Midwest Actuarial Forum
March 22, 2005
State of the Reinsurance Market
Bill Godfrey
Reinsurance Market Review
 Security
Assessment
 Renewals
Guy Carpenter
in 2005
2
A.M. Best Rating Distribution
40%
30%
20%
10%
0%
A++
A+
A
A-
B++
Global Reinsurers
B+
B, B-
C++,
C+
C, C-
D
E, F
U.S. Primary Companies
Source: A.M. Best
Guy Carpenter
3
Number of Reinsurers
S&P Rating Migrations Among the
Top 150 Reinsurers*
35
30
25
20
15
10
5
Rating as at 12/31/01
Guy Carpenter
Rating as at 8/01/02
Rating as at 8/01/03
R
N
R
B
-
B
B
B
B
B
B
B
B
B
B
B
+
B
B
A
-
A
A
+
A
A
A
A
+
A
A
A
A
A
0
Rating as at 8/01/04
Source: Standard & Poor’s
4
S&P 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
Guy Carpenter
5
Rating Changes Since September 11, 2001
for Top Ten Reinsurers
Standard and Poor's
Reinsurer
A.M. Best
9/11/2001
12/2/2003
9/11/2004
9/11/2001
11/6/2003
9/11/2004
Munich Re Group
AAA
A+
A+
A++
A+
A+
Swiss Re Group
AAA
AA
AA
A++
A+
A+
Employers Re Group
AAA
A+
A+
A++
A
A
Berkshire Hathaway Re Group
AAA
AAA
AAA
A++
A++
A++
Hannover Re Group
AA+
AA-
AA-
A+
A
A
A+
A
A
A
A-
A
Allianz Re Group
AA+
AA-
AA-
A++
A+
A+
SCOR Re Group
AA-
BBB+
BBB+
A+
B++g
B++g
Converium Holdings
A+
A
BBB
A
A
B++g
XL Re Group
AA
AA
AA-
A+
A+
A+
Lloyd's
U – indicates under review
Guy Carpenter
NR3 - indicates rating procedure inapplicable
6
Combined Ratio
U.S. P & C vs. Reinsurance Industry
150
Percent
140
130
120
110
P&C Ind
Guy Carpenter
'03
'02
'01
'00
'99
'98
'97
'96
'95
'94
'93
'92
'91
'90
'89
'88
'87
'86
'85
'84
'83
'82
'81
'80
100
Re Ind
7
Global Insured Catastrophe Losses
45
40
US$ Billions
35
30
25
20
15
10
5
0
70 972 974 976 978 980 982 984 986 988 980 992 994 996 998 000 002 004
9
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
2
2
2
Guy Carpenter
8
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
$182.6B
$15.2B
$12.2B
Total
*Estimate
Source: U.S. SEC Filings
Guy Carpenter
9
Reinsurance Industry Reserve Additions
The impact of U.S. casualty reinsurance business from 1997-2001
2003 Examples include:
Additional Development
Employers Reinsurance Corp
$ 355 million
American Re-Insurance Co
$ 546 million
General Reinsurance Corp
$ 402 million
Swiss Re America
$ 903 million
Transatlantic Re
$ 298 million
XL Reinsurance America Inc
$ 289 million
$2,793 million
2003 Combined Ratio
105.1%
108.4%
103.6%
138.5%
96.4%
151.3%
Source: U.S. Statutory Filings
Guy Carpenter
10
Reinsurance Industry Reserve
Additions
The impact of U.S. casualty reinsurance business from 1997-2001

2004 First 9-months updates:
Additional Development
- American Re-Insurance Co
$ 201 million
- Employers Reinsurance Corp $ 473 million
- General Reinsurance Corp
$ 474 million
- Swiss Re America
$ 134 million
- Transatlantic Re
$ 157 million
- XL Reinsurance America Inc $ 50 million
$1,489 million
Combined Ratio
114.3%
116.2%
112.6%
108.0%
102.0%
94.4%
Despite these actions, have reinsurers fully accounted for reserve additions taken
by primary companies during the last 30 months?
Source: U.S. Statutory Filings
Guy Carpenter
11
S&P Global Reinsurance Industry
Combined Ratio Versus Return on Revenue
Combined Ratio (left scale)
Return on Revenue (right scale)
140
15
130
10
120
5
110
0
100
90
-5
80
-10
88 989 990 991 992 993 994 995 996 997 998 999 000 001 002 003
9
1
1
1
1
1
1
1
1
1
1
1
1
2
2
2
2
Guy Carpenter
12
US Reinsurance Composite
Return on Equity (Surplus)
25
20
15
Percent
10
5
0
-5
-10
-15
-20
'83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03
Fortune 500 Median
Guy Carpenter
U.S. P&C
U.S. Reins
13
U.S. Reinsurance Composite
RBC Composite Weighted Average
600
500
400
300
200
100
0
'94
Guy Carpenter
'95
'96
'97
'98
'99
'00
'01
'02
'03
14
U.S. Reinsurance RBC
Composite Companies - 2003
24
22
20
18
16
14
12
10
8
6
4
2
0
Guy Carpenter
15
US Reinsurance Recoverables
from Unaffiliated Reinsurers
Reinsurance Recoverables on:
2003
Paid Losses
2002
$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
$156,260 M
$153,549 M
Total Recoverable
Guy Carpenter
Source: A.M. Best
16
2003 US Reinsurance Recoverables
Reinsurance Recoverables
Admitted Assets
$156 B
$1,174 B
Reins. Recov. / Adm. Assets
Industry Surplus
Reins. Recov. / Surplus
Guy Carpenter
13%
$354 B
44%
Source: A.M. Best
17
U.S. Reinsurance Recoverables
Dependence of U.S. Insurers on Reinsurance
(recoverables as percentage of surplus)
70
60
50
40
30
20
10
0
1997
1998
1999
Secured
Guy Carpenter
2000
2001
2002
Unsecured
Source: Standard & Poor’s
18
An Unprecedented Convergence

