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19 October 2011 1 A.M. Best Company’s 2011 Insurance Market Briefing - Europe The Grange St Paul’s Hotel London Awarded Rating Agency of the Year at the.

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Presentation on theme: "19 October 2011 1 A.M. Best Company’s 2011 Insurance Market Briefing - Europe The Grange St Paul’s Hotel London Awarded Rating Agency of the Year at the."— Presentation transcript:

1 19 October A.M. Best Company’s 2011 Insurance Market Briefing - Europe The Grange St Paul’s Hotel London Awarded Rating Agency of the Year at the Reactions London Market Awards 2010 and Best Global Rating Agency in 2009, 2010 and 2011 (Reactions Global Awards, New York)

2 2 Agenda  Introductory comments  M&A in the Insurance Sector  Non-life outlook  Reinsurance  Emerging markets  Criteria update  Open Q & A

3 3

4 19 October A.M. Best Company’s 2011 Insurance Market Briefing - Europe The Grange St Paul’s Hotel London Awarded Rating Agency of the Year at the Reactions London Market Awards 2010 and Best Global Rating Agency in 2009, 2010 and 2011 (Reactions Global Awards, New York)

5 5 A M Best 2011 Insurance Market Briefing M&A in the Insurance Sector Matthew Lindsey-Clark, Evercore Partners 19 October 2011

6 Template Theme Colours Secondary + Chart Colours 6 Agenda 6 1.Market Background: Key Trends and Drivers 2.Overview of Recent Deal Activity 3.Major Transaction Issues 4.Outlook

7 Template Theme Colours Secondary + Chart Colours 77 ■ Impact of financial crisis – long-lasting and profound ■ Insurance sector far from immune:  Asset values and volatility  Investment returns  Economic growth ■ Crisis has prompted wholesale reassessment on multiple fronts  Risk  Regulation  Strategy ■ Systemic threats continue to weigh heavily Market backdrop fraught with uncertainty…

8 Template Theme Colours Secondary + Chart Colours 88 …and the odd Cat to boot

9 Template Theme Colours Secondary + Chart Colours 99 ■ Scale:  Capital and cost efficiency  Rating and counterparty strength ■ Growth:  Response to softening markets  Entry to higher growth/emerging markets  Additive product lines and distribution channels ■ Balance and diversification ■ Alternative underwriting platforms and agencies ■ Tactical refocusing Traditional drivers for M&A…

10 Template Theme Colours Secondary + Chart Colours 10 ■ Corporate life cycles ■ Low valuations:  Prolonged phase of cyclically low ratings  Many P&C stocks below run-off value ■ “Forced” sellers:  Governments  Recipients of State Aid  Resolution of portfolios in run-off  Other consequences of regulatory change …coupled with more opportunistic reasons

11 Template Theme Colours Secondary + Chart Colours 11 Investor interest tends to be sporadic… Source: Factset Ten Years Share Price Performance to 30 June 2011 (Indexed to 100) Lloyd’s: +22% FTSE 100: +2% 9/11 terrorist attack Hurricanes Katrina & Rita Lehman Collapse Hurricane Wilma Post 2005 Windstorms Lloyd’s: +45% FTSE 100: +26% Lloyd’s: +28% FTSE 100: (15)% Post Lehman Collapse Post WTC Recovery FTSE 100: (20)% Lloyd’s: +91%

12 Template Theme Colours Secondary + Chart Colours 12 …and ratings fluctuate with the cycle… Forward P/NAV Multiples of Lloyd’s and European Non-Life Sectors Forward P/NAV FTSE 100 Performance (Indexed to 100)

13 Template Theme Colours Secondary + Chart Colours 13 …as does M&A activity Forward/Historic P/NAV # of transactions: Average Historic P/NTA Multiples of UK Non-Life Transactions

14 Template Theme Colours Secondary + Chart Colours 14 Deal activity has been steady… Transactions >$100m by value($bn) Transactions >$100m by number

15 Template Theme Colours Secondary + Chart Colours 15 …and geographically spread Transactions >$100m by value ($bn) Transactions >$100m by number Asia PacificNumberValue Japan8$16.1bn Australia6$16.7bn Other AP30$12.2bn

