IASA Texas Chapter Fall Conference November 22, 2019 Zachary Wilson - - PowerPoint PPT Presentation

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STATE OF THE REINSURANCE MARKET IASA Texas Chapter Fall Conference

November 22, 2019 Zachary Wilson Senior Vice President

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GUY CARPENTER OVERVIEW & REINSURANCE BASICS

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2019 US PROPERTY CATASTROPHE UPDATE

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MARKET TRENDS AND 2020 RENEWAL EXPECTATIONS

3 STATE OF THE REINSURANCE MARKET IASA Texas Chapter Fall Conference

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Disclosure

Securities or investments, as applicable are offered in the US through GC Securities, a division of MMC Securities LLC. (“MMCS”), a US registered broker-dealer and member FINRA/NFA/SIPC. Main office: 1166 Avenue of the Americas, New York, NY 10036. Phone: 212.345.5000. Securities or investments, as applicable are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities LLC, MMC Securities (Europe) Ltd., and Guy Carpenter, LLC are affiliates owned by Marsh & McLennan Companies (“MMC”). Reinsurance intermediary services are offered through Guy Carpenter & Company, LLC. This information was prepared by MMCS and/or Guy Carpenter & Company, LLC. (“Guy Carpenter” or ”GC”), the reinsurance brokerage arm of MMC. All statistical tables, charts, graphs or other illustrations contained herein were prepared by MMCS or GC unless otherwise noted. Results from simulations and projections are for illustrative purposes only and are based on certain assumptions. Therefore the recipient should not place undue reliance on these results. Past performance does not guarantee future results. Neither MMCS nor GC is a legal, tax or accounting adviser and makes no representation as to the accuracy or completeness of any data or information gathered or prepared by MMCS or GC hereunder. Your company should therefore consult with its own tax, accounting, legal or other advisers and make its own independent analysis and investigation of any transaction, as well as the financial and tax consequences thereof, the creditworthiness of the parties involved and all other matters relating to the transaction, prior to its own independent decision whether or not to enter into any agreements in connection with any transaction. This presentation does not constitute an offer to sell or any solicitation of any offer to buy or sell any security or instrument or to enter into any transaction on such indicative terms. An investment in insurance linked securities is speculative, involves a high degree of risk and should be considered

• nly by institutional investors who can bear the economic risks of their investments and who can afford to sustain the loss of their investments.

Noteholders may lose all or a portion of their investment. Institutional investors should thoroughly consider the information contained herein. This document is not intended to provide the sole basis for any evaluation by you of any transaction, security or instrument described herein and you agree that the merits or suitability of any such transaction, security or instrument to your particular situation will be independently determined by you including consideration of the legal, tax, accounting, regulatory financial and other related aspects thereof. Opinions and estimates constitute MMCS’s and/or GC’s judgment and are subject to change without notice. In particular, neither MMCS nor GC owes duty to you (except as required by the rules of the Securities and Exchange Commission, Financial Industry Regulatory Authority, Financial Services Authority, and/or any other regulatory body having proper jurisdiction) to exercise any judgment on your behalf as to the merits or suitability of any transaction, security or instrument. The information contained herein is provided to you on a strictly confidential basis and you agree that it may not be copied, reproduced or otherwise distributed by you (other than to your professional advisers) without our prior written consent. This material provides general, educational and conceptual information about certain financial strategies, and does not discuss or refer to any specific securities or other financial product. This presentation is not intended as marketing, solicitation or offering any security or other financial product in any

• jurisdiction. This material is intended only for sponsors, financial intuitions and qualified investors.

MMCS and/or GC may have an independent business relationship with any companies described herein. Trademarks and service marks are the property of their respective owners. The source of information for any charts, graphs, or illustrations in this document is GC Securities Proprietary Database 2019, unless otherwise indicated.

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Disclaimer

Guy Carpenter & Company, LLC provides this report for general information only. The information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy, and it should be understood to be general insurance/reinsurance information only. Guy Carpenter & Company, LLC makes no representations or warranties, express or implied. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such. Please consult your insurance/reinsurance advisors with respect to individual coverage issues. Statements concerning tax, accounting, legal or regulatory matters should be understood to be general

• bservations based solely on our experience as reinsurance brokers and risk consultants, and may not be

relied upon as tax, accounting, legal or regulatory advice, which we are not authorized to provide. All such matters should be reviewed with your own qualified advisors in these areas. Readers are cautioned not to place undue reliance on any historical, current or forward-looking statements. Guy Carpenter & Company, LLC undertakes no obligation to update or revise publicly any historical, current

• r forward-looking statements, whether as a result of new information, research, future events or otherwise.

