STATE OF THE REINSURANCE MARKET IASA Texas Chapter … IASA PRESENTATION.pdfIASA Texas Chapter Fall Conference. GUY CARPENTER Disclosure Securities or investments, as applicable are

GUY CARPENTER

STATE OF THE REINSURANCE MARKETIASA Texas Chapter Fall Conference

November 22, 2019

Zachary Wilson

Senior Vice President

GUY CARPENTER 2

GUY CARPENTER OVERVIEW & REINSURANCE BASICS1

2019 US PROPERTY CATASTROPHE UPDATE 2

MARKET TRENDS AND 2020 RENEWAL EXPECTATIONS3

STATE OF THE REINSURANCE MARKETIASA Texas Chapter Fall Conference

GUY CARPENTER

Disclosure

Securities or investments, as applicable are offered in the US through GC Securities, a division of MMC Securities LLC. (“MMCS”), a US registeredbroker-dealer and member FINRA/NFA/SIPC. Main office: 1166 Avenue of the Americas, New York, NY 10036. Phone: 212.345.5000. Securities orinvestments, as applicable are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized andregulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMCSecurities LLC, MMC Securities (Europe) Ltd., and Guy Carpenter, LLC are affiliates owned by Marsh & McLennan Companies (“MMC”). Reinsuranceintermediary services are offered through Guy Carpenter & Company, LLC.

This information was prepared by MMCS and/or Guy Carpenter & Company, LLC. (“Guy Carpenter” or ”GC”), the reinsurance brokerage arm of MMC.All statistical tables, charts, graphs or other illustrations contained herein were prepared by MMCS or GC unless otherwise noted. Results fromsimulations and projections are for illustrative purposes only and are based on certain assumptions. Therefore the recipient should not place unduereliance on these results. Past performance does not guarantee future results.

Neither MMCS nor GC is a legal, tax or accounting adviser and makes no representation as to the accuracy or completeness of any data or informationgathered or prepared by MMCS or GC hereunder. Your company should therefore consult with its own tax, accounting, legal or other advisers and makeits own independent analysis and investigation of any transaction, as well as the financial and tax consequences thereof, the creditworthiness of theparties involved and all other matters relating to the transaction, prior to its own independent decision whether or not to enter into any agreements inconnection with any transaction.

This presentation does not constitute an offer to sell or any solicitation of any offer to buy or sell any security or instrument or to enter into anytransaction on such indicative terms. An investment in insurance linked securities is speculative, involves a high degree of risk and should be consideredonly by institutional investors who can bear the economic risks of their investments and who can afford to sustain the loss of their investments.Noteholders may lose all or a portion of their investment. Institutional investors should thoroughly consider the information contained herein.

This document is not intended to provide the sole basis for any evaluation by you of any transaction, security or instrument described herein and youagree that the merits or suitability of any such transaction, security or instrument to your particular situation will be independently determined by youincluding consideration of the legal, tax, accounting, regulatory financial and other related aspects thereof. Opinions and estimates constitute MMCS’sand/or GC’s judgment and are subject to change without notice. In particular, neither MMCS nor GC owes duty to you (except as required by the rules ofthe Securities and Exchange Commission, Financial Industry Regulatory Authority, Financial Services Authority, and/or any other regulatory body havingproper jurisdiction) to exercise any judgment on your behalf as to the merits or suitability of any transaction, security or instrument. The informationcontained herein is provided to you on a strictly confidential basis and you agree that it may not be copied, reproduced or otherwise distributed by you(other than to your professional advisers) without our prior written consent.

This material provides general, educational and conceptual information about certain financial strategies, and does not discuss or refer to any specificsecurities or other financial product. This presentation is not intended as marketing, solicitation or offering any security or other financial product in anyjurisdiction. This material is intended only for sponsors, financial intuitions and qualified investors.

MMCS and/or GC may have an independent business relationship with any companies described herein.

Trademarks and service marks are the property of their respective owners.

The source of information for any charts, graphs, or illustrations in this document is GC Securities Proprietary Database 2019, unless otherwiseindicated.

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Disclaimer

Guy Carpenter & Company, LLC provides this report for general information only. The information containedherein is based on sources we believe reliable, but we do not guarantee its accuracy, and it should beunderstood to be general insurance/reinsurance information only. Guy Carpenter & Company, LLC makesno representations or warranties, express or implied. The information is not intended to be taken as advicewith respect to any individual situation and cannot be relied upon as such. Please consult yourinsurance/reinsurance advisors with respect to individual coverage issues.