16 Template Theme Colours Secondary + Chart Colours 16 Key Themes ■ Critical mass threshold keeps increasing ■ Capital efficient platforms and structures ■ Consolidation phase with few company formations ■ Depressed stock values Transaction features ■ Mergers for scale (mainly agreed) ■ Platform diversification (i.e. Lloyd’s) ■ Run off transactions and share repurchases as alternatives to M&A International P&C and Reinsurance

17 Template Theme Colours Secondary + Chart Colours 17 Key Themes ■ Reserving issues and low profitability ■ Bancassurance model under pressure ■ Power of aggregators and other distributors, particularly UK ■ Rates improving in certain classes Transaction features ■ Disposals by bank owners ■ Small number of other underwriters sold ■ MGA and other distribution-driven models feature strongly European Non-life

18 Template Theme Colours Secondary + Chart Colours 18 Key Themes ■ Continues to be a destination of choice, but new starts not easy ■ Capital advantages remain, even post-Solvency II ■ More difficult underwriting environment ■ Low stock values Transaction features ■ Continued interest from platform purchasers ■ Renewed interest from private equity and other financial investors ■ Consolidation transactions remain difficult Lloyd’s

19 Template Theme Colours Secondary + Chart Colours 19 Key Themes ■ Drop off in M&A activity following busy phase between 2006 to 2008 ■ Financing scarce, stalling consolidator models ■ Pressure on profits but will be early beneficiaries of market turn Transaction features ■ No large scale deals since financial crash ■ Geographic bolt-ons and tuck-ins ■ Focus on MGA structures ■ IPO alternative may be available for exits Distribution

20 Template Theme Colours Secondary + Chart Colours 20 Major Transaction Issues ■ Financing:  Limited availability and high cost  Concern over rating impact of leveraged structures ■ Regulation:  Increased scrutiny of change of control applications  Solvency II? ■ Sovereign debt and asset values ■ Reserves ■ Impact of redomiciliation on transaction processes ■ Reaction of investors to low take-out values

21 Template Theme Colours Secondary + Chart Colours 21 Outlook ■ Financial crisis will overhang market for years to come  Planning will be complicated by uncertainty over regulatory developments  Banks will continue to reduce exposures, as owners and lenders ■ Need for scale will drive merger activity among mid-sized players ■ Value buyers will continue to scour for opportunities  Buy low and play the cycle ■ Industry capital will be redirected to higher growth opportunities:  No sign of the wave of Chinese or SWP buyers for Western businesses…yet!

22 19 October A.M. Best Company’s 2011 Insurance Market Briefing - Europe The Grange St Paul’s Hotel London Awarded Rating Agency of the Year at the Reactions London Market Awards 2010 and Best Global Rating Agency in 2009, 2010 and 2011 (Reactions Global Awards, New York)

23 19 October Non-Life Outlook Sam Dobbyn Senior Financial Analyst – A.M. Best Europe Rating Services Ltd. (London) Catherine Thomas Director, Analytics – A.M. Best Europe Rating Services Ltd. (London)

24 19 October European non-life insurance Sam Dobbyn Senior Financial Analyst – A.M. Best Europe Rating Services Ltd. (London)

25 25 European non-life update  Relatively strong capitalisation  Continued economic weakness exacerbated by sovereign debt concerns. Inflation remains a threat  Volatile investment markets and persistently low interest rates have increased the emphasis on underwriting profitability  Regulatory strain  Flat to softening rating environment as a result of competitive pressures and flat demand  Conclusion

26 26 Relatively strong capitalisation Source: A.M. Best Statement File Global

27 27 Economic weakness  Continued economic weakness has been exacerbated by sovereign debt concerns. Inflation remains a threat Source: International Monetary Fund

28 28 Investments and interest rates  Volatile investment markets and persistently low interest rates have increased the emphasis on underwriting profitability Source: ECB Source: AM Best analysis

29 29 Regulatory strain  Solvency II continues to remain a challenge for European Insurers  Capital requirements may not be switched on until Jan. 1, 2014  The delay can be viewed from a positive or negative standpoint depending on implementation to date  Implementation concerns persist  Insurers also have to consider the implementation of IFRS 4 creating a further administrative burden

30 30 Markets remain challenging  The German non-life market remains challenging although still profitable Source: GDV  Premiums up 1% in 2010  COR increased 3% to 98% in 2010  Motor COR expected to improve in 2011 from 107%

