global re insurance

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September 2013

Global Reinsurance Segment Review

The Capital Challenge

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Copyright 2013 by A.M. Best Company, Inc.ALL RIGHTS RESERVED. No part of this report or document may be distributedin any electronic form or by any means, or stored in a database or retrieval system, without the prior written permission of the A.M. BestCompany. For additional details, refer to our Terms of Use available at the A.M. Best Company website: www.ambest.com/terms.

BESTSSPECIALREPORTOur Insight, Your Advantage.

The Capital Challenge: ReinsuranceCapacity Overshadows MarketDespite a subpar operating climate, global reinsurers have managed to squeeze outrelatively reasonable returns on capital and compensate investors while sustainingorganic growth in capacity. Quite an accomplishment, especially considering all thevarious obstacles they have and continue to navigate.

Over the past two-and-a-half years, catastrophes worldwide have inflicted approxi-mately USD 190 billion in insured losses, according to Swiss Res Sigma. For globalreinsurers, these events were primarily a drag on earnings, as balance sheets remained

robust. The challenge of managing loss accumulation from global catastrophes was evi-dent in 2011, and since 2008 reinsurers have faced numerous hurdles due to a weak-ened global economy: deteriorating investment returns; more volatile investments; sup-pressed growth opportunities; increased client retentions and competitive pricing.

Now another hurdle has materialized on the horizon in the form of third-party capital.With excess capacity prevalent among the traditional reinsurers, pricing in the marketis already very competitive. This is most evident in longer tail casualty classes, leavingonly shorter tail specialty and property classes up for the chase. While the capital mar-kets historically have provided capacity out on the tail for property/catastrophe risk,generally in the form of catastrophe bonds, industry loss warranties (ILWs) and othercollateralized structures, it now appears investors, asset managers and bankers are

showing more interest in the lower layers of catastrophe programs, as well as in otherspecialty and casualty classes.

Various reinsurance brokers have reported that as much as USD 45 billion of additionalcapacity has entered the reinsurance market in recent years, representing 14% of thecurrent global property limit. Hedge funds, pension funds, endowments and trustslooking for a bigger slice of the pie are lured by the relatively favorable returns, float

Segment Review

August 26, 2013

Third-party

capital

intensifes

competition.

Analytical ContactsRobert DeRose

+1 (908) 439-2200 Ext. 5453

[email protected]

Greg Reisner

+1 (908) 439-2200 Ext. 5224

[email protected]

Editorial ManagementAl Slavin

Global Reinsurance

Contents

Top 50 . . . . . . . . . . . . . . 7Top 50 Ranking . . . . . . . .8

Lloyds Trends . . . . . . . .11

Brazil & Latin America . . 12

Asia/Pacifc . . . . . . . . . . 17

Middle East & North Arica 20

Regulation . . . . . . . . . . . 24

Outlook . . . . . . . . . . . . . 26

Exhibit 1

Global Reinsurance Shareholders Equity Plus Share Repurchases

(2008-2Q 2013 YTD)

Note: Excludes Lloyd's in all years and Alterra in 2Q 2013 YTD.

Source: A.M. Best data & research

4.0

6.3 16.3 20.4

25.829.8

0

50

100

150

200

250

2008 2009 2010 2011 2012 2Q 2013YTD

USDBillions

Total Shareholders' Funds Share Repurchases


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Special Report Global Reinsurance

and uncorrelated risk that the reinsurance business offers. However, industry headlinesmay be aggrandizing the true reinsurance appetite of this third-party capital. Front-linesources indicate that capital is entering methodically and precisely, not just rushing inblindly.

A few hedge funds have chosen to enter the reinsurance market directly by forming newreinsurance companies, which certainly has drawn attention. However, with hedge-fund-backed companies, not all of the capital is dedicated to providing reinsurance capacity. Asubstantial portion of that capital supports investment risk. Other investors have found iteasier to collaborate with traditional reinsurers or collateralized facilities that already havethe operational infrastructure, established relationships and, most important, the intellectualcapital to succeed at building a profitable underwriting portfolio.

Over the past year, numerous new side-cars have been formed by traditional rein-

surers. Third party or managed capital isbeing spun as affording additional financialand operational flexibility. This source ofcapital provides additional underwritingcapacity to better serve clients and com-plements the traditional balance sheet andrisk appetite. Managed capital thereforeshould allow the reinsurer greater flexibil-ity with capital resources throughout theunderwriting cycle and provides a low-risksource of income in the form of manage-ment fees and profit sharing. This revenue

offsets fixed operating costs that otherwise would fall to the bottom line.

Stickiness o Some Capacity QuestionableThe bad news is that more capacity only makes reinsurance pricing more competi-tive, especially when demand for cover is declining. The stickiness of this capacity alsoremains questionable. The traditional market has long prided itself on enduring, deepclient relationships. Should this additional source of capacity decide to exit quickly, theunderwriter might have some explaining to do! Reinsurers have seriously contemplatedthis reputational risk and should continue to do so. As is the case with SAC Re, a com-panys affiliation can greatly influence its destiny.

Some market observers believe that hedge funds are the biggest influence on the rein-surance market. Actually, its more likely pension funds, which control vast amounts ofcapital. These funds have been quietly involved in the reinsurance sector for some time.They have slowly taken the time to learn the industry, accumulate knowledge and gainsome comfort with the sectors cyclical characteristics and profitability. In addition,pension funds are typically long-term investors, which is more in line with reinsur-ance market fundamentals. Hedge funds typically are deemed to be fast money, but thatshould not be construed as criticism. Many hedge funds, not necessarily all, dart in andout of markets as opportunities arise and are careful not to overstay their welcome.That strategy has its place in the markets, and the key differences need to be under-stood. Many market observers would expect that over time the vast majority of hedgefund participants will move in and out of the reinsurance sector, while a minority of

hedge funds may make a longer term commitment.

Exhibit 2


Global Reinsurance Net Premium vs.Shareholders Equity (2007-2012)

0

50

100

150

200

250

2007 2008 2009 2010 2011 2012

(USDB

illions)

NPW Shareholders' Equity


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From a reinsurers perspective, this just might be the wave of the future where capitalmanagement includes managing third-party capital. The jury is still out on this, but tradi-tional reinsurers that dont have a long history of managing third-party capital are wadinginto the water. This suggests that management teams believe third-party capital likely could

linger in the reinsurance sector for some time, and that they understand a basic tenet thebest money managers attract the most capital. This subtle variation paints a different mind-set than the disposable reinsurers established after Hurricanes Katrina, Rita and Wilma in

2005. Currently, the traditional reinsurersmove is both defensive and offensive.Reinsurers want to demonstrate successat managing third-party capital, becauseif the market continues to evolve in thatdirection, they need the ability to point toan established track record.

A year ago, A.M. Best stated that overall,the (re)insurance market seems to befunctioning in solid though unspectacularfashion, a statement that is still valid today.Can a transition to easier days with hand-some pay take place without it first get-ting worse? It will continue to take a greatdeal of discipline. Traditional reinsurancecompanies may be able to emerge fromthis soft market in a strong position bysharing the brunt of any future losses withthird-party capital, a vast majority of which then quickly exits. That will be the trial by fire.

Until the staying power of recent third-party capital is tested by the wrath of a major loss,reinsurers will jockey for position to make sure they have a horse in that race.

Source: A.M. Best research

Exhibit 3

Global Reinsurance Year-to-Date Stock Price Change for Select

Reinsurers (2013)Prices as of Aug. 5, 2013

ArchAs

pen

Amlin

AlliedAx

is

Berkshir

eHa

thawa

yCa

tlin

Endu

rance

Gene

rali

Gree

nligh

t

Hann

over

Re

Korea

nRe

Mapfr

e

Maide

n

Montp

elier

MS&A

D

Munic

hRe

Partn

erRe

Platin

um QBE

Evere

stReRG

A

R

enna

isanc

eReSC

OR

Swiss

Re

Tokio

Mari

ne

Valid

us

Whit

eMou

ntainsXL

Alleg

hany

Corp.