Statements concerning tax, accounting, legal or regulatory matters should be understood to be generalobservations based solely on our experience as reinsurance brokers and risk consultants, and may not berelied upon as tax, accounting, legal or regulatory advice, which we are not authorized to provide. All suchmatters should be reviewed with your own qualified advisors in these areas.

Readers are cautioned not to place undue reliance on any historical, current or forward-looking statements.Guy Carpenter & Company, LLC undertakes no obligation to update or revise publicly any historical, currentor forward-looking statements, whether as a result of new information, research, future events or otherwise.

This document or any portion of the information it contains may not be copied or reproduced in any formwithout the permission of Guy Carpenter & Company, LLC, except that clients of Guy Carpenter &Company, LLC need not obtain such permission when using this report for their internal purposes.

The trademarks and service marks contained herein are the property of their respective owners.

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GUY CARPENTER OVERVIEW

5

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Marsh & McLennan Companies at a Glance

Marsh & McLennan Companies is a global professional services firm providing advice

and solutions in the areas of risk, strategy and human capital. It is the parent company

of a number of the world’s leading risk experts, and specialty consultants.

6

Clients in more than

130 countries

More than 60,000

colleagues worldwide

Annual revenue

exceeding $14.95 B

140+ year history

of leadership and

innovation

Dan Glaser

President/CEO

(Oliver Wyman, Lippincott,

NERA Economic Consulting)

Insurance Broker

and Risk Advisor

Risk and Reinsurance

Intermediary Services

Talent, Health, Retirement,

and Investment Consulting

Management

Consulting

Four companies with one purpose, helping clients manage risks and make the most of their opportunities, their capital, and their people

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The Basics – Guy Carpenter Today

1,600clients globally

$40Bin premium

placed

worldwide

More than

3,100colleagues

Revenue of

$1.6BMore than

60Offices

worldwide

Guy Carpenter helps its clients achieve profitable growth with a powerful combination

of specialized reinsurance broking expertise, strategic advisory services, and industry-

leading analytics.

7

We provide advice and solutions to address our clients’ strategic imperatives and strive to deliver superior results for every assignment

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Optimize return on

risk-adjusted capital

RISK

MANAGEMENT SOLUTIONS

• Treaty Reinsurance

• Facultative Reinsurance

• GC Analytics

• Specialty Practices

• Client Services

Achieve long-

term growth

BUSINESS

GROWTH SOLUTIONS• Capital Advisory

• Alliances + Acquisitions

• Geographic Expansion

• New Products + Distribution

• Technology Solutions

• Enterprise Risk Management

• Microinsurance

Full Range of Services to Support Profitable Growth

Strengthen Balance

Sheets to gain a

competitive advantage

• Mergers + Acquisitions

• Corporate Finance

• Alternative Capital

• Ratings Advisory

CAPITAL SOLUTIONS

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Guy Carpenter OverviewSpecialty Practices

GC SpecialtiesLine-of-business experts deliver deep market knowledge and efficient transactions in every

relevant geography to provide clients with an enduring competitive advantage.

GC Specialties

Over 100 professionals & staff

• Unique market insights

• Specialized analytics

• Peer analysis

• Frictionless transactions

• Market Influence

• Agriculture

• Aviation And Aerospace

• Construction/Engineering

• Credit, Bond, And Political Risk

• Cyber Solutions

• Excess & Surplus Lines

• General Liability, Umbrella &

Casualty Clash

• Healthcare & Life

• Marine & Energy

• Mutual Company

• Professional Liability

• Program Manager Solutions

• Property

• Retrocessional

• Structured Solutions

• Surety & Fidelity

• Terror Risk

• Workers Compensation

Reinsurance Basics

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What is Reinsurance?

INSURANCE COMPANY

(PRIMARY OR CEDING COMPANY)

PRIMARY

POLICY HOLDERREINSURER

Insurance for insurance companies

An insurance company, called the primary or ceding company, cedes portions of its premiums

and liabilities to another insurance company, known as a reinsurer

Reinsurance is a transaction between insurance

companies only – the primary policyholder is not

involved

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How Risk Is Transferred Through the Industry

Retail

Clients

Primary

Insurance

Companies

Insurance

Brokers &

Agents

Brokers and agents match buyers with

appropriate insurers, generally receiving a

commission from the insurer or a fee paid

by the buyer

Individuals, business of all sizes and

governments buy Insurance to protect

against all kinds of risk, including property,

liability, life / health, and credit

Sell policies to the original

consumer / business, either via

agents and brokers or directly,

(e.g. over the internet)

Reinsurance

Brokers

Insurance companies amass portfolios of

policies and reinsurance brokers help them

to buy reinsurance to manage risk.