31 31 Markets remain challenging  The French market is showing signs of improvement but profitability has deteriorated since 2008 Source: FFSA  Improvement in COR in 2010  2011 is developing favourably  Total net income for the sector was EUR 3.3 bn in 2010

32 32 Markets remain challenging  The Italian market is improving but remains tough with a COR over 100% Source: ANIA  Technical result improved but still above 100%  Motor market beset by legislative, judicial and regulatory rulings  However, rate increases should see technical profitability improve

33 33 Markets remain challenging Source: ICEA, DGSFP  Aggregate non-life premiums reached EUR 31.8 billion in 2010 in line with 2008 levels  Overall market combined ratio remained stable at 93.8% in 2010  The Spanish market has posted a slight recovery but still has to deal with a challenging economic environment

34 34 Conclusion  European Non-Life insurance – At a fork in the road  Outlook – Stable  Strong balance sheets, however, markets still remain challenging  Future direction of travel will be dependent on how the Eurozone crisis is resolved

35 19 October United Kingdom non-life and London Market Catherine Thomas Director, Analytics – A.M. Best Europe Rating Services Ltd. (London)

36 36 UK non-life: current state of the market  2010 earnings down despite a rate driven improvement in accident year performance  Reserve releases lower, but still making a positive contribution to results  Lower investment returns  Weak economic conditions persist  But rates are rising, particularly in classes with poor recent loss experience

37 37 Performance of the top 100 performers  Considerable variation in the performance of individual companies  Companies with motor focussed portfolios reported the weakest results Underwriting result Pre-tax profit3,6765,361 Capital and surplus57,20956,112 Data: GBP millions Source: A.M. Best Co. based on FSA returns Underwriting Result is before transfers to/from Equalisation Provision and includes allocated investment return Capital and Surplus includes equalisation provisions

38 38 UK motor: another difficult year U.K. Motor – Combined Ratios Accident Year Combined Ratio120%114% 122%116% Effect of Prior Years' Reserve Movements-18%-12%-9%-2%6% Calendar-Year Combined Ratio101%102%105%120%122% Data based on FSA returns for all firms reporting on a one-year underwriting basis. Source: Best's Statement File – United Kingdom  Accident year performance has been weak for some time  Reserve releases dried up in 2009  Reported performance still weak in 2010 despite a rate driven improvement in accident year performance  Prior years added 6% points to the loss ratio

39 39 UK motor: accident year loss ratios  Reserve strengthening required for business written in recent years, particularly 2007, 2008 and Gross Ultimate Accident Year Loss Ratio Development ( ) Source: A.M. Best Co. based on FSA returns

40 40 UK motor: accident year loss ratios  Reserve strengthening required for business written in recent years, particularly 2007, 2008 and Gross Ultimate Accident Year Loss Ratio Development ( ) Source: A.M. Best Co. based on FSA returns

41 41 Motor: outlook uncertain  Claims environment still difficult  Bodily injury – Severity continues to creep upwards – Frequency stable despite lower number of collisions – Some optimism surrounding Lord Jackson’s review of civil litigation costs  How sustainable are rate increases in such a competitive market? 41

42 42 UK non-life: outlook stable  Gap between accident year and calendar year performance expected to narrow again in 2011 underpinned by: – A rate driven improvement in accident year results – Lower prior year redundancies  Investment income low  Growing concern regarding reserve adequacy  Overall, market expected to maintain strong capitalisation, despite performance pressures 42

43 43 London Market: catastrophe losses 1H Net Catastrophe Losses (millions) YE 2010 SHF (millions) 1H Net Cat Losses as % of YE 2010 SHF 1H loss ratio (%) Amlin plcGBP 314GBP 1, Aspen Insurance Holdings LtdUSD 361USD 3, Beazley plcUSD 183USD 1, Brit Insurance Holdings BVGBP 95GBP Catlin Group LtdUSD 534USD 3, Hiscox LtdGBP 210GBP 1, Omega Insurance Holdings LtdUSD 51USD QBE Insurance Group Ltd*USD 1,080USD 10, *QBE figure includes large single risk and catastrophe claims

44 44 Post event analysis  Loss estimate vs risk appetite  Peer group comparison  Extent of capital erosion  Catastrophe risk and aggregate management  Financial flexibility  Ability to exploit any subsequent improvement in market conditions