22.9

15.6

8.8

20.424.4

32.3

1.6

33.9

6.6

18.5

-3.0-0.4

23.1

32.5

14.7

57.5

12.210.3

26.7

58.6

23.3

27.9

5.8

21.9

13.5

36.8

1.6

15.9

26.322.8

-5

0

5

10

15

20

25

30

35

4045

50

55

60

65

(%C

hange)

YTD % Price Change Avg Reinsurers % Change S&P 500

19.7

20.4

Exhibit 4Global Reinsurance Issued Sidecars and Cat

Bonds (2006-2013 YTD)

Source: A.M. Best research

0

2

4

6

8

10

12

2006 2007 2008 2009 2010 2011 2012 2013YTD

USDBillions

Cat Bonds Sidecars


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4


Given the greater pricing pressure that abundant capacity has placed on some of themost attractive margin business, A.M. Best can only contemplate the near-term effectto be thinner underwriting profits. That, combined with lackluster investment yields,makes achieving a reasonable return on equity a challenging proposition. There is the

hope that fee income and profit share on managed capital may help close the gap. Itis argued that while pricing is under pressure, perhaps the traditional reinsurers havecommanded too much rate on line. This new capacity may cut off the peaks and bringgreater stability to pricing for the foreseeable future. Time will tell.

While the January and April renewal period seemed to progress in orderly fashion, Juneand July renewals in Florida and southern states gave way to the pressure of excesscapacity and stagnant demand. U.S. property catastrophe pricing is reported to be offby as much as 20%. This class and region has been the bread and butter for the tradi-tional reinsurance sector since the hard market peaked in 2006, and it remains a leadingopportunity relative to other classes and regions in the world. Historical results demon-

strate that global reinsurers have done a commendable job in cycle management since9/11. It now seems this endeavor will become even more challenging.

Cycle Management: The Key to Long-Term SuccessIn this challenging market environment, prudent cycle management remains the mostimportant factor to long-term success. This cannot be overemphasized. Global reinsur-ers have successfully executed on this strategy in recent years, perhaps because of the

Exhibit 5Global Reinsurance US/Bermuda, European Big Four & Lloyds TrendSummary (2008-2Q 2013 YTD)(USD Billions)

2008 2009 2010 2011 2012 2Q 2013YTD*

5yr Avg

NPW (Non-Lie only) $119.5 $120.9 $128.0 $137.0 $146.6 $59.2 $130.4

Net Earned Premiums (Non-Lie only) 116.9 127.8 126.7 133.4 143.7 55.4 129.7

Net Investment Income 25.9 31.0 24.3 26.0 27.3 10.9 26.9

Realized Investment Gains / (Losses) (12.3) (4.2) 10.6 2.4 7.6 (4.4) 0.8

Total Revenue 175.1 206.0 227.9 226.4 250.4 102.8 217.1

Net Income 3.4 24.1 20.3 4.9 24.9 10.7 15.5

Shareholders' Equity 141.5 184.3 193.9 194.3 218.4 174.3 186.5

Loss Ratio 65.2% 58.9% 63.8% 76.1% 60.7% 59.2% 64.9%

Expense Ratio 29.8% 30.6% 31.6% 31.3% 31.3% 30.1% 30.9%

Combined Ratio 95.0% 89.5% 95.4% 107.4% 92.0% 89.3% 95.9%

Favorable Loss Reserve Development -7.6% -3.9% -4.9% -6.3% -6.1% -4.5% -5.8%

Net Investment Ratio 22.2% 24.2% 19.2% 19.5% 19.0% 19.6% 20.7%

Operating Ratio 72.8% 65.3% 76.2% 87.9% 72.9% 69.6% 75.1%

Return on Equity (Annualized) 2.1% 14.6% 10.6% 2.5% 12.1% 12.0% 8.3%

Return on Revenue (Annualized) 1.9% 11.7% 8.9% 2.2% 12.5% 20.8% 7.1%

NPW (Non-Lie only/Annualized) to Equity (End o Period) 84% 66% 66% 71% 67% 68% 70%

Net Reserves to Equity (End o Period) 357% 297% 293% 298% 264% 299% 298%

Gross Reserves to Equity (End o Period) 405% 332% 327% 327% 293% 325% 332%

Note: 2Q 2013 YTD data excluded Lloyds and Alterra.Source: A.M. Best data & research


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5


tough lessons learned in the late 1990s. Many reinsurers were badly burned by thesevere financial and operational ramifications of adverse loss-reserve development thatresulted from poorly underwritten and priced casualty business written during thatperiod. The bleeding that emerged from that time continued into the first half of the

next decade and strained some balance sheets, so much so that some reinsurers couldnot participate fully in the subsequent hard casualty cycle that began in 2001. For thosereinsurers that were able to leverage capacity in the following years, the opportunitywas enormous and continues to pay dividends in the form of favorable reserve runoff.Over the past five years, favorable reserve development has cumulatively contributedapproximately $37 billion to the bottomline for the segment and added approxi-mately four points to the average annualreturn on equity (ROE). It would be fool-ish to believe this benefit will continueindefinitely, but the roller-coaster ride of

the past serves as a powerful reminderthat reinsurers must continue to care-fully chart their course.

Reinsurers have used several key cyclemanagement strategies to manage orimprove capital efficiency in the cur-rent market dynamic. Third-party capitalseems to be emerging as a predomi-nant tool in todays tool box. Mergersand acquisitions have been used, butin a limited way to build larger bal-

ance sheets, augment the top line andrepatriate excess capital to investors.Expansion or diversification into fledg-ling business opportunities also hasincreased as companies look to offset the pressures associated with excess capacitychasing fewer opportunities in mature markets. Share repurchases continue to be themost favored capital management tool, providing reinsurers with a throttle on availablecapacity suitable to current market conditions. Since 2008, there have been approxi-mately $30 billion of share repurchases through June 30, 2013.

There have been relatively few visible M&A transactions: Validus Re/IPC and Flagstone,

Transatlantic Re/Alleghany, Harbor Point/Max Re and Alterra/Markel. Each transactionexpanded the scope of existing businesses. Low share valuations, difficulty in structur-ing mutually agreeable terms and conquering cultural issues remain as key obstaclesto additional deals. Still, A.M. Best does expect activity to increase as share valuationsimprove and excess capacity builds, further fueling competition as the global economycontinues to stabilize.

Some reinsurers have placed small bets on new ventures or classes of business such asagriculture (crop) insurance, accident and health, mortgage insurance, or even enteredemerging markets such as Latin America, China, the Middle East and Africa, either directlyor through investments and joint ventures. These opportunities generally present diversifi-cation benefits and help stabilize the top line as core businesses come under competitive

pricing pressure and shrinking demand. It appears management is doing its homeworkbefore making these strategic decisions, assessing downside risks and acquiring the

Exhibit 6

Global Reinsurance Return on Equity

US/Bermuda, Lloyd's & European Big Four

(2008-2Q 2013 YTD)

Note: Excludes Lloyd's 2Q 2013 YTD; data unavailable at date of publication.

Big Four includes Munich Re, Swiss Re, Hannover Re and SCOR.


-5

0

5

10

15

20

25

30

2008 2009 2010 2011 2012 2Q 2013 YTD

(%)

European "Big Four" US & Bermuda Market

Lloyd's Five-Year Average


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6


needed expertise to profitably manage these operations and investments. These steps arenecessary to assure the bottom line does not suffer as a consequence.

As previously discussed, reinsurers feeling the competitive pressure from capital market

participants increasingly have sought to partner with this capacity rather than fight it.Using this lower cost capacity has enabled reinsurers to better control market share, ifnot retain or gain it. Sourcing profitable risk is the main value-added quality that tradi-tional reinsurance companies provide to third-party capital. These days, sourcing risk isjust as hard, if not harder, than sourcing capital. The added revenues from managementfees and profit sharing from these ventures, while not a fortune, enhance reinsurersearnings and solidify the overall client relationship by affording additional capacity atpricing that otherwise would not be obtainable.


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The Top 50 Reinsurers: Reserve Releases,Diversity Drive ResultsThere was some movement among the ranks of global reinsurers during 2012, as pre-mium growth was mixed compared with 2011.

