State of the Reinsurance Market

1
State of the Reinsurance Market

• Midwest Actuarial Forum
• March 22, 2005

Bill Godfrey
2
Reinsurance Market Review

• Security Assessment
• Renewals in 2005

3
A.M. Best Rating Distribution
Source A.M. Best
4
SP Rating Migrations Among theTop 150
Reinsurers
Source Standard Poors
5
SP Outlook on Reinsurance Sector

• September 13, 2004 Revised outlook to stable
  from negative
• Expect downgrades AND upgrades will be limited
• Potential for more reporting of prior-year
  reserve development continues to weigh on ratings
  of older reinsurers
• Concern over Asbestos reserving remains
  Reinsurers not recognizing what primary insurers
  are
• Negative on Rating related triggers
• Diminishing Parental Support
• Outlook for 2004 and 2005 Strong Profitability

6
Rating Changes Since September 11, 2001 for Top
Ten Reinsurers
U indicates under review NR3 - indicates rating
procedure inapplicable
7
Combined RatioU.S. P C vs. Reinsurance Industry
8
Global Insured Catastrophe Losses
9
Reserve Strengthening 5 Selected Groups
Group Year-End 2003 Gross Loss Reserves Reserve Deficiency During 2002 Reserve Deficiency During 2003
AIG 56.1B 4.8B 2.0B
ACE 27.2B 2.9B 0.7B
Chubb 17.9B 1.4B 0.6B
CNA 21.3B 0.2B 6.9B
St. Paul Travelers 60.1B 5.9B 2.0B
Total Estimate 182.6B 15.2B 12.2B
Source U.S. SEC Filings
10
Reinsurance Industry Reserve Additions
The impact of U.S. casualty reinsurance business
from 1997-2001

• 2003 Examples include
• Additional Development 2003
  Combined Ratio
• Employers Reinsurance Corp 355 million
  105.1
• American Re-Insurance Co 546 million 108.4
• General Reinsurance Corp 402 million 103.6
• Swiss Re America 903 million 138.5
• Transatlantic Re 298 million 96.4
• XL Reinsurance America Inc 289
  million 151.3
• 2,793 million

Source U.S. Statutory Filings
11
Reinsurance Industry Reserve Additions
The impact of U.S. casualty reinsurance business
from 1997-2001

• 2004 First 9-months updates
• Additional Development Combined
  Ratio
• American Re-Insurance Co 201 million 114.3
• Employers Reinsurance Corp 473 million
  116.2
• General Reinsurance Corp 474 million 112.6
• Swiss Re America 134 million 108.0
• Transatlantic Re 157 million 102.0
• XL Reinsurance America Inc 50 million
  94.4
• 
  1,489 million

Despite these actions, have reinsurers fully
accounted for reserve additions taken by primary
companies during the last 30 months?
Source U.S. Statutory Filings
12
SP Global Reinsurance Industry Combined Ratio
Versus Return on Revenue
13
US Reinsurance CompositeReturn on Equity
(Surplus)
14
U.S. Reinsurance CompositeRBC Composite Weighted
Average
15
U.S. Reinsurance RBCComposite Companies - 2003
16
US Reinsurance Recoverables from Unaffiliated
Reinsurers

• Reinsurance Recoverables on
• 2003 2002
• Paid Losses 17,931 M 16,833 M
• Unpaid Losses 79,945 M 77,490 M
• IBNR Losses 79,090 M 78,146 M
• Sub-total 176,966 M 172,469 M
• Funds Withheld -20,706 M -18,920 M
• Total Recoverable 156,260 M
  153,549 M

Source A.M. Best
17
2003 US Reinsurance Recoverables

• Reinsurance Recoverables 156 B
• Admitted Assets 1,174 B
• Reins. Recov. / Adm. Assets 13
• Industry Surplus 354 B
• Reins. Recov. / Surplus 44

Source A.M. Best
18
U.S. Reinsurance Recoverables
Dependence of U.S. Insurers on
Reinsurance (recoverables as percentage of
surplus)
Source Standard Poors
19
An Unprecedented Convergence

• Adverse loss development in commercial lines for
  the last 10 accident years
• Adverse loss development for asbestos and
  pollution
• Increased severity and frequency in short tail
  lines
• September 11, 2001 - correlated losses from one
  event
• Increase in reinsurance recoverables
• Reserve gap (primary reinsurers)
• Low interest rates and lack of investment income
• Drop in asset values due to equity market
  volatility
• Regulatory and rating agency scrutiny following a
  climate of corporate scandals
• Prolonged soft market in insurance and reinsurance

A perfect storm?
20
Reasons to be optimistic...

