratings of terms also andreflect conditions. Fitch's negative This has sector been outlookparticularly on InsurerRating Financial Outlook Strength A globalthe case reinsurance, for property as thecatastrop fundamentalshe risk, ofValidus’ the reinsurance largest individual sector haveline ofdeteriorated business withthat Stable declining premium pricing and weakening of terms and conditions. This has been particularly Rating Outlook represented approximately one third of total company gross premiums written in 2013. the case for property catastrophe risk, Validus’ largest individual line of business that StableFinancial Data representedRatings Recognize approximately Potential one thirdVolatility: of totalValidus company’ ratings gross considerpremiums its writtensignificant in 2013. exposure to Validus Holdings, Ltd. earnings and capital volatility derived from its property catastrophe reinsurance products. Fitch Financial Data ($ Mil.) 2013 1H14 Ratingsbelieves Recognizethat Validus Potential uses sound Volatility: risk managementValidus’ ratings processes consider to itsmanagesignificant its exposure to ValidusNet Income Holdings, Available Ltd. to earningspotential catastropheand capital volatility-related lossesderived by from geographic its property zone catastrophe and relative reinsurance to its capital products base. . Fitch Common Shareholders 533 316 ($ Mil.) 2013 1H14 believes that Validus uses sound risk management processes to manage its exposure to Annualized Return on NetAvg. Income Equity Available(%) to 13.8 16.7 potentialCapitalization catastrophe Is Solid:-relatedFitch losses views by capitalizationgeographic zone as strongand relative for the to itscurrent capital rating base category,. Common Shareholders 533 316 Total Debt (Par) 790 790 when measured by operating and asset leverage ratios and the company’s publicly disclosed Annualized Return on Total Capital 5,077 5,207 Avg. Equity (%) 13.8 16.7 Capitalizationmodeled catastrophe Is Solid: lossesFitch. Fitch views believes capitalization that Validus as strong’ capitalizat for theion current provides rating protection category, for Combined Ratio (%) 71.2 68.5 Total Debt (Par) 790 790 whenthe underwriting measured andby operating investment and risks asset the leveragecompany ratios faces.and the company’s publicly disclosed TotalSource: Capital Company data, Fitch.5,077 5,207 modeled catastrophe losses. Fitch believes that Validus’ capitalization provides protection for Combined Ratio (%) 71.2 68.5 theSolid underwriting Market Position and investment: Through risks strategic the company acquisitions faces. and organic growth, Validus has grown Source:Related Company Research data, Fitch. quickly into one of the largest providers of catastrophe and other short-tail reinsurance. Validus is Related Research Solid Market Position: Through strategic acquisitions and organic growth, Validus has grown 2015 Outlook: Global Reinsurance larger than many competitors that focus on catastrophe reinsurance but is significantly smaller RelatedFitch Affirms Research Validus’ Ratings; quickly into one of the largest providers of catastrophe and other short-tail reinsurance. Validus is (SeptemberOutlook Stable 2014) (August 2014) than many global competitors in reinsurance and primary insurance markets. Alternative Reinsurance 2014 Market Update larger than many competitors that focus on catastrophe reinsurance but is significantly smaller FitchGlobal AffirmsReinsurers’ Validus’ 2013 Ratings;Financial (September 2014) OutlookResults (April Stable 2014) (August 2014) thanRating many Sensitivities global competitors in reinsurance and primary insurance markets. GlobalValidus Reinsurance’s Holdings, Ltd. Shifting(March 2014)Landscape (SeptemberGlobal Reinsurers’ 2014) 2013 Financial ResultsBermuda (April 2014 2014) Market Update WeakerPerformance/Capital Strength: A downgrade could occur if net premiums written-to- Latin American Reinsurance Rating Sensitivities Validus(January Holdings, 2014) Ltd. (March 2014) (September 2014) equity ratios increased to levels at or above 0.8x from current levels of 0.5x. An increase in Bermuda2014 Outlook: 2014 GlobalMarket Reinsurers Update Reinsurer Mergers and Acquisitions WeakerPerformance/Capital Strength: A downgrade could occur if net premiums written-to- (January(August 