Despite a number of loss events in 2012 (including Superstorm Sandy, U.S. torna-does, wildfires and severe droughts), most reinsurers delivered underwriting profitsand solid earnings. Combined ratios for most were below 100, driven in part bycontinued reserve releases and well-diversified books of business. Capacity for theindustry remains strong, as outside investors continued to pour money into catas-trophe bonds, sidecars and other structured products. In 2012, close to $8 billion incapital went into sidecars and cat bonds alone, compared with about $6 billion in2011. Such investments in 2013 are on track to beat 2012 figures.

Some noted movements within the ranking included Arch Capital Group Ltd., whichmoved up five spots in 2012 to reach No. 30. The company increased premiums by28%, mainly on growth across all reinsurance lines of business, but particularly dueto the full year of premiums from other lines, which included mortgage reinsur-ance and significant growth in property, excluding cat and casualty reinsurance.These opportunities are somewhat unique, but being selective and opportunistic isin Archs DNA.

Lloyds secured fourth place, moving up from fifth in 2011, as premiums grew 16%,an increase attributed to growth in treaty reinsurance and facultative property. Atthe same time, Berkshire Hathaway slipped to fifth place, in part due to the end of

its 20% quota-share agreement with Swiss Re. The full impact of that change wastempered by new opportunities Berkshire found in Asia after the cat losses in 2011.

Tokio Marine moved up four spots in 2012 to reach No. 22. The company continuedto focus on growing international business, particularly in commercial specialty andin standard reinsurance lines in the United States.

Also worth noting in the ranking are companies that lowered premiums slightlyin 2012, likely through continued underwriting discipline under current marketconditions. American Agricultural Insurance Co., Axis Capital, Maiden Holdings,MS&AD, Validus and Platinum Underwriters all dropped several spots in the rank-

ing as they employed cycle management and elected to slightly reduce premiumscompared with 2011. Companies that exited the ranking included Flagstone, whichwas acquired by Validus, and Ariel, which was sold in pieces to several companies. Itappears that Enstar a significant run-off specialist will enter reinsurance throughits recently announced acquisitions of Arden Re (formerly Ariel) and Torus. It willbe interesting to see how much scale Enstar can gain. Newcomers to the top 50include Milli Re from Turkey and Wilton Re.

Given the abundant capacity in the industry heading into 2013, rates continue to beunder some pressure, particularly for areas that have experienced no losses over thepast few years. Overall returns are increasingly dependent on underwriting as inter-est rates remain at historical lows and pricing continues to show signs of softness. The

Jan. 1 renewal season saw pricing flat to increasing in the low single digits. April pric-ing was up slightly, particularly for loss-impacted contracts. However, June 1 renewals


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Exhibit 7Top 50 Global Reinsurance GroupsRanked by gross premium written in 2012.(USD millions)

Reinsurance Premiums Written

Life & Non-Life Non-Life only Ratios1

2013

Ranking Company Gross Net Gross Net

Total

Shareholders

Funds Loss Expense Combined

1 Munich Reinsurance Co.2 $37,251 $36,167 $22,539 $22,038 $36,248 61.2% 30.0% 91.2%2 Swiss Reinsurance Co. Ltd. 31,723 25,344 19,468 15,117 34,026 53.1 30.0 83.13 Hannover Rueckversicherung AG 2 18,208 16,231 10,201 9,060 8,909 70.7 25.4 96.04 Lloyds 3,4 15,785 11,371 15,770 11,358 31,204 56.0 34.9 91.05 Berkshire Hathaway Inc. 5 15,059 15,059 9,668 9,668 191,588 N/A N/A 99.96 SCOR S.E. 12,576 11,286 6,146 5,558 6,358 65.4 29.0 94.37 Reinsurance Group o America Inc. 8,233 7,907 - - 6,910 N/A N/A N/A 8 China Reinsurance (Group) Corp. 6,708 6,471 4,184 4,090 7,026 58.6 41.7 100.49 Korean Reinsurance Co. 6 5,113 3,390 5,113 3,390 1,275 79.7 18.1 97.910 PartnerRe Ltd. 4,712 4,567 3,910 3,768 6,934 58.5 29.3 87.811 Everest Re Group Ltd. 4,311 4,081 4,311 4,081 6,734 65.9 27.9 93.8

12 Transatlantic Reinsurance Co. 3,577 3,456 3,577 3,456 4,331 70.6 20.3 90.913 London Reinsurance Group Inc. 3,319 3,268 43 43 715 N/A N/A N/A 14 Assicurazioni Generali SpA 2,979 2,979 958 958 29,830 62.3 23.7 86.015 General Insurance Corporation o India 6 2,776 2,534 2,758 2,520 5,012 82.1 22.7 104.816 XL Group plc 2,364 2,209 2,008 1,885 11,856 58.4 28.6 86.917 QBE Insurance Group Ltd. 2,265 1,675 2,265 1,675 11,417 67.1 32.1 99.218 MAPFRE RE, Compania de Reaseguros, S.A. 7 2,256 1,466 1,890 1,174 768 67.3 29.6 97.019 The Toa Reinsurance Co., Ltd. 6,8 2,155 1,821 2,155 1,821 2,157 80.4 27.6 108.020 Odyssey Re Holdings Corp. 2,044 1,916 2,044 1,916 3,679 57.0 27.6 84.621 R+V Versicherung AG 9 2,017 1,972 1,981 1,955 2,527 74.1 24.5 98.622 Tokio Marine Holdings, Inc. 6,8 1,966 1,579 1,966 1,579 35,196 N/A N/A N/A 23 Catlin Group Ltd. 1,860 1,614 1,860 1,614 3,512 63.5 19.9 83.424 Axis Capital Holdings Limited 1,830 1,815 1,830 1,815 5,780 61.5 27.9 89.425 Caisse Centrale de Reassurance 1,719 1,719 1,645 1,595 2,330 52.5 12.0 64.526 MS&AD Insurance Group Holdings, Inc. 6,8,10 1,700 N/A 1,700 N/A 28,740 N/A N/A N/A 27 Amlin plc 1,592 1,278 1,592 1,278 2,411 59.6 27.3 86.9

28 RenaissanceRe Holdings Ltd. 1,552 1,103 1,552 1,103 3,507 30.4 27.4 57.829 IRB - Brasil Resseguros S.A. 1,365 792 1,301 745 1,140 67.2 44.8 112.030 Arch Capital Group Ltd. 1,282 1,227 1,282 1,227 5,169 50.9 29.3 80.231 Deutsche Rueckversicherung AG 1,280 819 1,221 772 273 72.0 28.6 100.632 Aspen Insurance Holdings Ltd. 1,228 1,157 1,228 1,157 3,488 56.1 29.3 85.433 White Mountains Insurance Group, Ltd. 1,179 948 1,179 948 4,258 58.4 31.9 90.334 Validus Holdings, Ltd. 1,154 1,009 1,154 1,009 4,455 55.5 23.1 78.635 Endurance Specialty Holdings, Ltd. 1,119 1,087 1,119 1,087 2,711 62.8 32.0 94.836 ACE Ltd. 1,070 1,025 1,070 1,025 27,531 55.2 22.3 77.437 American Agricultural Insurance Co.11 955 284 955 284 440 86.3 13.1 99.438 Alterra Capital Holdings Ltd. 899 727 899 727 2,840 57.8 33.7 91.539 Paciic LieCorp 882 882 - - 9,497 N/A N/A N/A 40 Maiden Holdings, Ltd. 864 765 864 765 1,015 73.4 29.1 102.541 ACR Capital Holdings Pte, Ltd. 6 765 389 765 389 699 73.2 29.4 102.742 Allied World Assurance Co. Holdings, AG 760 748 760 748 3,326 69.0 26.1 95.143 Montpelier Re Holdings Ltd. 735 616 735 616 1,629 46.5 34.5 81.044 Arican Reinsurance Corp. 648 586 618 562 609 60.2 32.0 92.245 NKSJ Holdings, Inc. 6,8 608 501 608 557 19,857 N/A N/A N/A 46 Milli Reasurans Turk Anonim Sirketi 12 576 518 565 508 548 77.2 30.0 107.247 Platinum Underwriters Holdings Ltd. 570 565 570 565 1,895 32.4 30.1 62.548 Wilton Re Holdings Ltd. 542 502 - - 1,540 N/A N/A N/A 49 W.R. Berkley Corp. 509 477 509 477 4,336 60.5 40.0 100.550 Central Reinsurance Corp. 495 462 344 316 477 81.1 26.2 107.31 Non-life only.2 Net premiums written data not reported, net p remiums earned substituted.3 Lloyds premiums are reinsurance only. GPW for certain groups within the rankings also may include Lloyds Syndicate GPW when applicable.4 Total shareholders funds includes Lloyds members assets and Lloyds central reserves.5 Loss reserve and expense ratio detail not available on a GAAP basis.6 Fiscal year-end March 31, 2013.7 Excluded 40% of premiums related to affiliated business.8 Total shareholders funds includes catastrophe and price fluctuation reserves.9 Ratios are as reported and calculated on a gross basis.