This document or any portion of the information it contains may not be copied or reproduced in any form without the permission of Guy Carpenter & Company, LLC, except that clients of Guy Carpenter & Company, LLC need not obtain such permission when using this report for their internal purposes. The trademarks and service marks contained herein are the property of their respective owners.

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GUY CARPENTER OVERVIEW

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Marsh & McLennan Companies at a Glance

Marsh & McLennan Companies is a global professional services firm providing advice and solutions in the areas of risk, strategy and human capital. It is the parent company

• f a number of the world’s leading risk experts, and specialty consultants.

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Clients in more than 130 countries More than 60,000 colleagues worldwide Annual revenue exceeding $14.95 B 140+ year history

• f leadership and

innovation

Dan Glaser President/CEO

(Oliver Wyman, Lippincott, NERA Economic Consulting)

Insurance Broker and Risk Advisor Risk and Reinsurance Intermediary Services Talent, Health, Retirement, and Investment Consulting Management Consulting

Four companies with one purpose, helping clients manage risks and make the most of their opportunities, their capital, and their people

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The Basics – Guy Carpenter Today

1,600

clients globally

$40B

in premium placed worldwide More than

3,100

colleagues Revenue of

$1.6B

More than

60

Offices worldwide

Guy Carpenter helps its clients achieve profitable growth with a powerful combination

• f specialized reinsurance broking expertise, strategic advisory services, and industry-

leading analytics.

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We provide advice and solutions to address our clients’ strategic imperatives and strive to deliver superior results for every assignment

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Optimize return on risk-adjusted capital

RISK MANAGEMENT SOLUTIONS

• Treaty Reinsurance
• Facultative Reinsurance
• GC Analytics
• Specialty Practices
• Client Services

Achieve long- term growth

BUSINESS GROWTH SOLUTIONS

• Capital Advisory
• Alliances + Acquisitions
• Geographic Expansion
• New Products + Distribution
• Technology Solutions
• Enterprise Risk Management
• Microinsurance

Full Range of Services to Support Profitable Growth

Strengthen Balance Sheets to gain a competitive advantage

• Mergers + Acquisitions
• Corporate Finance
• Alternative Capital
• Ratings Advisory

CAPITAL SOLUTIONS

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Guy Carpenter Overview Specialty Practices

GC Specialties

Line-of-business experts deliver deep market knowledge and efficient transactions in every relevant geography to provide clients with an enduring competitive advantage.

GC Specialties

Over 100

professionals & staff

• Unique market insights
• Specialized analytics
• Peer analysis
• Frictionless transactions
• Market Influence
• Agriculture
• Aviation And Aerospace
• Construction/Engineering
• Credit, Bond, And Political Risk
• Cyber Solutions
• Excess & Surplus Lines
• General Liability, Umbrella &

Casualty Clash

• Healthcare & Life
• Marine & Energy
• Mutual Company
• Professional Liability
• Program Manager Solutions
• Property
• Retrocessional
• Structured Solutions
• Surety & Fidelity
• Terror Risk
• Workers Compensation

Reinsurance Basics

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What is Reinsurance?

INSURANCE COMPANY (PRIMARY OR CEDING COMPANY) PRIMARY POLICY HOLDER REINSURER

Insurance for insurance companies An insurance company, called the primary or ceding company, cedes portions of its premiums and liabilities to another insurance company, known as a reinsurer Reinsurance is a transaction between insurance companies only – the primary policyholder is not involved

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How Risk Is Transferred Through the Industry

Retail Clients Primary Insurance Companies Insurance Brokers & Agents Brokers and agents match buyers with appropriate insurers, generally receiving a commission from the insurer or a fee paid by the buyer Individuals, business of all sizes and governments buy Insurance to protect against all kinds of risk, including property, liability, life / health, and credit Sell policies to the original consumer / business, either via agents and brokers or directly, (e.g. over the internet) Reinsurance Brokers Insurance companies amass portfolios of policies and reinsurance brokers help them to buy reinsurance to manage risk. Retrocessionaire Retrocessionaires are companies that sell reinsurance to reinsurers. Alternative/ Capital Markets Capital market investors, like pension funds, also assume insurance related risks through transactions that function similar to reinsurance.