2013) 2014) Validus’ 1-100- and 1-250-year per event catastrophe probable maximum loss to 30% (August 2014) equity ratios increased to levels at or above 0.8x from current levels of 0.5x. An increase in Reinsurance (Global) — Sector (currently 17%) and 40% (currently 23%) of equity, respectively, could result in a downgrade. Global2014 Outlook: Reinsurers’ Global Mid-Year Reinsurers 2014 Financial (AugustCredit Factors 2013) (August 2013) Validus’ 1-100- and 1-250-year per event catastrophe probable maximum loss to 30% Results (August 2014) Deteriorating Market Conditions: ontinued deterioration in market conditions in Validus’ Reinsurance (Global) — Sector (currently 17%) and 40% (currently 23%)C of equity, respectively, could result in a downgrade. Asian Reinsurance Markets core business lines that impair the company’s ability to sustain its historically strong profitability (AugustCredit Factors2014) (August 2013) Deterioratingcould lead to a Marketdowngrade Conditions:. Specifically,Continued failure to deterioration maintain a multi in market-year average conditions combined in Validus’ ratio Related Criteria coreof 90% business or better, lines could that result impair in athe ratings company’s downgrade. ability to sustain its historically strong profitability Insurance Rating Methodology could lead to a downgrade. Specifically, failure to maintain a multi-year average combined ratio (September 2014) ofCatastrophe 90% or better, Losses could resultExceed in aExpectations ratings downgrade.: Fitch could downgrade the company’s ratings if Validus were to suffer catastrophe losses that were unfavorably inconsistent with its own Analysts Catastrophe Losses Exceed Expectations: Fitch could downgrade the company’s ratings if Gregory W. Dickerson internally modeled results or that resulted in earnings and/or capital declines that were +1 212 908-0220 Validussignificantly wer eworse to suffer than comparablycatastrophe rated losses peers. that were unfavorably inconsistent with its own [email protected] Gregory W. Dickerson internally modeled results or that resulted in earnings and/or capital declines that were +1Brian 212 Schneider, 908-0220 CPA, CPCU, ARe significantlySustained Strongworse than Results: comparablyKey rating rated triggers peers. that could generate longer term positive rating [email protected]+1 312 606-2321 [email protected] pressure include a prolonged period when Validus outperformed comparably rated peers with Brian Schneider, CPA, CPCU, ARe Sustainedrespect to Strongunderwriting Results: performanceKey rating and triggers overall that profitability, could generate continued longer strongterm positive risk-adjusted rating +1 312 606-2321 [email protected] pressurecapitalization include metrics a prolonged and enhanced period competitive when Validus positioning outperformed and scale comparably in the key rated product peers lines. with respect to underwriting performance and overall profitability, continued strong risk-adjusted capitalization metrics and enhanced competitive positioning and scale in the key product lines.

The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

61 Global Reinsurance Guide 2015 Insurance

Property/Casualty Insurers/Bermuda and U.S. XL Group plc And Subsidiaries Update Insurance Ratings Key Rating Drivers XLIT Ltd. Long-Term Issuer Default Rating (IDR) A- Improved Net Earnings: XL Group plc (XL) posted a net loss of $24 million through the first six Senior Unsecured Notes BBB+ months of 2014, as favorable underwritingProperty/Casualty results were offs etInsurers/Bermuda by a $621 million loss andon the U.S. sale Preferred Stock BBB- of its runoff life reinsurance business. This follows net income of $1.1 billion in 2013 and $651 XL Insurance (Bermuda) Ltd. million in 2012. XL recorded a net loss of $475 million in 2011, which included $761 million of XL Re Ltd Group. plc catastrophe losses and a $429 million goodwill impairment charge in the insurance segment. AndXL Re EuropeSub SEsidiaries XL Re Latin America Ltd. Underwriting Results Favorable: XL’s core property/casualty operations posted a favorable six UpdateXL Insurance Switzerland Ltd. XL Reinsurance America Inc. -month 2014 GAAP combined ratio of 89.0%, which included 1.9 percentage points for XL Insurance Company SE catastrophe losses and 4.4 points of