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CURRENT DIRECTIONS OF

CURRENT DIRECTIONS OF. P & C REINSURANCE 2005 REVIEW - 2006 PREVIEW. GORDON CRUTCHER, Sutton Reinsurance. THE REINSURANCE MARKET IS GLOBAL. 3. REINSURANCE MARKET. The reinsurance market is complex and inter-related. One reinsurer can rarely respond to all of a client’s needs.

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CURRENT DIRECTIONS OF

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  1. CURRENT DIRECTIONS OF P & C REINSURANCE 2005 REVIEW - 2006 PREVIEW GORDON CRUTCHER, Sutton Reinsurance

  2. THE REINSURANCE MARKET IS GLOBAL 3

  3. REINSURANCE MARKET • The reinsurance market is complex and inter-related. • One reinsurer can rarely respond to all of a client’s needs.

  4. REINSURANCE MARKET • Insurers usually prefer to have several reinsurers on their treaties. • Better security; more flexibility.

  5. REINSURANCE MARKET In compiling its 2005 edition of Global Reinsurance Highlights, Standard & Poor’s Ratings Services collected data on approximately 220 reinsurance organizations from 48 countries.(Life + P&C)

  6. REINSURANCE MARKET Estimated Global Reinsurance (in 2004) : • Capital + Shareholders’ Funds: $377 billion • Net Reinsurance Premiums Written: $167 billion S&P: Global Reinsurance Highlights, Sept. 2005 (P&C + Life)

  7. REINSURANCE MARKET Estimated Net Reinsurance Premiums Written by the top 35 world-wide reinsurance groups: $146 Billion (87%) A.M. Best: Review/Preview – January 2006 (P&C + Life)

  8. REINSURANCE MARKET Estimated Global Reinsurance Capacity: $2 billion any one program

  9. REINSURANCE MARKET • Reinsurers usually want to spread their risks geographically, and by class of business – seeking a diverse portfolio of risks. • Diversification helps make underwriting results more predictable – and more profitable.

  10. REINSURANCE MARKET • Canada does NOT have a single independent domestic reinsurance company. • All reinsurers operating here are ultimately foreign-owned. 11

  11. COMPARISON OF ASSUMED REINSURANCE PREMIUMS

  12. COMPARISON OF ASSUMED REINSURANCE PREMIUMS • Source for Gross Reinsurance Premiums ceded by Region: • International Association of Insurance Supervisors – “Global Reinsurance Market Report 2004” Published December 2005

  13. Thus eventselsewherein the worldcan impactCanadian reinsurance rates and conditions – as well as the security ratings of reinsurers doing business in Canada. 14

  14. CURRENT REINSURANCE MARKET • With a few exceptions, the reinsurance sector’s capital adequacy generally held up in the face of record losses in 2005. • The global reinsurance sector lost as much as $20 billion of equity in 2005, as a result of record Cat losses. - Fitch Ratings Special Report: Dec. 7, 2005

  15. CURRENT REINSURANCE MARKET • This equates to 5% - 6% of the global reinsurance industry’s year-end 2004 surplus. (Significant but manageable.) • Expect more than $16 billion of new capital to find its way in the reinsurance sector by April 2006. • Also expect rates to stay firm. - Fitch Ratings Special Report: Dec. 7, 2005

  16. NEW CAPITALand the “Class of 2005” • Some $20 billion of new capital has already been injected into the insurance and reinsurance industry after the 2005 U.S. hurricanes. • 80% went to Bermuda. • $8 - $12 billion going into 12 new start-up reinsurers. S&P: “Global Reinsurance 2006 Outlook”, Dec. 2005

  17. ANNOUNCED INSURER CAPITAL RAISING*($ Millions, as of December 1, 2005) As of Dec. 1st, 19 insurers announced plans to raise $9.95 billion in new capital. Twelve start-ups plan to raise as much as $8.65 billion more for a total of $18.65 billion. Likely at least $20B raised eventually. *Existing (re) insurers. Announced amounts may differ from sums actually raised. Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute.