Retrocessionaire Retrocessionaires are companies that sell reinsurance to

reinsurers.

Alternative/

Capital

Markets

Capital market investors, like pension funds, also

assume insurance related risks through

transactions that function similar to reinsurance.

Retail

Clients

Primary

Insurance

Companies

Reinsurance

Companies

Alternative /

Capital Markets

Insurance Brokers

& Agents

Reinsurance

Brokers

Retrocessionaire

Reinsurers, either through a broker or directly,

sell reinsurance coverage to primary

insurance companies

Reinsurance

Companies

Motor Home

CatastropheBusiness

Life & Health

12

EXAMPLES

&/or

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Why Do Insurance Companies Buy Reinsurance?

13

Capacity

StabilityCatastrophe

Financing

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Capacity

14

Capacity


Financing

Why do companies want capacity?

• Larger policy limits

─ Insurer may not want to issue a single

policy with a limit greater than a

certain amount

• Premium capacity

─ Regulators often cap the amount of

premium that an insurance company can

write in relation to the insurer’s surplus

(capital)

─ Use of reinsurance reduces an insurer’s

net written premium, enabling the insurer

to sell more policies

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Stability

15

Capacity


Financing

Why do companies want stability?

• Volatility may:

─ Affect stock value of publicly traded insurer

─ Alter financial rating by independent rating

agencies

─ Require abrupt changes in approaches taken to

manage underwriting/claim/marketing

─ Lead to insolvency

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Catastrophe Protection

16

Capacity


Financing

Why do companies want catastrophe protection?

• A single large event such as an earthquake can

cause losses to many of an insurer’s policies at the

same time

• The accumulation of all these losses may be more

than the insurer is able to pay on its own and

threaten its solvency

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Financing

17

Capacity


Financing

Why do companies want financing?

• Provides surplus relief by way of ceding

commission

─ Premium growth = surplus drain

- Immediate recognition of expenses when

issuing policy

- But, premium is only earned gradually

throughout year

- Causes surplus to decrease with each

incremental policy written

– Ceding Commission offsets expenses

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2019 US Property Catastrophe Update

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Market DriversGlobal Significant Insured Loss Activity

19

While insured loss for the first half of 2019 is below average compared with

previous years, Q3 has seen slightly more activity with Typhoon Faxai and

Hurricane Dorian primary contributors.

2019 loss estimates are preliminary and subject to change

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Dallas Tornado Update

20November 21, 2019

October 20, 2019

Insurance Council of TX - $2B

PCS - $2.5B

- Expecting over 30,000 claims

- Part of larger system, weather losses into

OK and AR

- Gap Clothes found 10 miles away

- Largely expected to be a retained event

for HNW Homeowners carriers

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Market DriversGlobal Significant Insured Loss Activity

21

While insured loss for the first half of 2019 is below average compared with

previous years, Q3 has seen slightly more activity with Typhoon Faxai and

Hurricane Dorian primary contributors.

2019 loss estimates are preliminary and subject to change

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Loss CreepHurricane Irma Losses Continue To Rise

22November 21, 2019

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HOT TOPIC: COLLATERALIZED REINSURANCE TRANSACTIONS

GUY CARPENTER 24November 21, 2019

Market DriversAnnounced New Reinsurance Capital 2018 vs 2019

Source: Artemis, Guy Carpenter

2018 H1 totalled $10.5B

2019 experienced a 54%

decrease at $4.8B

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Market DriversTotal Capital Base for Insurance Linked Funds Decreased in 2019

25November 21, 2019

Chart depicts the approximate AUM of the larger specialist managers up to April 1, 2019. Individual fund changes varied

considerably and there are material differences in how managers report their AUMs.

Source: InsuranceLinked

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Unique Features of a Collateralized Reinsurance Transaction

26

At contract inception,

market funds its

“obligations,”defined

as the contract limit

or a negotiated

amount via a trust

account.

A trust document

with a qualified bank

as trustee is

required; bank

requires other critical

documentation.

After expiration, if a

covered event has

not occurred, the

trusteed assets are

returned to the

reinsurer according

to a negotiated

collateral release

schedule.

The reinsurance

contract and/or I&L

incorporates the

funding feature;

negotiated collateral

release schedule

and other

amendments to

contract provisions.

1 2 3 4

Each step can take longer - timing is critical!

