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Global Reinsurance Guide 2015 Global Reinsurance Guide 2015 Contents 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
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