  18. S&P lowered its outlook for the GLOBAL reinsurance sector from stable to negative on Sept. 28, 2005. Outlook remains negative. S&P downgraded five reinsurance groups in November and December. 19

  19. S & P’s CONCERNS: • Strains on reinsurers’ capital caused by largest Cat loss year in history. • Higher than expected volatility. • Will the industry price risk exposures appropriately and manage its risk aggregation? • Potential for adverse reserve development from 2005 Cats. S&P: “Global Reinsurance 2006 Outlook”, Dec. 2005

  20. REINSURERS’ COMBINED RATIOS • Canadian Reinsurers • 2001: 119% • 2002: 110% • 2003: 96% • 2004: 92% • 2005 (@ Q3): * 107% • U.S. Reinsurers • 2001: 143% • 2002: 121% • 2003: 101% • 2004 105% • 2005 (@ Q3) 124% (* MSA Research)

  21. COMBINED LOSS & EXPENSE RATIOS OF CANADIAN REINSURERS Source: Annual Statistical Issues of Canadian Underwriter Magazine and MSA Research for Q3 2005

  22. NET PREMIUMS WRITTEN BY CANADIAN REINSURERS Source: Annual Statistical Issues of Canadian Underwriter Magazine and MSA Research for Q3 2005

  23. TOTAL REINSURANCE CEDED(Domestic & Foreign Companies) Source: OSFI Financial Data

  24. LESS BUSINESS AVAILABLE FOR REINSURERS • Insurer retentions continuing to gradually increase. • Mergers and acquisitions. • Reinsurance “pie” in Canada is shrinking.

  25. LESS BUSINESS AVAILABLE FOR REINSURERS • Insurance company mergers and acquisitions are NOT good news for reinsurers. • e.g. Allianz Canada no longer buys an independent treaty program. Neither will Citadel next year. • SUPPLY of reinsurance has increased but the DEMAND has been declining.

  26. CEDED REINSURANCE PREMIUMS AS % OF TOTAL INS. PREMIUMS 30% 24% 24% 27% 30% 31% Source: OSFI @ Q4 each year – but Q3 for 2005

  27. RELATIVE IMPORTANCE OF REINSURANCE TO CANADIAN INSURERS Ratios of “Reinsurance Ceded” to “Net Premiums Written” • Wawanesa Mutual Insurance: 2% • Dominion of Canada General: 4% • Aviva Insurance Co. of Canada: 17% • Economical Mutual 28% • Zurich Insurance Company: 28% • R & SA Insurance Co. of Canada: 33% • ING Insurance Co. of Canada: 45% • Commonwealth Insurance Company: 79% Source: OSFI Data as of Q3 2005

  28. QUESTION ? • If an insurer’s reinsurance premiums are only 2% - 20% of its total original premium income, what impact would a 10% increase in reinsurance costs have on the premiums that insurer charges the public?

  29. REINSURANCE CEDED TO PREMIUMS WRITTEN Source: OSFI @ Q3 2005

  30. IT’S GETTING LONELY OUT THERE! • Fewer licensed reinsurers. • If Swiss Re buys ERC, will be only 18 active markets left in Canada. •  Used to be 41 in 1991. 31

  31. ACTIVE FEDERALLY – LICENCED INDEPENDENT REINSURERS • Aspen Re • AXA Re • CCR • Endurance Re • Everest Re • Folksamerica • GE/ERC • General Re • Hannover Re • Lloyd’s • Mapfre Re • Munich Re • Odyssey Re • Partner Re • SCOR Re • Swiss Re • Toa Re • Transatlantic Re • XL Re • NEW IN 2005: • None • LOST IN 2006: • GE/ERC ?

  32. UNLIKELY THAT MORE M&A ACTIVTY JUST AHEAD FOR REINSURERS • Fitch does not view GE’s sale of E.R.C. to Swiss Re as the beginning of a trend. • GE had indicated for some time that its reinsurance operations were not a strategic fit with the rest of its operations. - Fitch Ratings Special Report: Dec. 7, 2005

  33. REVIEW OF 2005- THE BIG STORY WAS THE WEATHER • 2005 was the year Mother Nature showed it was mad at the world. • Relentless, unstoppable weather extremes wreaked havoc around the world. • The driest year in decades across the Amazon rainforest. 34

  34. REVIEW OF 2005-THE BIG STORY WAS THE WEATHER • A record drought in south-eastern Australia; • Weather striking Europe with a biblical vengeance (flooding, searing heat, wildfires); • Weeks of torrential rains and floods in south China. 35