45 45 Casualty market still challenging  Strong competition and weak economic conditions are putting downward pressure on profit margins  Uncertainty regarding reserve adequacy is growing  A number of London market insurers have set up local US admitted and surplus lines carriers – improve access to small to medium sized risks – but profitable growth in this competitive market is difficult

46 46 Pricing for casualty business

47 47 London Market outlook  Underwriting results under pressure – Catastrophe losses – Difficult trading environment – Shrinking reserve releases  Investment earnings weak  Overall capitalisation remains strong  Stronger companies well positioned to take advantage of a positive change in the pricing environment

48 19 October A.M. Best Company’s 2011 Insurance Market Briefing - Europe The Grange St Paul’s Hotel London Awarded Rating Agency of the Year at the Reactions London Market Awards 2010 and Best Global Rating Agency in 2009, 2010 and 2011 (Reactions Global Awards, New York)

49 19 October Current state of the global reinsurance market Robert de Rose Vice President – Reinsurance Ratings (Oldwick, New Jersey) David Flandro Head of Global Business Intelligence, Guy Carpenter (London)

50 50 Current state of the global reinsurance market  Ratings largely unchanged from 2011 events to date: – Probable Maximum Losses (PMLs) factored into reinsurers’ capital adequacy – No single loss has exceeded a reinsurer’s stated risk appetite, but some have approached their single event PML – Most have solid financial flexibility  Second quarter results were generally solid and mitigated some of the first quarter losses

51 51 Current state of the global reinsurance market  Issues still persist: – Many companies unlikely to show a profit by year-end 2011 – Depressed investment yields – It’s always earthquake season – Capital remains sound but excess capacity in the market diminished due to first quarter losses in excess of USD 70 billion – Pricing fundamentals weak for classes other than property catastrophe – Global financial market issues

52 52 Global Reinsurance Rating Outlook  Outlook remains stable – Capital cushion eroded but balance sheets remain sound  Events, though large, are still earnings events  Market underwriting appears disciplined  Concerns: – Possibility for short-lived pricing improvement – Impact of catastrophe model changes – Investment situation puts more emphasis on underwriting acumen – Regulatory uncertainty – Financial flexibility  Outlook will be revisited in January 2012

53 19 October Emerging Markets: Russia and the CIS Middle East & North Africa Carlos Wong-Fupuy Senior Director, Analytics – A.M. Best Europe Rating Services Ltd. (London) Mahesh Mistry Associate Director – A.M. Best Europe Rating Services Ltd. (London)

54 19 October Russia and the CIS Insurance Markets: Main Features and Trends Carlos Wong-Fupuy Senior Director, Analytics – A.M. Best Europe Rating Services Ltd. (London)

55 55 Russian insurance market: main features  General Economy – Russian GDP – 6th largest economy / One of the BRIC countries – GDP growth (4% in 2010) and growth forecast for the coming years – Follows higher rates and severe contraction in 2009 – Russian top companies – Revenues 2010 GazpromUSD 94 bn LukoilUSD 68 bn RosneftUSD 35 bn SberbankUSD 30 bn – Strongly dependant on oil prices – Fragile banking system following 2008 crisis

56 56 Russian insurance market: relative size 56 GWP Tech Reserves AssetsCapital Russia Munich Re RSA CCR France  The market as a whole remains relatively small / Ranked 19th in the world  Relatively low technical reserves compared to premiums  Asset and capital base small compared to insurance risk volumes Figures in USD billions

57 57 Russian insurance market main features  Primary Insurance – Fragmented market – Mainly non-life – Compulsory Medical “non-risk bearing” / MTPL – Financial schemes (tax optimisation)  Reinsurance – USD 1 billion GWP estimated in total – Main reinsurers are primary writers as well – “Captive” business 57

58 58 Russian insurance market trends  Top 20 companies accounted for 55% of market share in 2007 (about 65% in 2010)  Curbing measures regarding financial schemes  Increase in regulatory capital requirements  Foreign participation has reached current limits  Expansion on regional reinsurance – regulatory / rating restrictions 58