10 Non-affiliated reinsurance information only available on a gross basis.

11 Data and ratios based on U.S. statutory filing.12 Total shareholders funds includes equalization and unexpired risk reserve.N/A Information not applicable or not available at time of publication.Source: A.M. Best data & research


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saw prices decline as much as 20% forsome programs. The bright spot remainssome specialty lines such as marineand offshore energy. Property cat pric-ing is expected to remain under somepressure absent any major event. In an

attempt to improve returns, companiescontinue to strategically shift portions oftheir investment portfolios into higherreturn investments, which includes alter-native investments.

Some companies continued to repur-chase their own shares during 2012,although not at the same pace as inprevious years. Companies thus farin 2013 are again aggressively buying

back shares and increasing dividends.Valuations, although better than oneor two years ago, are still below theindustrys long-term average. Forthose companies still below bookvalue, share buybacks remain a way toimprove valuations and earnings pershare. Merger and acquisition (M&A)activity is expected to remain muted.

Looking forward, the overall marketenvironment remains challenging, and companies for the most part are realistic

about the returns they can achieve in the current market. Pricing is not expectedto improve for the Jan. 1 renewal, absent any major event. Management teams

Munich

Re

SwissRe

Lloyd's

Hann

overRe

Berks

hireH

athaway

SCORS

.E.

Korean

Re

Everest

Re

ChinaRe

Partner

Re

TransRe

GICofInd

ia

QBE

ToaRe

Odyssey

Re

Exhibit 8

Global Reinsurance Market Top 15 Ranked on Non-Life Gross Premium Written (2012)

22.5

19.5

15.8

10.2 9.7

6.15.1

4.3 4.2 3.9 3.62.8 2.3 2.2 2.0

91.2

83.1

91.096.0

99.994.3 97.9 93.8

100.487.8 90.9

104.8 99.2

108.0

84.6

0%

20%

40%

60%

80%

100%

120%

0

5

10

15

20

25

CombinedRatio(

USDBillions)

Non-Life Gross Premium YE 2012 Combined Ratio


Exhibit 9

Global Reinsurance Total Shareholders' Funds

by Region* (2012)

Germany

10%

Switzerland

13%

Americas*

28%

London

7%

Asia - Pacific

22%

Bermuda Market

10%

OtherMarkets

10%

Note: Region determined by the domicile of ultimate parent.

*Americas includes the United States, Canada and Latin America. Americas

Total Shareholders' Funds excludes non -reinsurance subsidiaries of Berkshire

Hathaway.



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10


agree that reinsurance pricing stillneeds to improve, particularly forsome casualty business where ratesremain below profitable levels.

Reinsurers thus far have maintaineda rational and disciplined approachto the market. Returns are expected tobe around 8% to 10% for the next 12months, and companies certainly willstrive to deliver results at the double-digit end of that range. Performanceanxiety is real, and that round numberof 10% continues to be a threshold thatis both tangible and psychological. Com-

panies seem to be focused on profitableunderwriting and strong enterprise riskmanagement, as opposed to gainingmarket share and growing premium.Some M&A activity continued as 2012saw a number of deals create strongerand more diversified companies. Man-aging risk exposure however, shouldremain the focus for the combined enti-ties to avoid the past missteps by somethat led to higher than expected lossesfor certain events.

Exhibit 10

Global Reinsurance Non-Life Gross Premium

Written by Region (2012)

Note: Region determined by the domicile of ultimate parent.

*Americas includes the United States, Canada and Latin America. Americas

also includes GPW of National Indemnity & General Re Corp. (subsidiaries of

Berkshire Hathaway).


London13%

Other Markets9%

Bermuda

Market14%

Germany24%

Americas12%

Asia-Pacific14%

Switzerland14%


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Lloyds Premium Up; MarketEyes Developing CountriesLloyds is a significant writer of catastrophe and reinsurance business, with reinsur-ance representing 38% of gross premium in 2012 and direct insurance accountingfor the balance. Reinsurance premiums increased nearly 11% in 2012, supportedby rate increases in areas exposed to the natural catastrophes of 2011. While theselosses led to a firming of reinsurance rates in loss exposed regions of the world,excess reinsurance capacity prevented a broader market hardening.

At the beginning of 2013, general market conditions were similar to those prevail-ing at the start of 2012 with excess capacity and a generally difficult rating envi-ronment overall, albeit with another strong improvement in catastrophe-affectedareas of business. At the same time, there are few signs of recovery in the global

economy, and weak conditions persist in the more developed economies, reducingthe demand for some lines of insurance and continuing the prospect of increasedrecession-related claims.

Lloyds goal is that by 2025 the portion of its business from developing economieswill exceed 25% of gross written premiums. This new strategic direction is part ofVision 2025, an approach launched in May 2012 that aims to position Lloyds asthe global centre for specialist insurance and reinsurance. Based on its analysis ofpotential growth in developing countries, Lloyds has identified Mexico, India andTurkey as priority countries, alongside Brazil and China, where Lloyds already hasreinsurance licenses. Subject to market demand, the initial focus will be on thesecountries, but Lloyds has indicated that other, smaller developing countries, such as

Colombia, Vietnam and Poland, may present attractive opportunities.

2012 Perormance Boosted by Prior-Year Reserve DevelopmentIn contrast to 2011s series of natural catastrophes in the Asia-Pacific region, 2012 hadfew major catastrophe events, apart from the grounding of the Costa Concordia, anearthquake in Northern Italy and Hurricane Isaac until Superstorm Sandy struck theeastern seaboard of the United States and became the most costly U.S. catastrophesince Hurricane Katrina in 2005. Losses from these events were the main drivers of anaccident-year combined ratio of 97.9 for Lloyds reinsurance sector. On a calendar-yearbasis, the combined ratio was reduced to 91.0 by favorable development of prior yearsreserves.

Positive reserve development reduced combined ratios for Lloyds main classes ofbusiness. For property and reinsurance, prior-year releases improved the combinedratio by 8.2 and 6.9 percentage points respectively. Reserves for the 2011 catastrophesremained stable overall in 2012.

Lloyds U.S.-domiciled business consists primarily of reinsurance and surplus lines. InCanada, Lloyds writes primarily direct business, with reinsurance accounting for amuch smaller share. In 2012, as measured by combined ratio, Lloyds outperformed theU.S. property and casualty industry, U.S. reinsurers and comparable European reinsurers,while performance was comparable to that of a peer group of Bermudian reinsurers.


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Despite a Crowded Market,Brazil Is Still a DrawAbundant reinsurance capacity and the prevalence of coinsurance agreements inBrazils primary market are softening the near-term growth outlook for its reinsur-ers. A sense of weariness exists among underwriters contemplating profitability ina crowded reinsurance segment that has weakened pricing. Yet the increasing pre-mium volume in Latin Americas largest primary market still is proving difficult toresist.

Brazils limited exposure to catastrophe risks, such as hurricanes or earthquakes, leavesit well positioned as a diversity play relative to other emerging markets in Latin Amer-ica. Perhaps more important, the countrys need to build out infrastructure before host-ing the 2014 FIFA World Cup and 2016 Olympic Games remains a catalyst in the overall

economy. Low insurance penetration, vast offshore oil reserves and a growing middleclass also factor into long-term growth forecasts for insurers and reinsurers.