  35. REVIEW OF 2005- THE BIG STORY WAS THE WEATHER • More than 112,000 people died around the world from natural and man-made catastrophes. • Total financial losses of some US $225 billion. • Estimated US $80 - $100 billion of these losses (36%) were insured. Source: Swiss Re Sigma 36

  36. REVIEW OF 2005 - THE BIG STORY WAS THE WEATHER • It was the “worst-ever” Atlantic hurricane season. Unprecedented. • The most active – and destructive. • 27 named tropical storms (average: 10) • 13 of these became hurricanes (ave: 6) • 7 of the hurricanes were major (ave: 2) 37

  37. REVIEW OF 2005 - THEBIG STORY WAS THE WEATHER • One hurricane in particular, Katrina, pounded Florida, the Gulf Coast, and the City of New Orleans. • The worst natural disaster in American history. • Then came Rita . . . and Wilma . . . and Alpha . . . and Zeta. 38

  38. WEATHER EXTREMES – MORE TO COME ? • There is increasing evidence Katrina and Rita were not freak events. • The noticeable increase in storm activity in recent years is part of an emerging trend over the past 25 years of: - greater frequency of storms; and - increasing destructive capacity. Nature magazine: August 2005, quoting Kerry Emanuel of the Massachusetts Institute of Technology

  39. REVIEW OF 2005 LOSSES- IN NORTH AMERICA • A year of record losses. • Earliest start of hurricane season in 45 years. • First time in 89 years that two major hurricanes occurred before August 1st. • The last hurricane in 2005 formed on December 30th. 40

  40. KATRINA • The largest insured loss in history. • Estimated loss: $40 - $60 billion. • 1.6 million claims. • Some 10,000 adjusters at work. • Mississippi lawsuit to recover flood claims from insurance policies.

  41. MAJOR 2005 HURRICANES • August 28: Hurricane Katrina (Cat 3) • Sept 24: Hurricane Rita (Cat 5) • Oct 24: Hurricane Wilma (Cat 3) • Total deaths (U.S.): 1,777 confirmed • These hurricanes alone may cost the insurance industry as much as $90 billion. • Global reinsurers will absorb a substantial portion of this amount. S&P: “Global Reinsurance 2006 Outlook”, Dec. 2005

  42. IMPACT ON LOUISIANA ALONE • “It would take all the Homeowners insurance premiums paid in Louisiana over the past 25 years to cover the total Homeowners claims resulting from the 2005 hurricanes in the state.” - Insurance Information Institute

  43. U.S. INSUREDCATASTROPHE LOSSES $ Billions $100 Billion CAT year is coming soon 2005 will be by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come. *Includes $53.7 billion per ISO/PCS plus $4B offshore energy losses from Hurricanes Katrina & Rita. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B. Source: Property Claims Service/ISO; Insurance Information Institute

  44. CAT MODELS SHOWN NOT PERFECT AFTER ALL 2005 hurricanes turned an intense spotlight on exposure management - and on Cat models. 45

  45. INSURERS RELIED ONMODELS WHICH INDICATED THE PROBABILITY OF A KATRINA EVENT WAS ONE IN 500 YEARS = 0.20% Which insurer or reinsurer do you think incurred the largest loss from Katrina? . . . And also from Rita?

  46. IMPACT ON ALLSTATE • Allstate’s net loss from Katrina: $3.68 billion. (Rita was $850 M.) • Effective June 1, 2006, Allstate is buying additional Catastrophe reinsurance for 95% of $2 billion excess of $2 billion of aggregate losses.

  47. CATASTROPHE MODELS ARE BEING RECALIBRATED • Models built partly on science; • And partly on historical data; • And partly onprofessional judgement. • They weren’t programmed for a Katrina. 48

  48. SOURCE OF FUNDS FOR 2005 HURRICANE LOSSES • How was the insurance industry able to absorb the 2005 Catastrophe losses? • High profitability of insurance industry during Q1 and Q2 of 2005; • Record policyholder surpluses; • Investment income and new capital; • Significant risk transfer to reinsurers.

  49. SOURCE OF FUNDS FOR 2005 HURRICANE LOSSES • Reinsurers are expected to absorb at least 50% of the 2005 hurricane losses – & possibly as much as 60%.

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