59 59 Russian insurance market rating considerations  Capitalisation and financial flexibility – Complex ownership structures – Strong links with industrial and financial groups  Rapid expansion  Volatility of results and business mix – Underwriting results (insurance cycle) / lumpy business – Investment returns  Risk management – large exposures versus capital base  Quality of reinsurance / co-insurance programmes  Third-party scrutiny: IFRS / actuarial reviews / ratings 59

60 60 Ukrainian insurance market  GWP USD 2.5 bn (out of which only USD 1.0 bn is estimated to be proper risk transfer business)  Dominated by motor insurance (about 50%)  Outwards reinsurance to Russia expected to increase – removal of restrictions – need to meet rating requirements  Tax optimisation schemes  Very fragmented market - impact from investment markets – around 450 companies at the moment  Significant links with banks, industrial groups and government institutions  Concentration – Top 10 companies 50%  Foreign participation restrictions being relaxed following WTO membership  Regulatory changes in the pipeline 60

61 61 Kazakhstan insurance market  GWP USD 1.0 bn – Top 10 companies 75%  Low penetration but double digit growth in GWP  Energy reserves – compulsory business (MTPL / health)  Outwards reinsurance mainly to Russia  Compulsory insurance – MTPL 20% / Accident & health care 10%  About 40 companies at the moment  Tax optimisation schemes  Major players owned by banks  Banking bailouts in 2008/09  No restrictions on foreign participation 61

62 62 Russian & CIS insurance markets conclusions  Significant growth potential from a relatively small base  Rapid consolidation  Regulatory changes in the pipeline  For top companies, capitalisation and volatility of results not necessarily an issue  Major players gradually enhancing transparency  Investment risk and group structure need to be addressed 62

63 19 October Emerging Markets: Middle East & North Africa Mahesh Mistry Associate Director – A.M. Best Europe Rating Services Ltd. (London)

64 64 Middle East & North Africa update  Drivers for Ratings  Market Overview  Strengths / Challenges  Takaful  Conclusion

65 65 Drivers for ratings  Increasing involvement of brokers  Regulatory requirement to reinsure with secure rated companies  Access to better quality business  Large commercial risks placed through local insurers  Distinguished from competitors  Independent health check / Improving corporate governance  Expansion into regional markets  Reinsurance pools

66 66 Middle East & North Africa overview  Despite challenging market conditions, the Middle East & North Africa insurance market continues to grow Gross premiums written: Middle East & North Africa

67 67 Middle East & North Africa overview  Dominated by the UAE and the KSA, with non-life being the key component in the region. Life remains small with medical the main driver Middle East & North Africa - Life and Non-Life Premium Volumes (2010)

68 68 Middle East & North Africa overview  The Middle East & North Africa insurance market is still small compared to other emerging markets, focussed on non-life and not at the level of its peers Life and Non-Life Premium Volumes in 2010 Source: Swiss Re Sigma and A.M. Best Co.

69 69 Middle East & North Africa: strengths and challenges  Young markets with significant potential  Competition + Small market size, with low penetration rates + Oil prices above budgets will foster growth in the region + Expansion of compulsory lines +/- Changing demographics in the region - Political instability creates challenging environment + Top players consolidating their position - Fragmented markets - New conventional and takaful operators +/- Regional expansion by top players +/- Consolidation / M&A - Regulation

70 70 Middle East & North Africa: strengths and challenges  STRENGTHS – Strong growth – Top companies consolidating positions – Regional diversification – Diversified portfolios on gross basis Business ProfileOperating PerformanceBalance Sheet Strength  WEAKNESSES – In most cases due to market growth – Low retention / reinsurance dependence – No great depth of expertise for large risks  STRENGTHS – Top companies have excellent results – Gradual de-risking of investments  STRENGTHS – Very good risk-adjusted capitalisation – No leverage – Low CAT exposure  WEAKNESSES – Most reliant on reinsurance commissions – Not all make technical profits – High dependence on investment income  WEAKNESSES – Surplus capital used for aggressive investment policy – Limited capital modelling capabilities

71 71 Middle East & North Africa: strengths and challenges  STRENGTHS – Some companies have made significant improvements – Deployment of resources and skill should improve controls and risk mitigation  WEAKNESSES – Generally low ERM awareness – Reliant on consultants – Models are in use, however with limited understanding 71 Political Instability – Political instability – volatile environment – Companies have shown resilience to current market conditions – Reinsurers have mitigated risks more effectively due to diversification – Review of risk management and business continuity plans ERM