Pricing around Julys renewal season was flat to down 5%, with insurers able tosecure additional capacity on a treaty basis under terms unavailable a year ago. Thisreflects the growth in their own portfolios. It is not yet clear whether an imbalanceexists between this years reinsurance premium prices and the amount of coveragebeing purchased, which in some cases may be excessive for underlying risk. Theexistence of coinsurance arrangements also has generated potential accumulationrisks for reinsurers placing treaty-based cover under this scenario, should a signifi-cant event coincide across separate treaties within a single reinsurers portfolio.While reinsurers would prefer facultative coverage, demand for this is driven down-ward by abundant capacity for treaty business.

These developments outline the growth trajectory of Brazils reinsurance market sinceit first opened five years ago, ending the monopoly held by IRB Brasil Resseguros S.A.

0

1

2

3

4

5

6

2008 2009 2010 2011 2012

Local Reinsurers Admitted & Occassional

Exhibit 11

Brazil Reinsurance Local Reinsurer Market Share (2008-2012)Admitted and occasional reinsurers have gained a larger share of ceded

premium since Brazil's reinsurance market opened in 2008.(BRL Billions)

Source: SUSEP website (Statistics System); data reflects industry totals and financial statements available

from SUSEP as of July 12, 2013. Individual breakout of admitted and occassional figures not available.


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since 1939. The road to an open reinsurance market took a detour in 2010 withlegislation that required 40% of reinsurance premium be ceded to locally basedreinsurers. Insurers also are prohibited from ceding more than 20% of premium to off-shore reinsurance affiliates, but a key exception involves the surety business, a line that

factors heavily into Brazils build out.

M&A Should Tick UpwardThere are now 14 local reinsurers approved to operate in Brazil, with the balance ofthe reinsurance market composed of admitted and occasional reinsurers, and the latterprimarily serving in a retrocession role. There is a market expectation that merger andacquisition activity will tick upward in this admitted and occasional segment, whichincludes more than 100 registered companies and 15 to 20 Lloyds syndicates. Smallercompanies contending with administrative costs and competitive pricing may be forcedto find local partners or exit the market. Local players seeking cheaper capital also maybenefit by pairing with a foreign reinsurer that has a less formidable market presence.

Source: SUSEP website (Statistics System); data reflects financial statements available as of July 12, 2013.

Exhibit 13

Brazil Local Reinsurer Segment Profit/Loss (2008-2012)

IRB Brasil Resseguros' monopoly ended in 2007, but it maintains a dominantshare of the local reinsurance market's profit margin.

0 100 200 300 400 500 600

2008

2009

2010

2011

2012

BRL Millions

IRB

Other

Exhibit 12

Brazil Reinsurance Ceded as a Percentage of

Primary Market's Direct Premium (2008-2012)

* 2012 is gross of reinsurance commission (BRL 932.2 million).

Source: SUSEP website (Statistics System); data reflects industry totals and financial statements available

from SUSEP as of July 12, 2013.

0

1

2

3

4

5

6

7

8

9

10

0

10

20

30

40

50

60

70

80

2008 2009 2010 2011 2012*

(%ofDirectPr

emium)

Direct Premium Ceded Reinsurance Premium Reinsurance Premium as % of Direct Premium

Premium(

BRLBillions)


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Local reinsurers have maintained a steady market position with 59% of the BRL 5.53billion in reinsurance premium generated in 2012 (see Exhibit 11), according to datafrom Superintendencia de Seguros Privados (SUSEP). In 2011, local reinsurers held a57% share of the BRL 5.52 billion in reinsurance premium. As an aside, reinsurance com-

missions totaled BRL 932 million in 2012 (a comparable figure for 2011 was unavail-able), according to SUSEP. It should be noted that some reporting and accounting anom-alies may exist within publicly available SUSEP data.

The level of reinsurance premium as a percentage of the primary markets direct pre-mium has hovered at just under 9% since 2008, according to an A.M. Best review ofcompany financial statements filed with SUSEP. This level of reinsurance penetrationheld steady as direct market premium climbed from BRL 42.9 billion in 2008 to BRL73.2 billion in 2012, a cumulative increase of 70% (see Exhibit 12). This illustrates how,despite a modest percentage of ceded reinsurance premium, the overall premium vol-ume in Brazils insurance market remains attractive.

IRB Still Dominates, Preps or ExpansionDespite the opening of Brazils local reinsurance market to competition, IRB has main-tained a dominant market position and held its No. 29 spot in A.M. Bests 2012 global rank-ing of top 50 reinsurers based on gross premium written. IRB generated gross premiums ofBRL 2.4 billion in 2012, which was equivalent to 37% of the reinsurance premium ceded

from Brazils direct market. IRBsshare of the local reinsurance seg-ment in 2012 was far more pro-nounced at slightly more than 65%.The company notched a net profitof BRL 397.1 million in 2012, which

was 79.3% of the overall net profitgenerated from the local reinsurersegment (see Exhibit 13), accordingto SUSEP filings.

IRBs earned premium increasedalmost 11% to BRL 1.9 billion in2012, more than five times theearned premium of the second-largest local reinsurer, Munich Re(see Exhibit 14). IRB also reported

a return on equity of 18.7% last year,lower than the 23.7% reported for2011.

IRB has continued with its transi-tion into a competitive market environment and has cleared necessary regulatory hurdlesto privatize. This move coincides with IRBs plan to expand beyond Brazils borders andprovide an international reinsurance platform for multinational insurers operating withinBrazil. This has required IRB to dedicate a team to catastrophe assessment and to licensecatastrophe modeling software, an operational aspect that required less emphasis given theless volatile catastrophe exposures in a Brazil-focused portfolio. In June 2012, IRB acquireda 4.8% stake in Africa Re. A.M. Best understands the relationship between IRB Brasil-Re and

Africa Re to be strategic, owing to the reciprocal arrangement between the two entities tosupport development in their corresponding markets.

Exhibit 14Brazil Local Reinsurers Earned Premium & LossRatios (2012)(BRL Millions)

Earned Premium Claims Incurred Loss Ratio

Rank Company 2012

Y/Y %

Change

Market

Share 2012

Y/Y %

Change 2012 20111 IRB 1,850.7 10.9 62.2 1,664.5 40.0 89.9 71.2

2 Munich Re 354.9 -22.5 11.9 307.2 -17.6 86.6 81.4

3 Ace 206.8 37.9 6.9 90.3 22.3 43.6 49.2

4 Mapre 190.7 18.4 6.4 302.9 145.7 158.8 76.5

5 J. Malucelli 172.8 4.1 5.8 143.2 579.4 82.9 12.7

6 XL 89.9 7.1 3.0 68.4 1.2 76.1 80.6

7 Austral 82.8 700.9 2.8 83.2 778.1 100.4 91.6

8 AIG 16.2 1,852.4 0.5 8.5 2,144.7 52.1 45.3

9 Swiss Re* 6.4 n/a 0.2 1.6 n/a 24.7 n/a

10 Alterra* 4.9 n/a 0.2 3.9 n/a 79.0 n/a

11 Terra Re* 0.1 n/a 0.0 0.1 n/a 67.2 n/a

Total 2,976.2 10.3 2,673.5 44.0 89.8 68.8

Note: 2012 financial statements on file with SUSEP for Allianz Global Corporate & SpecialtyResseguros Brasil and Zurich Resseguradora Brasil S.A. reflect no earned income. BTGPactual received SUSEP authorization on Feb. 26, 2013.* 2011 financial statements unavailable through SUSEP website.Source: SUSEP website (Statistics System); data reflects financial statements available asof July 12, 2013.


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In addition to operating in Argentina, IRB has signed up as a reinsurer in Peru, Mexico,Colombia, Paraguay, Uruguay and Ecuador, and is in the process of obtaining registration inVenezuela, according to the companys annual report. The challenge in this next phase willbe gaining scale as a foreign reinsurer without strong brand awareness or the transitional

glide path to market competition that IRB experienced under legislation in Brazil.