favorable prior year reserve development. This Ratings XL Insurance Company of underwritingKey Rating performance Drivers compares favorably with 92.5% for full-year 2013, which included 5.3 XLITNew Ltd.York, Inc. XL Group plc (XL) posted a net loss of $24 million through the first six XLLong Specialty-Term Issuer Insurance Default Co. Rating (IDR) A- pointsImproved for catastropheNet Earnings: losses and 4.8 points of favorable prior year reserve development. IndianSenior UnsecuredHarbor Insurance Notes Co. BBB+ months of 2014, as favorable underwriting results were offset by a $621 million loss on the sale Insurance Segment Turnaround: XL’s insurance segment, in particular, has demonstrated GreenwichPreferred Stock Insurance Co. BBB- of its runoff life reinsurance business. This follows net income of $1.1 billion in 2013 and $651 XL Insurance (Bermuda)America, Inc. Ltd. meaningful improvement, with an accident year combined ratio, excluding catastrophes, of million in 2012. XL recorded a net loss of $475 million in 2011, which included $761 million of XL SelectRe Ltd .Insurance Co. 95.3% in the first six months of 2014, compared with 96.7% in full-year 2013, 98.5% in 2012 InsurerXL Re Europe Financial SE Strength A+ catastrophe losses and a $429 million goodwill impairment charge in the insurance segment. and a sizable 104.2% in 2011. This favorable performance is due in part to underwriting actions RatingXL Re Latin Outlook America Ltd. Underwriting Results Favorable: XL’s core property/casualty operations posted a favorable six XL Insurance Switzerland Ltd. taken by the company over the last several years to improve the margins in its poorer Long-Term Issuer Default Rating Positive XL Reinsurance America Inc. -month 2014 GAAP combined ratio of 89.0%, which included 1.9 percentage points for Insurer Financial Strength Stable performing insurance businesses. XL Insurance Company SE catastrophe losses and 4.4 points of favorable prior year reserve development. This XL Insurance Company of Improvingunderwriting Earnings performance-Based compares Interest favorably Coverage with: XL’s92.5 %operating for full-year earnings 2013,- basedwhich includedinterest and5.3 FinancialNew York, Inc. Data preferred dividend coverage has been weak in recent years, averaging a low 4.4x from XL GroupSpecialty plc Insurance Co. points for catastrophe losses and 4.8 points of favorable prior year reserve development. − ($Indian Mil.) Harbor Insurance12 Co./31/13 6/30/14 2009 2013. However, earnings coverage improved to more historic levels at 6.0x both through Insurance Segment Turnaround: XL’s insurance segment, in particular, has demonstrated TotalGreenwich Shareholders’ Insurance Co. the first half of 2014 and in 2013, with low catastrophe losses and reduced interest costs. XLEquity Insurance America, Inc.11,349 11,409 meaningful improvement, with an accident year combined ratio, excluding catastrophes, of Reasonable Financial Leverage: XL maintains a modest financial leverage ratio of 17.7% at XLTotal Select Debt Insurance Co. 2,263 2,262 95.3% in the first six months of 2014, compared with 96.7% in full-year 2013, 98.5% in 2012 InsurerTotal Assets Financial Strength 45,653 48,162A+ June 30, 2014 and 16.9% at Dec. 31, 2013, with debt plus preferred equity to total capital of Operating Revenue 7,446 3,524 and a sizable 104.2% in 2011. This favorable performance is due in part to underwriting actions 26.4% at June 30, 2014, in line with 26.5% at Dec. 31, 2013. XL’s capital position has remained NetRating Income Outlook 1,060 (24) taken by the company over the last several years to improve the margins in its poorer CombinedLong-Term Ratio Issuer (%) Default Rating92.5 Positive89.0 stable, with shareholders’ equity of $11.4 billion at June 30, 2014, up slightly from $11.3 billion at Insurer Financial Strength Stable performing insurance businesses. ROAE (%) 10.3 (0.5) Dec. 31, 2013, as a net loss and share repurchases were offset by unrealized investment gains. Source: XL Group plc. Improving Earnings-Based Interest Coverage: XL’s operating earnings-based interest and Financial Data Related Research preferredRating Sensitivitiesdividend coverage has been weak in recent years, averaging a low 4.4x from XLRelated Group plcResearch 2009−2013. However, earnings coverage improved to more