72 72 Basic Takaful model

73 73 Takaful  Competition – Compete in the same space as conventional insurers – Conventional companies expanding offering through Takaful windows or subsidiaries  Weak capital strength of policyholders’ fund – Difficulty in generating surpluses in the policyholders’ fund Poor underwriting results High management charges and fees – Increasing dependence on Qard’ Hasan  Regulation – Lack of transparency on regulation implies unclear protection to policyholders – Conflict between regulators and Sharia’ board  Rating Methodology to take into consideration changes in the market

74 74 Middle East & North Africa: conclusion  Market Potential – Growth by energy prices and expansion of compulsory medical – Changing dynamics of underlying population  Political instability – Create volatility and reduce growth prospects – Longer disruptions may impact ratings  Competition – Expected to be fierce with top companies strengthening their positions, with consolidation expected in the medium term  ERM – Current climate highlights weaknesses (capital and investment management, regional instability) – Rebalancing of portfolios underwriting and investments activity in current climate  Regulation – Must keep pace as companies and markets continue to develop

75 19 October Rating Criteria Update Stefan Holzberger CPA Managing Director, Analytics – A.M. Best Europe Rating Services Ltd. (London)

76 76 Topics  Solvency II and Financial Strength Ratings  Natural Catastrophe Risk – Reliance on Models  Investment Risk and Economic Uncertainty – Sovereign Risk – Contagion

77 77 Topics  Solvency II and Financial Strength Ratings  Natural Catastrophe Risk – Reliance on Models  Investment Risk and Economic Uncertainty – Sovereign Risk – Contagion

78 78 Solvency II RATING IMPLICATIONS STILL UNCERTAIN POSITIVE  MCR / SCR not an issue (for now)  Diversification benefits  Improved risk management  More in-depth reporting – Improved transparency NEGATIVE  Increased capital requirements – Investments – Lines of business  Costs (Pillars II and III)  Confusion around disclosures  Fungibility of capital  Insurers in non-EU countries – Collateral requirements – Elevated capital requirements

79 79 Solvency II RATING IMPLICATIONS STILL UNCERTAIN GOOD NEWS FOR…  Global Insurers – Diversification – Increased M&A – Internal Economic Capital Models  Global Reinsurers – Increased demand – Capital charge on re recoverables STILL MUCH UNCERTAINTY…  Effective date  Transition periods  Catastrophe risk module  Internal economic capital model approval  Finalized capital charges  Equivalence  Group supervision  Regulatory execution risk

80 80 Topics  Solvency II and Financial Strength Ratings  Natural Catastrophe Risk – Reliance on Models  Investment Risk and Economic Uncertainty – Sovereign Risk – Contagion

81 81 Catastrophe risk management Data Quality Monitoring Controls

82 82 Catastrophe risk management KEY FACTOR IN ANALYSIS DUE TO SUDDEN SHOCK TO BALANCE SHEET MAIN COMPONENTS OF ANALYSIS  PMLs for various return periods  TVaR above various return thresholds  Zonal aggregates  Data quality  Underwriting decision making DISCUSSIONS WITH MANAGEMENT  Model output is the starting point  Characteristics of the book of business  Risk mitigation  Deterministic scenarios  Actual loss experience

83 83 KEY FACTOR IN ANALYSIS DUE TO SUDDEN SHOCK TO BALANCE SHEET Catastrophe risk management REQUIREMENTS  PMLs reflect most recent information available  Credible assessment of catastrophe risk based on worldwide exposures  No requirement to use a specific model or multiple models  Options selected for demand surge, storm surge, fire following earthquakes, Atlantic Multi-Decadal Oscillation and secondary uncertainty DISCUSSIONS WITH MANAGEMENT  Materiality of change relative to capital requirements  Overall approach to risk management  Management’s view of model changes relative to book of business  Planned actions to mitigate exposure

84 84 Catastrophe risk management Catastrophe model changes – RMS v. 11 PRIMARY INSURERS  Still sorting out the impact / response  Raising prices on cat business  Buying higher limits  Buying protection beyond 100 / 250 year return periods  Multiple models run  Some negative rating actions  Material changes in assumptions reviewed by A.M. Best REINSURERS  Minimal direct impact  Not model dependent – Variety of tools (internal and external) – Zonal aggregates  Potential business opportunities – RMS v.11 partially reflected in 1 July renewals (blend of old and new) – Expect full adoption of new model in 1 January renewals  Impact still uncertain