Brazils local reinsurance market added a few new players in 2012, some of which hadfamiliar corporate brands such as Allianz Global Corporate and Specialty RessegurosBrasil S.A.; Alterra Resseguradora Do Brasil S.A. (since acquired by Markel); Swiss Re Bra-sil Resseguros S.A.; and Zurich Resseguradora Brasil S.A. Two additional new players Terra Brasis Re and BTG Pactual Resseguradora S.A. have added distinctive local flavorto Brazils reinsurance market.

Two New Reinsurers Bring Local TouchTerra Brasis is a privately owned, start-up reinsurance company domiciled in the coun-

try. Brazil-based financial conglomerate Brasil Plural is the majority shareholder, and theWorld Banks International Finance Corp. is a minority shareholder. Terra Brasis has amodest level of market-facing capacity, starting with BRL 100 million in policyholderssurplus. The company was licensed on Oct. 4, 2012 and is focused on writing a diversebook of property, casualty and life reinsurance business as a local reinsurer in Brazil.

BTG Pactual, which was authorized as a local reinsurer on Feb. 26, 2013, is a subsid-iary of Banco BTG Pactual, a leading Latin America investment bank founded in Rio deJaneiro. BTG will target the primary insurance market with cover for engineering andoil projects, in addition to civil liability on construction projects. The company also hasindicated it will partner with international reinsurers on products.

As Brazils reinsurance market matures, customer loyalty and personal relationships stillhave a role but may have become less crucial for insurers seeking the most profitablepath to deploy capital. Reinsurers have grown stricter on requiring data, the quality ofwhich continues to improve.

As Brazil and other Latin America countries move to align their respective regulatoryschemes with international standards, added capital requirements are expected to gen-erate opportunity for reinsurers in the form of higher cession rates and needed techni-cal expertise. Non-life cession rates on a regional basis had declined over the past decade,driven down by softer rates and companies shifting to nonproportional schemes. Reinsurersalso stand to benefit from rising cession rates in reinsurance-intensive lines of business such

as surety and engineering.

Exhibit 15Latin America A.M. Best-Rated Reinsurance CompaniesRatings as o Aug. 16, 2013.

Domicile Company AMB #

Bests

Financial

Strength

Rating (FSR)

Bests Long-

Term Issuer

Credit

Rating (ICR)

Bests FSR &

ICR Outlook

FSR & ICR

Rating

Action

Rating

Effective Date

Brazil IRB-Brasil Resseguros S.A. 085590 A- a- Stable Airmed Dec. 19, 2012

Brazil Terra Brasis Resseguros 092722 B++ bbb Stable Assigned May 9, 2013

Mexico Reaseguradora Patria, S.A.B. 086054 A- a- Positive Airmed July 31, 2013

Panama Barents Re Reinsurance Co. Inc. 091083 A- a- Positive Airmed Sept. 27, 2012Panama QBE del Istmo Reinsurance Co. Inc. 078448 A- a- Stable Airmed Jan. 10, 2013

Source: Bests Statement File Global


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Low Penetration Persists in Latin America

With the exception of Chiles mature market, the level of insurance penetration in Braziland other Latin America markets remain below 3%, and in some cases even below 2%. Thesepositive growth indicators are bolstered further by the infrastructure gap that Latin America

countries are trying to bridge via spending projects. Yet this upside for reinsurers is tem-pered by challenges to profitability that arise from competitive pressure on underwritingresults, the low interest rate environment and pockets of regulatory uncertainty.

According to Guy Carpenter & Co., rates in Latin America and the Caribbean decreasedat July 1 renewal because of a high level and diversity of reinsurer offerings. Theexception noted by Guy Carpenter was Argentina, where market conditions wereaffected by heavy flooding in April and regulatory restrictions. Argentinas insurancemarket remains susceptible to political volatility. This was evident during 2011from gov-ernment actions that prohibited insurers from ceding business to foreign reinsurers. Asubsequent regulation required all insurers to liquidate and transfer foreign investments

back to Argentina, while reinsurers were allowed to keep a level of foreign investmentsand capital not to exceed 50% of the companys total capital.

Venezuela represents another market where an expanding middle class can fuel theindustrys growth, but it is subject to political dynamics. Yet some reinsurers still pursuethese markets with eyes wide open, hoping to be agile enough to skillfully build marketshare despite the potential for more fluid market dynamics.

Like Brazil, Mexico represents a significant portion and more established component ofLatin Americas insurance industry. An insurance law adopted this year marks further prog-ress in efforts to modernize the countrys regulatory scheme. A strong element of risk man-agement based principles will foster stronger capital and reserve measures. Mexicos pri-

mary market remains soft but is viewed as stable and increasingly professional. New capitalrequirements are expected to increase demand for reinsurance coverage and spur mergerand acquisition activity.

With insurance penetration of just 2.12%, Colombias market has demonstrated its poten-tial with growth of 14.9% in 2012. Non-life business accounted for 54% of $8.76 billion inpremium written last year. Colombias insurance market is opening to nonadmitted writersunder a bilateral free-trade agreement reached with the United States, an aspect that under-scores Latin Americas business friendly environment. Government officials announcedplans in April for a $2.7 billion stimulus package that would drive economic growth andcreate an estimated 300,000 new jobs. Projected spending on construction projects is $630

million, generating reinsurance opportunities in construction risks and surety bonds.


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Asias Reinsurers AreLooking to Grow AgainReinsurers in Asia have resorted to capital replenishment following large catastrophelosses while the regions growth prospects remain a lure for many reinsurers.

Most Asian reinsurers results turned negative following large-scale catastrophes, par-ticularly the 2011 Thailand flooding. Singapore, a major reinsurance hub in Asia-Pacific,reported significant deterioration in the combined ratio of reinsurers to 239.8 in 2011from 95.1 in 2010.

Natural catastrophes in 2011 brought significant losses to many Asian reinsurers. Inter-estingly, many of these reinsurers, except for a few players, quickly restored their bal-ance sheet strength in terms of risk-based capital through raising new capital, issuing

subordinated debt or reducing asset risks. Companies have also avoided writing purecatastrophe business.

Capitalization of Asias reinsurers significantly eroded in 2011, with the widest capi-tal and surplus drop of 86% and 57% for the Thailand-based Thai Re and Asian Re,according to A.M. Best data. Nevertheless, most reinsurers restored capital, changedtheir risk appetite and focused on underwriting and financial strength during thepast year.

Exhibit 16Asia/Pacific A.M. Best-Rated Reinsurance Companies

Ratings as of Aug. 16, 2013.


Bests

Financial

Strength

Rating (FSR)

Bests Long-

Term Issuer

Credit

Rating (ICR)

Bests FSR &

ICR Outlook/

Implications

FSR & ICR

Rating

Action

Rating

Effective Date

Australia General Reinsurance Australia Ltd. 086052 A++ aa+ Stable Airmed June 11, 2013

Australia General Reinsurance Lie Australia Ltd. 086652 A++ aa+ Stable Airmed June 11, 2013

China China Lie Reinsurance Co. Ltd 090957 A a Stable Airmed Sept. 12, 2012

China China Reinsurance (Group) Corp. 090955 A a Stable Airmed Sept. 12, 2012

China China P&C Re 088692 A a Stable Airmed Sept. 12, 2012

Hong Kong Peak Reinsurance Company Ltd. 091406 A- a- Stable Assigned Dec. 28, 2012

Hong Kong Taiping Reinsurance Company Limited 085029 A- a- Stable Airmed Oct. 18, 2012

India General Insurance Corp. o India 086041 A- a- Stable Airmed Feb. 21, 2013

Japan The Toa Reinsurance Co. Ltd. 085179 A+ aa- Stable Airmed May 30, 2013Malaysia ACR ReTakaul Berhad 090060 A- a- Stable Airmed Dec. 20, 2012

Malaysia Asia Capital Reinsurance Malaysia Sdn 090756 A- a- Stable Airmed Dec. 20, 2012