Retail Clients Primary Insurance Companies Reinsurance Companies Alternative / Capital Markets Insurance Brokers & Agents Reinsurance Brokers Retrocessionaire

Reinsurers, either through a broker or directly, sell reinsurance coverage to primary insurance companies Reinsurance Companies

Motor Home Catastrophe Business Life & Health

12 EXAMPLES

&/or

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Why Do Insurance Companies Buy Reinsurance?

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Capacity Stability Catastrophe Financing

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Capacity

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Capacity Stability Catastrophe Financing

Why do companies want capacity?

• Larger policy limits

─

Insurer may not want to issue a single policy with a limit greater than a certain amount

• Premium capacity

─

Regulators often cap the amount of premium that an insurance company can write in relation to the insurer’s surplus (capital)

─

Use of reinsurance reduces an insurer’s net written premium, enabling the insurer to sell more policies

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Stability

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Capacity Stability Catastrophe Financing

Why do companies want stability?

• Volatility may:

─ Affect stock value of publicly traded insurer ─ Alter financial rating by independent rating

agencies

─ Require abrupt changes in approaches taken to

manage underwriting/claim/marketing

─ Lead to insolvency

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Catastrophe Protection

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Capacity Stability Catastrophe Financing

Why do companies want catastrophe protection?

• A single large event such as an earthquake can

cause losses to many of an insurer’s policies at the same time

• The accumulation of all these losses may be more

than the insurer is able to pay on its own and threaten its solvency

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Financing

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Capacity Stability Catastrophe Financing

Why do companies want financing?

• Provides surplus relief by way of ceding

commission

─

Premium growth = surplus drain

• Immediate recognition of expenses when

issuing policy

• But, premium is only earned gradually

throughout year

• Causes surplus to decrease with each

incremental policy written – Ceding Commission offsets expenses

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2019 US Property Catastrophe Update

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Market Drivers Global Significant Insured Loss Activity

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While insured loss for the first half of 2019 is below average compared with previous years, Q3 has seen slightly more activity with Typhoon Faxai and Hurricane Dorian primary contributors.

2019 loss estimates are preliminary and subject to change

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Dallas Tornado Update

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November 21, 2019

October 20, 2019 Insurance Council of TX - $2B PCS - $2.5B

• Expecting over 30,000 claims
• Part of larger system, weather losses into

OK and AR

• Gap Clothes found 10 miles away
• Largely expected to be a retained event

for HNW Homeowners carriers

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Market Drivers Global Significant Insured Loss Activity

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While insured loss for the first half of 2019 is below average compared with previous years, Q3 has seen slightly more activity with Typhoon Faxai and Hurricane Dorian primary contributors.

2019 loss estimates are preliminary and subject to change

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Loss Creep Hurricane Irma Losses Continue To Rise

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November 21, 2019

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HOT TOPIC: COLLATERALIZED REINSURANCE TRANSACTIONS

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November 21, 2019

Market Drivers Announced New Reinsurance Capital 2018 vs 2019

Source: Artemis, Guy Carpenter

2018 H1 totalled $10.5B 2019 experienced a 54% decrease at $4.8B

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Market Drivers Total Capital Base for Insurance Linked Funds Decreased in 2019

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November 21, 2019

Chart depicts the approximate AUM of the larger specialist managers up to April 1, 2019. Individual fund changes varied considerably and there are material differences in how managers report their AUMs. Source: InsuranceLinked

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Unique Features of a Collateralized Reinsurance Transaction

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At contract inception, market funds its “obligations,”defined as the contract limit

• r a negotiated

amount via a trust account. A trust document with a qualified bank as trustee is required; bank requires other critical documentation. After expiration, if a covered event has not occurred, the trusteed assets are returned to the reinsurer according to a negotiated collateral release schedule. The reinsurance contract and/or I&L incorporates the funding feature; negotiated collateral release schedule and other amendments to contract provisions.

1 2 3 4 Each step can take longer - timing is critical!