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Steps in Collateralized Placement Process

27

If CollateralizedFronted or

CollateralizedParticipation

IdentifyAppropriate

Markets

Program opportunities:

• Private layers • Aggregate • Top and agg/drop• RPP• CWIL• ILW• Cat bond

• Collateralized market database

• Through GC Securities, PropertySpecialty, existing broker relationships

• Obtain written client instruction to access markets

• Negotiate coverage including collateral release language

• Begin Trust

Agreement and Know

Your Client

documentation as

soon as possible

– Standard GC trust

agreement language

being negotiated

with main banks

Evaluate Client Cover Needs

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Coverage Comparison for Property Catastrophe Risk Transfer Products

28

Traditional/Collateralized Reinsurance Cat Bond

Access to CapitalAll traditional reinsurers and most ILS

investors

ILS investors and a small minority of

traditional reinsurers

Pricing* Matching ILS spreads 25% - 40% price reductions in 2013

Timeframe 4 weeks 8 – 12 weeks

Loss Trigger IndemnityIndemnity / Industry / Hybrid /

Parametric

Term Typically 1 year, multi-year available Typically 2-5 years

Loss Reporting / PaymentsBased on actual loss settlement / ability to

pre-fund

Requires claims reviewer / pre-set

payment dates / limited pre-funding

Additional Loss Settlement Cost NoYes, typically for each claims

submission

Counter-Party Risk Reinsurer security/collateralized Collateralized

CommutationNot required for traditional / flexible up to

5 years

Less flexibility; additional premium due

for each extension

Transaction Expense Minimal (Brokerage)Several additional fees spread over

duration of bond

Resolution of Issues Reinsurance case lawInvestor protective securities laws and

case law


Case Study: Issues with Collateralized Placements

• Recently, an insurance company released collateral after getting an updated

Claims Count in Florida

• The loss then continued to develop, so they asked the collateralized Markets

to return the collateral in order to pay claims

• Given the details of the Collateral agreement, the Markets were not

obligated to return the collateral after the Collateral Release was signed

• Some of the Collateralized Markets made a “Business Decision” to return

some of the collateral

• Others were not so commercial and did not return the collateral, leaving the

Insurance Company with a large Unrecoverable on their Balance Sheet

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2020 Property Renewal Preview

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Industry Headlines

31

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Lloyds Capacity Changes and Decile Ten

32

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What are Reinsurers Telling Us?

33

Based on 2017 to current catastrophe loss activity and increasing scientific reporting,

evaluation of climate change impact is a significant reinsurer concern

Capital remains plentiful but with greater scrutiny on where and how to deploy

Similar to mid-year 2019 renewals reinsurers will look to make underwriting adjustments

based on evolving view of risk

Most reinsurers report they will have similar capacity to deploy year on year

Retro pricing is under pressure and many markets are assessing potential impacts of buying

less cover or increasing spend

Mid-year 2019 renewals experienced program specific differentiation and reinsurers intend a

similar focus at January 1

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The Last Few Years in Review - Property

34

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The Last Few Years in Review - Casualty

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US Property Cat ROL Index

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Reinsurance Market Drivers

1

Capital

• The industry remains well capitalized even after the 2017 and 2018 catastrophes

• Pension fund interest in ILS funds continues, but is more cautious and is shifting between

managers

• The tightening of retro capacity has the potential to reshape reinsurer portfolios

2

Catastrophe Losses

• Catastrophe losses of $85 billion in 2018 (typhoons, hurricanes, wildfires) and catastrophe

loss reserve development from 2017 again challenged underwriting results

• Despite two year cat losses exceeding $230 billion, Reinsurer balance sheets remain strong

3

Mergers & Acquisitions

• Company combinations for a variety of reasons are re-shaping the industry:

China Re / Chaucer

Enstar / Maiden NA

Apollo / Aspen

Arch / Barbican

SCOR / Coriolis

Ren Re / TMR

MS Amlin / Leadenhall

Canopius / AmTrust Syn

Cincinnati Financial/ Beaufort

4

Taxes, Regulation, Ratings

• US Tax Reform drove changes to quota share arrangement to affiliates

• Brexit caused new company formations and/or domicile changes

• Solvency II should increase the transparency of European insurers and reinsurers