Adverse loss development in commercial lines for the last 10 accident
years

Adverse loss development for asbestos and pollution

Increased severity and frequency in short tail lines

September 11, 2001 - correlated losses from one event

Increase in reinsurance recoverables

Reserve gap (primary & reinsurers)

Low interest rates and lack of investment income

Drop in asset values due to equity market volatility

Regulatory and rating agency scrutiny following a climate of corporate
scandals

Prolonged soft market in insurance and reinsurance
A perfect storm?
Guy Carpenter
19
Reasons to be optimistic...

In the end, the insurance and reinsurance mechanism has
effectively done what it is supposed to do
– The industry has absorbed the losses from
WTC / 9-11
asbestos
pollution
and many other systemic threatening situations





Corrective measures are in place
– An increased focus on underwriting disciplines
– Adequate pricing
– New risk management techniques
Guy Carpenter
20
New Capital
2001 - 2003 Start-Ups
Year
Initial Capital
(US$ 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
Name
Total
Guy Carpenter
9.5
21
Agencies issue ratings to start up companies
Start Up Credit Ratings
Reinsurer
Standard & Poor's
AM Best & Co.
Allied World Assurance
NR
A+
Arch Re
NR
A-
Aspen Re
A
A
AXIS
A
A
Catlin Insurance Co.
NR
A
DaVinci Re
A
A
Endurance
A-
A
Montpelier Re
A-
A
Olympus Re
NR
A-
Platinum Underwriters
NR
A
Guy Carpenter
22
Exited 2001 - 2004
Name
AXA Corporate Solutions Re
Atlantic Mutual (Atlantic Re)
Auto-Owners Insurance Co.
Centre Re
CNA Re
Commercial Risk Partners
Copenhagen Re
Erie Insurance Group
Europa Re
Farm Family Casualty Insurance Co.
Fortress Re
Gerling Global Re
Hartford Re
Overseas Partners Re
PMA Re
Scandinavian Re
SCPIE Indemnity
St. Paul Re
SPS Re
Lloyd's Syndicate 102 (Goshawk)
Lloyd's Syndicate 839 (Trenwick)
Reason
Strategic
Strategic
Strategic
Financial Difficulty
Strategic
Financial Difficulty
Financial Difficulty
Strategic
Strategic
Strategic
Financial Difficulty
Financial Difficulty
Strategic
Financial Difficulty
Financial Difficulty
Financial Difficulty
Financial Difficulty
Strategic
Strategic
Financial Difficulty
Financial Difficulty
* Figures include primary and reinsurance business.
Guy Carpenter
Net Premiums
(US$ millions)
2,572
553*
2,797*
610
605
642
271
3,563*
145*
338
4,463
703
601
384
253*
751
170
114
201
Year
exited
2003
2003
2003
2002
2003
2001
2001
2003
2001
2003
2003
2002
2002
2001
2002
2003
2002
2002
2002
2002
2002
23
Major Reinsurance Centers:
Financial State in 2004

Bermuda
– Profitable
– Hurricanes impact reduced by FHCF
– Exposed to new Florida “take-outs”

US
– Profitable

UK
– Profitable
– Lloyd’s reducing capacity in 2005
Guy Carpenter
24
Reinsurance Market Review
 Security
Assessment
 Renewals
Guy Carpenter
in 2005
25
2005 Renewals

Property

Casualty
Guy Carpenter
26
U.S. – Cat Property Rate On Line Index*
300
ROL
200
100
0
89
90
91
92
93
94
95
96
97
98
99
0
01
02
03
04
* 1989=100. Index constructed by Guy Carpenter & Company, Inc.
Guy Carpenter
27
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.
Guy Carpenter
28
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
Guy Carpenter
29
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

Guy Carpenter
30
2005 U.S. Casualty Renewals

Workers Compensation

Medical Malpractice

Directors & Officers

Errors & Omissions

Employment Practices

Umbrella and Excess
Guy Carpenter
31
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
Guy Carpenter
32
2005 U.S. Casualty Renewals
Medical 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
Guy Carpenter
33
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
Guy Carpenter
34
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 E&O
Start-ups pushed to Quota Share





Guy Carpenter
35
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
Guy Carpenter
36
2005 U.S. Casualty Renewals
Umbrella 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


Guy Carpenter
37
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
Guy Carpenter
38
Midwest Actuarial Forum
March 22, 2005
State of the Reinsurance Market
Bill Godfrey