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Steps in Collateralized Placement Process

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If Collateralized Fronted or Collateralized Participation Identify Appropriate Markets

Program opportunities:

• Private layers
• Aggregate
• Top and agg/drop
• RPP
• CWIL
• ILW
• Cat bond
• Collateralized market

database

• Through GC

Securities, Property Specialty, existing broker relationships

• Obtain written client

instruction to access markets

• Negotiate coverage

including collateral release language

• Begin Trust

Agreement and Know Your Client documentation as soon as possible – Standard GC trust agreement language being negotiated with main banks

Evaluate Client Cover Needs

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Coverage Comparison for Property Catastrophe Risk Transfer Products

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Traditional/Collateralized Reinsurance Cat Bond Access to Capital All traditional reinsurers and most ILS investors ILS investors and a small minority of traditional reinsurers Pricing* Matching ILS spreads 25% - 40% price reductions in 2013 Timeframe 4 weeks 8 – 12 weeks Loss Trigger Indemnity Indemnity / Industry / Hybrid / Parametric Term Typically 1 year, multi-year available Typically 2-5 years Loss Reporting / Payments Based on actual loss settlement / ability to pre-fund Requires claims reviewer / pre-set payment dates / limited pre-funding Additional Loss Settlement Cost No Yes, typically for each claims submission Counter-Party Risk Reinsurer security/collateralized Collateralized Commutation Not required for traditional / flexible up to 5 years Less flexibility; additional premium due for each extension Transaction Expense Minimal (Brokerage) Several additional fees spread over duration of bond Resolution of Issues Reinsurance case law Investor protective securities laws and case law

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November 21, 2019

Case Study: Issues with Collateralized Placements

• Recently, an insurance company released collateral after getting an updated

Claims Count in Florida

• The loss then continued to develop, so they asked the collateralized Markets

to return the collateral in order to pay claims

• Given the details of the Collateral agreement, the Markets were not
• bligated to return the collateral after the Collateral Release was signed
• Some of the Collateralized Markets made a “Business Decision” to return

some of the collateral

• Others were not so commercial and did not return the collateral, leaving the

Insurance Company with a large Unrecoverable on their Balance Sheet

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2020 Property Renewal Preview

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Industry Headlines

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Lloyds Capacity Changes and Decile Ten

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What are Reinsurers Telling Us?

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Based on 2017 to current catastrophe loss activity and increasing scientific reporting, evaluation of climate change impact is a significant reinsurer concern Capital remains plentiful but with greater scrutiny on where and how to deploy Similar to mid-year 2019 renewals reinsurers will look to make underwriting adjustments based on evolving view of risk Most reinsurers report they will have similar capacity to deploy year on year Retro pricing is under pressure and many markets are assessing potential impacts of buying less cover or increasing spend Mid-year 2019 renewals experienced program specific differentiation and reinsurers intend a similar focus at January 1

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The Last Few Years in Review - Property

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The Last Few Years in Review - Casualty

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US Property Cat ROL Index

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Reinsurance Market Drivers

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Capital

• The industry remains well capitalized even after the 2017 and 2018 catastrophes
• Pension fund interest in ILS funds continues, but is more cautious and is shifting between

managers

• The tightening of retro capacity has the potential to reshape reinsurer portfolios

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Catastrophe Losses

• Catastrophe losses of $85 billion in 2018 (typhoons, hurricanes, wildfires) and catastrophe

loss reserve development from 2017 again challenged underwriting results

• Despite two year cat losses exceeding $230 billion, Reinsurer balance sheets remain strong

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Mergers & Acquisitions

• Company combinations for a variety of reasons are re-shaping the industry:

China Re / Chaucer Enstar / Maiden NA Apollo / Aspen Arch / Barbican SCOR / Coriolis Ren Re / TMR MS Amlin / Leadenhall Canopius / AmTrust Syn Cincinnati Financial/ Beaufort

4

Taxes, Regulation, Ratings

• US Tax Reform drove changes to quota share arrangement to affiliates
• Brexit caused new company formations and/or domicile changes
• Solvency II should increase the transparency of European insurers and reinsurers
• Rating agencies toughen stance on Hedge Fund Re model

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November 21, 2019

2019 Japanese Typhoon Loss Estimates

Super Typhoon Hagibis made landfall on October 12 in Japan as a category-2 passing over the Greater Tokyo Area

