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Global Reinsurance AIG REINSURANCE UPDATE CAGNY MEETING June 2003 Chris Milton & Rich Skolnik.

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Presentation on theme: "Global Reinsurance AIG REINSURANCE UPDATE CAGNY MEETING June 2003 Chris Milton & Rich Skolnik."— Presentation transcript:

1 Global Reinsurance AIG REINSURANCE UPDATE CAGNY MEETING June 2003 Chris Milton & Rich Skolnik

2 Global Reinsurance AIG Current & Future Reinsurance Climate Reinsurance Market Players Capacity Price Contract Terms Credit Risk Rating Agency vs. Regulator

3 Global Reinsurance AIG Reinsurance Market Players Old Money vs. New Money Bermuda vs. Europe vs. USA Legacy Problems for Old Money –Asbestos –Reserve deficiencies Growing Pains for New Money –Staffing –Distribution

4 Global Reinsurance AIG Capacity Quality vs. Quantity –Casualty –Property –Specialty Conditions Future Considerations

5 Global Reinsurance AIG Price Soft Market Hard Market Transition Between the Two Cyclic Nature

6 Global Reinsurance AIG Contract Terms Reinsurers Try to Tighten Ceding Companies Try to Loosen Control Issues Collection Issues

7 Global Reinsurance AIG Credit Risk in Reinsurance Transaction Quality of Reinsurers’ Credit Preference in Collection Other Collection Problems –Willingness to Pay –Ability to Pay Counterparty Risk - Admitted vs. Non-Admitted - Collaterization

8 Global Reinsurance AIG Rating Agency vs. Regulator Rating Agency Requirements and Concerns Regulatory Requirements & Concerns How the Two Coordinate or Don’t

9 Global Reinsurance AIG Lloyd’s Market Highlights Creation of a Franchise Structure Transition From the Current 3-year Accounting to Annual Accounting The Phasing Out of Unlimited Liability 2002 Markets Combined Ratios –Lloyd’s: 98.6% (Source: Lloyd’s of London Global Report) –European Reinsurers:105.1% (Source: CSFB 13/03/03) –US Total P&C:108.3% (Source: Business Insurance 03/24/03) –US Reinsurers:121.3% (Source: RAA 03/26/03)

10 Global Reinsurance AIG Individual Members Corporate Members Strict investment criteria Premiums Trust Funds Funds at Lloyd's 40% of OPL* Other Personal Wealth Premiums Trust Funds Funds at Lloyd's 40% + of OPL* Central Fund * Overall Premium Limit. Ratios are minimum's from 2002, subject to a Risk Based Capital loading ** Plus $690m callable from Members ***Annual limit of cover = $562m, subject to $160m annual excess point (with maximum of $802m aggregate cover over 5 years) 13,974 11,200 24.8% 26,767 19,600 36.6% 438 474 -0.8% 903** 526 71.7% 2002 2001 Change $m Insurance of the Central Fund 562*** 508 10.6% Source: Lloyd’s global results and annual report 2002 Lloyd’s Chain of Security

11 Global Reinsurance AIG The Global Reinsurance Market is Dominated by a Few Key Players 2001 ($ in millions) Source: S&P Top 5 Reinsurance Groups55,365 Estimated Global Premiums96,808 % Total 57.2%

12 Global Reinsurance AIG Reporting Issues: Exposures are Measurable Only Once a Year Resources Needed to Monitor 250 + Reinsurers (Screening Model) Choices of Quality Reinsurers are Limited as Industry is Concentrated What Should be the Maximum Aggregated Recoverable Exposure per Reinsurer? Rating Agencies Inability to Forecast a Reinsurer’s Downfall Curtailment of Cessions to a Reinsurer May Help Realize the Prophecy Key Concerns of Credit Risk Management Process

13 Global Reinsurance AIG Strict Minimum Security Criteria Guarantees Collateral Diligent Monitoring of Reinsurers Credit Triggers in Reinsurance Agreements - Ratio Tests - Rating Downgrades - 20% Decline in PHS - Minimum RBC Ratio - Change in Ownership Credit Risk Mitigants

14 Global Reinsurance AIG Axis Specialty$1.7 billion Allied World Assurances Co Ltd.$1.5 billion Arch Reinsurance Ltd.$1.0 billion Montpelier Reinsurance Ltd.*$1.1 billion Endurance Specialty Insurance Ltd.$1.2 billion Olympus Reinsurance Company Ltd.$500 million DaVinci $500 million Aspen Insurance Ltd.$200 million TOTAL$7.7 Billion *Includes $200 million in capital raised in October 2002. Source: A.M. Best Co. data New Bermuda Start -Ups

15 Global Reinsurance AIG CompanyFormCapital Raised Partner Re Group Preferred Stock$400 million ACE Bermuda Insurance Ltd. Common Stock$1.1 billion XL Capital Group Common Stock$725 million Debt$1.6 billion Renaissance Reinsurance Ltd. Common Stock$233 million Preferred Stock$150 million PXRe GroupPreferred Stock$150 million Everest Re Group Common Stock$346 million Debt$200 million Source: A.M. Best Co. data Capital Increase in Established Bermuda Companies since 9/11

16 Global Reinsurance AIG Source: Standard & Poor’s Number of Reinsurers Change in Distribution for Top 150 Reinsurers Worldwide

17 Global Reinsurance AIG Asbestos Reserve Deficiencies Management Issues (e.g., transitions) Reinsurance Uncollectibles Investment Write-Downs Adverse Development Missed/Shifting Earnings Targets Reasons for Recent Downgrades of Reinsurers Worldwide

18 Global Reinsurance AIG  2001’s combined ratio was the worst-ever for reinsurers  2002 was bad as well  Clearly pressure on reinsurers to improve performance Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute Combined Ratio: Reinsurance vs. PC Industry

19 Global Reinsurance AIG Trends and Future Concerns 70% of the World’s Reinsurance Premium Suffered a Downgrade in the Past Year 8 of the Top 15 Reinsurers Have a Negative Outlook Virtually All Have Raised Equity or Hybrid Capital Since September 11th Deteriorating Investment Results Recognition of Prior Period Reserve Deficiencies Asbestos Losses Continue to Materialize Stagnant Mergers and Acquisition Market Foreign Markets’ Retrenchment S&P’s Negative Outlook for the Reinsurance Industry

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