• Rating agencies toughen stance on Hedge Fund Re model

37


2019 Japanese Typhoon Loss Estimates

Super Typhoon Hagibis made landfall on October 12 in Japan as a category-2

passing over the Greater Tokyo Area

CompanyInsured Loss

EstimateNotes

AIR Worldwide $8 to $16bn

Estimate includes insured damage to property (residential, commercial, industrial and

agriculture/mutual), structures and their contents, and automobiles from wind storm surge

and inland flood

RMS $7 to $11bn

Estimate includes property damage and business interruption to residential, commercial,

industrial, marine, and automobile lines, for both the private and kyosai/mutual markets

from typhoon wind and typhoon flood

CoreLogic $7 to 11bn Estimate includes Wind: $2.8 to $4.4bn, Flood: $4.2 to $6.6bn

Typhoon Faxai made landfall on September 9 in the Greater Tokyo Area as one

of the strongest in recent years to strike Japan's capital city as a category-2

CompanyInsured Loss

EstimateNotes

AIR Worldwide $3 to $7bn

Estimate includes damage to property (residential, commercial, industrial, and

agriculture/mutual), both structures and their contents, and automobiles from wind and

storm surge.

RMS $5 to $9bn

Estimate includes damage and business interruption caused by typhoon wind and

coastal flooding to residential, commercial, industrial, marine, automobile lines, and

includes both the private and kyosai/mutual markets

CoreLogic $2.5 to $4.5bnEstimate includes insured loss from wind, storm surge, and inland flooding in Japan.

This estimate excludes losses from marine cargo, CBI, Autos and Crop

Karen Clark & Co $3 to $7bn Return time of a $15bn typhoon in Japan is 1 in 20 years

Typhoons Faxai and Hagibis significantly impacted the Tokyo metropolitan region one month apart at category 2 strength.

Stronger winds in Faxai and widespread flooding in Hagibis both will be material contributions to insured losses. Combined

loss estimates are as high as $25 billion.

GUY CARPENTER 39

Market DriversClaims Development for Costly North Atlantic Hurricanes – 2000 to 2017

This graphic uses data from Property Claim Services (PCS) to show the development of claims (in percentage terms) for a selection of U.S. hurricanes since 2000, starting at 200 days post-landfall and leading up to 700 days. All incurred an ultimate insured cost in the U.S. of more than USD 10 billion. Source: Guy Carpenter, PCS

GUY CARPENTER 40

Market Drivers

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Market Drivers

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Market DriversSignificant decrease in Excess Capacity at June 1

42November 21, 2019

Capacity tightened significantly at the June 1, 2019 US property catastrophe

renewals, both in Florida and on renewals with exposure primarily outside Florida.

Source: Guy Carpenter

148%

132%140%

116% 116% 116%

FLORIDA NON-FLORIDA ALL

2018 2019


Market DriversDedicated Reinsurance Sector Capital 2012 to H1 2019

While alternative capital dipped slightly through H1 2019, traditional capital grew by

roughly 1.5% for a total increase of 0.5% since year end 2018

GUY CARPENTER

Market DriversAlternative Capital by Source 2013 to 2019

Alternative capital decreased 3% by mid-year 2019 to $92 billion. Markel’s purchase of Nephila in November 2018 is reflected in the shift to Reinsurance Sponsored

Managers

0

20

40

60

80

100

120

2013 2014 2015 2016 2017 2018 6M19 E

Dedicated ILS Managers Reinsurance Sponsored Managers Direct Institutional Investors


Source: GC Securities Proprietary Database

Risk limit outstanding due to full or partial extension is not included. *144A catastrophe bonds issued as of Nov 7, 2019 excluding private transactions.

ILS Market UpdateState of the 144A Catastrophe Bond Market

Support for 2019 transactions has varied – while some were upsized,

others were downsized or pulled out of the market at this time


P&C Catastrophe Bond Pricing 2018 v. 2019

Source: GC Securities Proprietary Database (P&C catastrophe bonds status update as of Nov 7, 2019)

Catastrophe bond activity was impacted by the same factors reinsurers tackled when

forming their new views of risk; many transactions were completed at the top end of

initial pricing guidance or above

Following outliers are excluded from trending and not displayed: Atmos Re DAC 2019-1 (Expected Loss 0.45%; Net RoL 4.50%); Sanders Re II 2019-1 Cl B (Expected Loss 1.76%; Net RoL 12.25%)

GUY CARPENTER 47

Global Insurance Pricing Change2Q15 To 3Q19


U-Shape Market Cycle

Primary Rates

Increasing

Cost of Retro-

Reinsurance

Increasing

Will Reinsurance

Rates Follow?

STATE OF THE REINSURANCE MARKET IASA Texas Chapter … IASA PRESENTATION.pdfIASA Texas Chapter Fall Conference. GUY CARPENTER Disclosure Securities or investments, as applicable are

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