Company Insured Loss Estimate Notes AIR Worldwide $8 to $16bn Estimate includes insured damage to property (residential, commercial, industrial and agriculture/mutual), structures and their contents, and automobiles from wind storm surge and inland flood RMS $7 to $11bn Estimate includes property damage and business interruption to residential, commercial, industrial, marine, and automobile lines, for both the private and kyosai/mutual markets from typhoon wind and typhoon flood CoreLogic $7 to 11bn Estimate includes Wind: $2.8 to $4.4bn, Flood: $4.2 to $6.6bn

Typhoon Faxai made landfall on September 9 in the Greater Tokyo Area as one

• f the strongest in recent years to strike Japan's capital city as a category-2

Company Insured Loss Estimate Notes AIR Worldwide $3 to $7bn Estimate includes damage to property (residential, commercial, industrial, and agriculture/mutual), both structures and their contents, and automobiles from wind and storm surge. RMS $5 to $9bn Estimate includes damage and business interruption caused by typhoon wind and coastal flooding to residential, commercial, industrial, marine, automobile lines, and includes both the private and kyosai/mutual markets CoreLogic $2.5 to $4.5bn Estimate includes insured loss from wind, storm surge, and inland flooding in Japan. This estimate excludes losses from marine cargo, CBI, Autos and Crop Karen Clark & Co $3 to $7bn Return time of a $15bn typhoon in Japan is 1 in 20 years

Typhoons Faxai and Hagibis significantly impacted the Tokyo metropolitan region one month apart at category 2 strength. Stronger winds in Faxai and widespread flooding in Hagibis both will be material contributions to insured losses. Combined loss estimates are as high as $25 billion.

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Market Drivers Claims Development for Costly North Atlantic Hurricanes – 2000 to 2017

This graphic uses data from Property Claim Services (PCS) to show the development of claims (in percentage terms) for a selection of U.S. hurricanes since 2000, starting at 200 days post-landfall and leading up to 700 days. All incurred an ultimate insured cost in the U.S. of more than USD 10 billion. Source: Guy Carpenter, PCS

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Market Drivers

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Market Drivers

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Market Drivers Significant decrease in Excess Capacity at June 1

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November 21, 2019

Capacity tightened significantly at the June 1, 2019 US property catastrophe renewals, both in Florida and on renewals with exposure primarily outside Florida.

Source: Guy Carpenter

148% 132% 140% 116% 116% 116%

FLORIDA NON-FLORIDA ALL

2018 2019

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November 21, 2019

Market Drivers Dedicated Reinsurance Sector Capital 2012 to H1 2019

While alternative capital dipped slightly through H1 2019, traditional capital grew by roughly 1.5% for a total increase of 0.5% since year end 2018

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Market Drivers Alternative Capital by Source 2013 to 2019

Alternative capital decreased 3% by mid-year 2019 to $92 billion. Markel’s purchase

• f Nephila in November 2018 is reflected in the shift to Reinsurance Sponsored

Managers

20 40 60 80 100 120 2013 2014 2015 2016 2017 2018 6M19 E

Dedicated ILS Managers Reinsurance Sponsored Managers Direct Institutional Investors

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November 21, 2019

Source: GC Securities Proprietary Database Risk limit outstanding due to full or partial extension is not included. *144A catastrophe bonds issued as of Nov 7, 2019 excluding private transactions.

ILS Market Update State of the 144A Catastrophe Bond Market

Support for 2019 transactions has varied – while some were upsized,

• thers were downsized or pulled out of the market at this time

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November 21, 2019

P&C Catastrophe Bond Pricing 2018 v. 2019

Source: GC Securities Proprietary Database (P&C catastrophe bonds status update as of Nov 7, 2019)

Catastrophe bond activity was impacted by the same factors reinsurers tackled when forming their new views of risk; many transactions were completed at the top end of initial pricing guidance or above

Following outliers are excluded from trending and not displayed: Atmos Re DAC 2019-1 (Expected Loss 0.45%; Net RoL 4.50%); Sanders Re II 2019-1 Cl B (Expected Loss 1.76%; Net RoL 12.25%)

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Global Insurance Pricing Change 2Q15 To 3Q19

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November 21, 2019

U-Shape Market Cycle

Primary Rates Increasing Cost of Retro- Reinsurance Increasing

Will Reinsurance Rates Follow?