historic levels at 6.0x both through ($2015 Mil.) Outlook: Global Reinsurance12/31/13 6/30/14 Upgrade Triggers: The key rating trigger that could result in a near term upgrade to XL’s IDR Total(September Shareholders’ 2014) theand first debt half ratings of 201 includes4 and in operating2013, with-earnings low catastrophe-based interest losses and reducedpreferred interest dividend costs. coverage EquityAlternative Reinsurance 201411,349 Market 11,409Update Total Debt 2,263 2,262 Reasonablemaintained at Financial 6.0x or higher. Leverage: Key ratingXL maintain triggerss athatmodest could financial lead to anleverage upgrade ratio to XL’sof 17 ratings.7% at (September 2014) TotalRelated Assets Criteria 45,653 48,162 Global Reinsurance’s Shifting Landscape Juneover time30, 201include4 and favorable 16.9% at earnings Dec. 31, with 201 low3, with volatility, debt plusincluding preferred a combined equity to ratio total in capital the low of OperatingInsurance RevenueRating 7,446Methodology3,524 Net((SeptemberNovember Income 20 2014)13) 1,060 (24) 90s26.4;%continued at June 3strong0, 201 capitalization4, in line with of26 .the5% insuranceat Dec. 31, subsidiaries, 2013. XL’s capitalwith a netposition premiums has remained written- CombinedLatin American Ratio Reinsurance(%) 92.5 89.0 tostable,-equity with ratio shareholders’ of 0.8x of equity lower of; financial$11.4 billion leverage at June ratio 30, 201maintained4, up slightly at orfrom below $11. 320%billion and at (September 2014) ROAE (%) 10.3 (0.5) Dec. 31, 2013, as a net loss and share repurchases were offset by unrealized investment gains. Reinsurer Mergers and Acquisitions operating-earnings-based interest and preferred dividend coverage of at least 10x. Source:Analysts XL Group plc. Brian(August C. Schneider,2014) CPA, CPCU, ARe Related+1Global 312 606Reinsurers’ Research-2321 Mid-Year 2014 Financial RatingDowngrade Sensitivities Triggers: Key rating triggers that could result in a downgrade include significant [email protected] Results (August 2014) charges for reserves that affect equity and the capitalization of the insurance subsidiaries; Upgrade Triggers: The key rating trigger that could result in a near term upgrade to XL’s IDR JamesAsian ReinsuranceB. Auden, CFA Markets financial leverage ratio maintained above 20% or debt plus preferred equity to total capital +1(August 312 368 2014)-3146 and debt ratings includes operating-earnings-based interest and preferred dividend coverage [email protected] maintainabove 30%ed at; 6.0xoperating or higher.earnings Key- basratinged triggersinterest that and could preferred lead to dividendan upgrade coverage to XL’s ratingsbelow Related Criteria − Related Criteria over6.0x time7.0x ;includeincreases favorable in underwriting earnings leverage with low abovevolatility, 1.0x including net premiums a combined written ratio-to-equity in the ratio low; InsuranceInsurance RatingRating Methodology Methodology or earnings below industry levels and failure to maintain consistent underwriting profitability. (November 2013) 90s; continued strong capitalization of the insurance subsidiaries, with a net premiums written- (September 2014) to-equity ratio of 0.8x of lower; financial leverage ratio maintained at or below 20% and www.fitchratings.com operating-earnings-based interest and preferred dividend coverage of at least 10x.July 10, 2013 Analysts Brian C. Schneider, CPA, CPCU, ARe +1 312 606-2321 Downgrade Triggers: Key rating triggers that could result in a downgrade include significant [email protected] charges for reserves that affect equity and the capitalization of the insurance subsidiaries; James B. Auden, CFA financial leverage ratio maintained above 20% or debt plus preferred equity to total capital +1 312 368-3146 [email protected] above 30%; operating earnings-based interest and preferred dividend coverage below 6.0x−7.0x; increases in underwriting leverage above 1.0x net premiums written-to-equity ratio; orTheearnings ratings above below were industry solicited levels by, or and on behalf failure of, to the maintain issuer, and consistent therefore, underwritingFitch has been profitability. compensated for the provision of the ratings.

www.fitchratings.com July 10, 2013

Global Reinsurance Guide 2015 62 Disclaimer

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