• In the end, the insurance and reinsurance
  mechanism has effectively done what it is
  supposed to do
• The industry has absorbed the losses from
• WTC / 9-11
• asbestos
• pollution
• and many other systemic threatening situations
• Corrective measures are in place
• An increased focus on underwriting disciplines
• Adequate pricing
• New risk management techniques

21
New Capital2001 - 2003 Start-Ups
Name Year Initial Capital (US billions)
Allied World Assurance Co. 2001 1.5
Arch Re 2001 1.0
AXIS 2001 1.7
Catlin Insurance Co. 2002 0.4
DaVinci Re 2001 0.4
Endurance 2001 1.2
Montpelier Re 2001 0.9
Olympus Re 2001 0.5
Platinum Underwriters 2002 1.0
Quanta 2003 0.6
Wellington Re (now Aspen) 2002 0.3
Total 9.5
22
Agencies issue ratings to start up companies
Start Up Credit Ratings
23
Exited 2001 - 2004
24
Major Reinsurance CentersFinancial State in 2004

• Bermuda
• Profitable
• Hurricanes impact reduced by FHCF
• Exposed to new Florida take-outs
• US
• Profitable
• UK
• Profitable
• Lloyds reducing capacity in 2005

25
Reinsurance Market Review

• Security Assessment
• Renewals in 2005

26
2005 Renewals

• Property
• Casualty

27
U.S. Cat Property Rate On Line Index
1989100. Index constructed by Guy Carpenter
Company, Inc.
28
Insured Losses from 2004 Hurricanes billions
Charley Frances Ivan Jeanne
U.S. 6.8 4.4 6.0 3.2
Caribbean 0.1 0.5 1.5 N/A
Total 6.9 4.9 7.5 3.2
US data for Charley, Frances, Ivan and Jeanne
from PCS. Other figures from model estimates.
29
U.S. Property Catastrophe 2005 Renewals

• Price
• Nationals pricing about flat.
• Average ROL down marginally for about 3 for
  regionals
• Florida exposure a concern (developing issue)
• Market most competitive at upper layers
• Retentions and limits stable
• Horizontal exposures a concern (active 2004
  hurricane and typhoon seasons)
• Pricing high
• Terms and Conditions
• Some extension from 72 hours to 96 hours
• Terrorism - following TRIA.
• Personal lines get full cover
• Commercial lines get cover for domestic
  terror.
• Brushfire defined by location, not ignition
  source
• Capacity
• Generally available. Decrease in
  oversubscriptions from 2004

30
U.S. Property Renewals, 2005 (Excluding
Catastrophe)

• US Property
• Per risk
• Pricing flat or down
• SPI growth implies significant drop in contract
  rates
• Reinsurers concerned over softness in primary
  property market
• Margins in pro rata renewing at expiring
• Florida exposure a concern. Aggregate caps
  imposed.
• Capacity adequate

31
2005 U.S. Casualty Renewals

• Workers Compensation
• Medical Malpractice
• Directors Officers
• Errors Omissions
• Employment Practices
• Umbrella and Excess

32
2005 U.S. Casualty Renewals Workers Comp

• Primary pricing strong
• Abundant capacity in catastrophe layers
• Market improved , but still firm for single
  claimant exposures
• Terror issue
• In-depth evaluation of exposure
• Non-certified free (ex NBC)
• Security concerns

33
2005 U.S. Casualty RenewalsMedical Malpractice

• Primary market recovering, but 20 states in
  crisis
• Pricing main issue, not capacity (new Bermuda
  capacity)
• Reinsurance rate stable (unless unfavorable loss
  history)
• Problem areas
• Start-ups
• Pro rata medical professional liability
• Tort terrors
• Cook County IL, South Florida

34
2005 U.S. Casualty Renewals Directors Officers

• Imbalance between soft primary market and firm
  reinsurance market
• Rates declining on primary business
• Reinsurance firm because
• Exits from the line, notably Converium
• Security issue reduces potential reinsurance
  panel
• Heightened concerns on Financial Institutions
• Rising settlement values
• Ceding commissions under fire as underlying
  premium viewed as inadequate
• Return of loss ratio caps and loss corridors

35
2005 U.S. Casualty Renewals Errors Omissions

• Primary market expected to soften in 2005
• A diverse line, with varying market conditions
• At January 1, 2005, ceding commissions and terms
  dependent on type of business, loss experience
  and portfolio size
• Difficult lines include
• Large Accountants
• Large Lawyers
• Project Architects Engineers
• Large Technology EO
• Start-ups pushed to Quota Share

36
2005 U.S. Casualty Renewals Employment Practices

• Mild softening of of the primary market in 2004
  and continuing into 2005
• Reinsurance renewals tend to be at expiring
• Increasing concerns by reinsurers on third party
  EPLI claims

37
2005 U.S. Casualty RenewalsUmbrella and Excess

• Primary market
• Flat to single digit increases in rates in early
  2004
• Single digit decreases to flat later in 2004
• Some classes saw 10-15 decreases
• Decreases in single digit range anticipated in
  2005
• Reinsurance market
• Reinsurers do not view original rates as
  redundant
• Reinsure pricing also reflecting fear of
  inadequacy, and possible recurrence of poor
  1997-2001 years
• Quota share
• Increased pressure for ceding commissions on a
  cost plus basis.
• Pressure to minimize override in ceding
  commission
• Pressure from reinsurers for mold, asbestos,
  silica, tobacco and terror exclusions

38
Summary

• Finances of reinsurers improved
• New non-legacy capital expanding in capacity and
  scope
• Moderate softening at reinsurance renewals in
  January, 2005
• TRIA and market security over-riding concerns

39
State of the Reinsurance Market

• Midwest Actuarial Forum
• March 22, 2005

Bill Godfrey