Malaysia Labuan Reinsurance (L) Ltd. 086913 A- a- Stable Airmed Dec. 12, 2012

Malaysia Malaysian Reinsurance Berhad 078303 A- a- Stable Airmed Dec. 13, 2012

Philippines National Reinsurance Corp. o Philippines 086771 B++ bbb Stable Airmed April 18, 2013

Singapore Asia Capital Reinsurance Group Pte. Ltd. 078461 A- a- Stable Airmed Dec. 20, 2012

Singapore Samsung Reinsurance Pte Ltd 091577 A a Stable Airmed Nov. 15, 2012

Singapore SCOR Reinsurance Asia-Paciic Pte Ltd 088684 A a+ Stable Airmed May 2, 2012

Singapore Singapore Reinsurance Corp. Ltd. 085224 A- a- Stable Airmed Nov. 21, 2012

South Korea Korean Reinsurance Co. 085225 A a Stable Airmed Feb. 28, 2013

Taiwan Central Reinsurance Corp. 086496 A a Stable Airmed July 30, 2013

Thailand Asian Reinsurance Corp. 085568 B- u bb- u Developing Downgraded June 13, 2013

Vietnam PVI Reinsurance Company 091541 B+ bbb- Positive Airmed April 11, 2013u Denotes rating under reviewSource: Bests Statement File Global


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For instance, Japans Toa Re took a series of capital replenishment actions, includ-ing issuance of 30 billion yen (US$302 million) in subordinated notes in March 2012,reducing risk exposures in its investment assets and underwriting portfolio. Korean Reenhanced its capital position with a disposal of its treasury stocks worth around 134

billion won (US$120.3 million), together with reduction of underwriting risks during its2011 fiscal year.

Malaysias Labuan Re restored its financial position through issuance of US$55 millionsubordinated bonds and revisions of underwriting guidelines, risk control and fur-ther risk retrocession. For new capital investment, Canadas Fairfax Financial Holdingsacquired around 25% of Thai Re for US$70 million in January 2012. Japans leading trad-ing company, Marubeni Corp., invested about a 22% stake in Singapore-based ACR Capi-tal Holdings to become one of its major shareholders in May 2012.

Companies became quite proactive in anticipation of a hardening market. Credit aware-

ness in the market has also increased substantially over the years and those reinsurersworked quickly to avoid a downgrade in credit quality.

However, with additional reinsurance capital, the hardening of the market was less thanmany would have expected, except in catastrophe business.

Capital deployment into the reinsurance industry has grown, with a recent inf lux ofcapital estimated in the double-digit range.

Asias increased capacity has come from both newly established regional writers andregional expansion from existing global reinsurers. Bermuda reinsurers and Lloyds havealso become notable additions to the Singapore market over the past two years.

In the past, a clear softening would be visible after a benign catastrophe year, such as2012 in Asia with additional capacity, but companies are more underwriting focused,and the extent of softening is mild. Asia players have been quite disciplined for termsand conditions, which differs from previous cycles of strong capital influx. Currentconditions could be explained by low investment return, along with the expectation ofa continuing low-yield environment, which has made companies more underwriting-focused. This will reduce the volatility of operating performance, although there wouldnot be a steep increase in profitability as the companies could expect.

Asia Growth and Challenges

Strong economic growth, low insurance penetration and risk diversification from exist-ing mature markets leave Asias emerging markets well positioned to attract industryplayers.

Buyers have increasingly used reinsurance as a form of risk transfer and commissiongearing, as well as part of their capital management on balance sheets, in solvency trans-actions and loss portfolio transfers.

More direct insurance companies are looking to diversify their reinsurers, thus increas-ing demand and a greater awareness of credit risk.

Credit risk associated with reinsurance recoverables is a substantial factor for direct

insurers, particularly in the wake of catastrophe loss. For instance, continuous deterio-ration of underwriting results of Malaysia-based Best Re has led to a rise of credit risk


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on its buyer, South Koreas Hanwha General Insurance. Hanwha Insurance recordeda sharp increase in credit risk associated with reinsurance recoverables due to thedownward rating of Best Re on Dec. 18, 2012.

Global reinsurers see Asia as a diversification play given their peak exposures in theUnited States, Europe and Japan, along with Australia as an additional increasingly aggre-gated peak zone.

The 2011 catastrophes highlighted the need of reinsurers to quantify exposures in aregion that lacks the full suite of vendor catastrophe models and where data transpar-ency can often be lacking.

Natural disasters are a challenging factor for Asia-Pacific writers and have affected alarge population in Asia but the corresponding insurance impact remains comparativelylow. The industry is in need of products that improve penetration levels on a wide-

spread basis across emerging Asia.

Capacity and CompetitionAsia-Pacific accounted for 14% of total global nonlife reinsurance gross written pre-mium, according to A.M. Bests 2012 ranking on global reinsurers. China Re (No. 8) andToa Re (No. 19) each held their respective ranking from the prior year, while Korean Removed up one spot to No. 9.

Much of Asian reinsurers premium growth is driven by market growth rather thancompetition, yet a growing number of players with a regional focus in Asia have limitedimpact on reinsurance terms and conditions.

Terms and conditions are still driven more by total capacity allocated to the regionby local and global players. In aggregate, an oversupply of capacity has generally keptprices competitive for ceding companies.


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MENA Reinsurance Demand ContinuesDespite Shit Toward Higher RetentionsInternational reinsurers play an important role in the Middle East and North Africa (MENA)insurance markets, providing capacity and technical expertise to local market participants,particularly on high-value risks. Primary insurers dependence on reinsurance support remainshigh among companies based in the region.

MENA insurance markets generated more than USD 30 billion of premiums in 2012, with thevast majority of high-value commercial risks ceded into the international reinsurance market.Despite the regions economic slowdown in recent years, owing to depressed world financialmarkets, potential growth in commercial risks, such as infrastructure and energy, is expectedto remain and continue to create opportunities for reinsurers.

Most markets within the MENA region are open, with limited restrictions on reinsuranceactivities. However, there are initiatives to foster growth and retain business within the region.Mandatory cessions are important to the dynamics of some markets, such as in Algeria andMorocco. In these countries, local players are obliged to cede a proportion of their reinsuredpremiums to the state reinsurers. This emphasizes the states involvement and intention toretain some of the risks within a country, or to support the country in case of natural catastro-phes.

Another mechanism in place to encourage retention is the establishment of long-standinglocal and regional reinsurance companies, in addition to reinsurance pools, whereby share-holders or pool members are largely local or regional insurance companies. In these cases, thecompanies may have vested interests in serving the local market and supporting the regional

reinsurance markets.

Some jurisdictions, such as Saudi Arabia, are introducing specific rules whereby an increasingproportion of total premiums must be retained within the country. This encourages higherparticipation in risks among local participants. Moreover, in many jurisdictions, most businessmust be placed through a local participant or sponsor.

Despite these market dynamics, the MENA insurance markets are still young and depend oninternational reinsurance support, with local and regional reinsurers generally acting as fol-lowers in such markets.

Primary insurers have tended to maintain low retentions, relying heavily on the reinsurancemarket, in particular for commercial risks. This is in part a result of insurers encountering chal-lenges in developing technical expertise, and partly due to the increased reinsurance com-missions available. They have tended to be risk averse in part, while reinsurance commissionsreceived have tended to cover the majority, if not all, of the commissions that insurers havebeen required to pay to agents. Despite insurers beginning to retain increasing amounts ofbusiness in recent years, the dependence on reinsurance remains high, with many risks beingfronted locally and ceded to the international market.

For international reinsurers with greater capacities and expertise, the MENA insurancemarket has presented opportunities to diversify risk into countries perceived to havelow exposures to natural catastrophes. Although there are indications that some rein-

surers have more recently been seeking to reduce their exposure to the region, plentyof reinsurance capacity remains in the market. Furthermore, the expansion of regional


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players operating within the Indian subcontinent, the Asia-Pacific territories and Africahas brought additional capacity to the market.