85 85 BCAR – Catastrophe stress test ADJUSTMENT -Subtract after-tax net PML from Surplus EVENT – 1/100 Wind or 1/250 Earthquake ADJUSTMENTS -Subtract after-tax net PML from Surplus +Add 40% of pre-tax net PML to Loss Reserves +Add 40% of reinsurance recoverable to credit risk ADJUSTMENT - Reduce surplus by after-tax net PML Standard BCARCatastrophe Stress Test Will use recent actual event if higher than modelled losses 1 st EVENT – 1/100 Wind or 1/250 Earthquake 2nd EVENT – 1/100 Wind or 1/100 Earthquake

86 86 Topics  Solvency II and Financial Strength Ratings  Natural Catastrophe Risk  Reliance on Models  Investment Risk and Economic Uncertainty  Sovereign Risk  Contagion

87 87 Economic uncertainty NOT A PRETTY PICTURE UNITED STATES  Sovereign debt downgrade  Anemic GDP growth  Elevated unemployment and weak labor market  Volatile financial markets  Economic and political costs of additional stimulus high  Danger of double-dip recession EUROPE  Greece, Portugal and Ireland in crisis  Italy and Spain experiencing pressure  Unemployment high  Social and political backlash to proposed austerity measures  EU based commitment to a solution uncertain  Long term solution to economic troubles even more uncertain

88 88 Economic uncertainty US INVESTMENT RISK STRESS TEST FACTORS  Assumes a downgrade of US bonds to AA negative  Decline in financial institutions directly linked to US government  General decline in US corporates  Rise in interest rates  Decline in equity markets and rise in equity market volatility  Decline in real estate values RESULTS  Greatest threat is decline in market value of fixed income securities  Pressure on companies with limited liquidity  Non-life companies benefited from lower asset leverage and more liquid investments  Life companies faired worse due to asset leverage  No immediate downgrades

89 89 Economic uncertainty EUROPEAN INVESTMENT RISK STRESS TEST FACTORS  Valuation haircut on all European sovereign and corporate bonds  Valuation haircut of – 25% on equities – 11% on residential property – 25% on commercial property – 11% on real estate funds  Increased risk charge on equities – To 25% from 15% RESULTS  Most passed the initial stress test – BCAR loss <50 points and remained above threshold for rating level  Ongoing discussions with management – Hedging strategies – Attitude toward investment risk – Rational for holding risky investments  Continued monitoring of situation

90 90 EUROPEAN INVESTMENT RISK STRESS TEST Economic uncertainty

91 91 Economic uncertainty  Rating Implications for US and European Companies  No immediate negative rating actions  Ongoing discussions with management – Hedging strategies – Attitude toward investment risk – Are investments supporting local business or is the group seeking to improve yields  Consideration for financial flexibility, earnings strength and business profile  A.M. Best will continue to monitor sovereign ratings  A.M. Best will follow developments within the US and EU as legislators seek long-term solutions to foster economic growth and balance fiscal budgets

92 92 Summary: Pressure for Many – Opportunities for Some  Pressure is mounting – Rising investment risk – Economic uncertainty – Regulatory uncertainty and increased costs – High catastrophe losses – Reserves are thin – Soft market pricing  Opportunities for those companies who… – Focus on risk and capital management – Develop a diversification strategy or defensible niche strategy – Prepare for the next generation of regulatory hurdles – Maintain capital levels that enable the company to seize market opportunities when they arise

93 93 A.M. Best’s Criteria and Market Briefings  For all methodologies and rating criteria please visit   For the latest insurance market briefings and special reports please visit  

94 94 Questions and Comments Welcome

95 95 © AM Best Company (AMB) and/or its licensors and affiliates. All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT AM Best Company PRIOR WRITTEN CONSENT. All information contained herein is obtained by AMB from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall AM Best Company have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of AM Best or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if AM Best Company is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY AM BEST COMPANY IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling.

96 19 October Open Q & A Nick Charteris-Black Managing Director, Market Development – A.M. Best Europe Rating Services Ltd. (London)


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