MENA Market Strategies Vary

Strategies adopted by reinsurers to penetrate the MENA markets vary considerably. Five yearsago, reinsurers tended to operate from a distance, with the vast majority of commercial risksplaced through the London market. However, the dynamics of the landscape have changedmaterially. The introduction of financial free zones, such as the Dubai International FinancialCentre (DIFC) and Qatar Financial Centre (QFC), have helped open the market and encour-aged international participants to establish operations in the region. This has been the casein particular for reinsurers and brokers, with most major insurance institutions having someform of regional presence.

Proximity to the market is seen as increasingly important to understanding the markets char-acteristics; creating closer ties between companies and cedents; and demonstrating a keen

willingness to support the market. While some reinsurers have left the market, overall thenumber of participants and capacity continue to increase. A growing amount of business isbeing placed directly within the MENA region, with this trend likely to continue. For reinsur-ers, risk selection is critical, with risk management practices of clients and cedents beingimportant to the quality of risk underwritten.

Cession rates vary significantly among MENA insurers, although in general the level of busi-ness ceded has gradually decreased in the past few years. A.M. Bests analysis of 130 compa-nies based in the Gulf Cooperation Council (GCC) countries of Bahrain, Kuwait, Oman, Qatar,Saudi Arabia and the United Arab Emirates (UAE) shows that in 2002 more than 60% of directpremiums written were ceded (see Exhibit 17). However, in 2011, cession rates for compa-nies in this data set were less than 40% of risks.

The reduction in part indicates a change in the markets mix of business, with health careplaying an increasingly important role in insurers profiles. The retention on medical remainshigh, and therefore primaryinsurers have improvedtheir overall retention. Forcommercial risks, retentionis gradually improving ascompanies seek to increaseexpertise and retain largerlines, yet insurers are still

largely dependent on rein-surers.

A.M. Bests analysis com-pares the performance of1,766 companies in 19countries over nine years.The data show that whileGCC companies haveimproved retention ratios,they continue to cede thelargest proportion of their

premiums compared withother markets. Premium

Exhibit 17

Global Reinsurance Premium Cession Rates in

Select Regions (2002-2011)

Source: Best's Statement File Global

10

20

30

40

50

60

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

GCC (Bahrain, KSA, Kuwait, Oman, Qatar, UAE) Levant (Jordan, Lebanon, Turkey)Indian Subcontinent (India, Pakistan) CIS (Kazakhstan, Russia, Ukraine)

Far East (Malaysia, Thailand, Vietnam) Developed (France, Germany, UK)

GCC

Far East

LevantIndian Subcontinent

Developed

CIS


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cession levels are approximately double those of the 111 companies that comprised the dataset for the Commonwealth of Independent States (CIS) Kazakhstan, Russia and Ukraine and the 1,191 entities analysed in the developed markets of France, Germany and the UnitedKingdom.

The MENA market largely utilizes proportional reinsurance, although there has beena gradual shift toward nonproportional cover in recent years. Within the region thereis extensive use of bouquet treaties, whereby most non-life lines are placed togetherunder the same treaty to service group multirisk accounts. This makes pricing the treatyfor the whole portfolio more critical, factoring in both under- and overperforminglines. In most cases, health care is placed separately. Historically, MENA insurers havebenefited from reinsurance rates that have been among the lowest in emerging mar-kets. While reinsurance prices have been under pressure in recent years, it is likely thatprices are starting to increase in the short term. For rates to materially increase therewould need to be a major shock to the reinsurance market. This could be triggered by a

major catastrophe in the region, or a series of large losses on high-value risks, such as inenergy and infrastructure risks.

Medical business has historically been written on a proportional basis. However, thelevel of competition in medical has contributed to losses among many insurers andreinsurers. The latter may have suffered more in some instances because of the out-wards commission structures attached to these treaties. As a result, reinsurers are dic-tating terms more aggressively as they threaten to remove capacity, move from treatiesto excess-of-loss cover, reduce commissions or shift to sliding-scale commissions. Thedominance of medical in the region makes it important for the markets to have reinsur-ers continued support.

In the medium term, MENA insurers are under pressure to maintain greater focus on tech-nical profitability, given depressed investment returns. There is pressure from reinsurers toincrease rates, enforce stricter terms or reduce commission levels, which will further encour-age companies to concentrate more on gross rather than net profitability. Furthermore, insur-ers are taking active steps to improve profitability, with increased retentions as one measure.They are also performing back-testing (sometimes with the assistance of third parties) on theirreinsurance utilization to see the overall benefits of reinsurance coverage, aiming to leveragetheir positions to negotiate improved terms and conditions.

Retakaul TrendsRetakaful operators represent an important sector of the MENA reinsurance market,

although these tend to be young companies finding it difficult to establish themselvesand create a balance between market franchise and profitability. Rather than distinguishthemselves through targeting new, untapped market segments, Retakaful operators tend tocompete directly with their conventional counterparts. Given that some existing conventionalreinsurers benefit from strong reputations and economies of scale, Retakaful operators find it dif-ficult to establish profitable operations. Moreover, pressure from shareholders to service capitalcan lead to the pursuit of premium income through pricing practices.

Retrocession should ideally be placed with Retakaful companies, but in reality, a lot of the riskis ceded to conventional reinsurers, as Retakaful operators have insufficient capacity to supportlarge and volatile commercial risks or lack the ratings required by the ultimate insureds.

Ratings Issues or MENA ReinsurersAll A.M. Best-rated reinsurers based in the MENA region have secure Financial Strength Ratings


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(FSRs). The highest rating achieved at present is an FSR of A (see Exhibit 18). In all but twoinstances, the outlook for the FSR and Issuer Credit Rating (ICR) is stable.

Most reinsurers in the MENA countries are now underwriting business outside of the region.

While the markets continue to expand, reinsurers will find opportunities to grow but need toensure underwriting is adequately controlled.

MENA insurers operating in countries that have suffered from regional political and economicinstability have seen their top lines affected. However, many A.M. Best-rated Middle Eastern rein-surers have shown resilience in their operating performances due to their diversified portfoliosand flexible business continuity plans. Reinsurers have felt obliged to support affected marketsduring the turbulent period however, after the initial unrest, policy wording has materially tight-ened in the region, driven by the international reinsurance markets desire to alleviate uncer-tainty or conflict arising from strike, riot and civil commotion (SRCC) definitions.

Furthermore, in relation to the uncertainty of natural catastrophes across the world and theincreased frequency of regional catastrophe events, focus has increased on introducing eventlimits in the region. This should provide further protection to reinsurers in the event of a majoradverse loss scenario. These issues over the past few years have highlighted the need for greatertransparency in policy wording and conditions offered in MENA markets.

MENA markets allow reinsurers to diversify into relatively less catastrophe-prone territo-ries. While insurers seek to increase their retention levels, reinsurers will continue to playan important role in the market. As the complexity of the market develops, the presenceof reinsurers and proximity to clients in the region will remain important.

Exhibit 18

Middle East & North Africa A.M. Best-Rated Reinsurance CompaniesRatings as o Aug. 16, 2013.


Bests

Financial

Strength

Rating

(FSR)

Bests Long-

Term Issuer

Credit

Rating (ICR)

Bests

FSR &

ICR

Outlook

FSR & ICR

Rating

Action

Rating

Effective Date

Algeria Compagnie Centrale de Reassurance 090777 B+ bbb- Stable Airmed July 18, 2013

Bahrain ACR ReTakaul MEA B.S.C. (c) 090059 A- a- Stable Airmed Dec. 20, 2012

Bahrain Arab Insurance Group (B.S.C.) 085013 B++ bbb+ Stable Airmed Dec. 18, 2012

Bahrain Trust International Insurance & Reinsurance Co. B.S.C. (c) Trust Re 086326 A- a- Stable Airmed Aug. 30, 2012

Kuwait Al Fajer Retakaul Insurance Co. K.S.C. (Closed) 088954 B++ bbb+ Stable Airmed July 10, 2013

Kuwait Kuwait Reinsurance Co. K.S.C. (Closed) 085585 A- a- Stable Airmed April 25, 2013

Lebanon Arab Reinsurance Co. S.A.L. 089190 B+ bbb- Stable Airmed Dec. 11, 2012

Morocco Societe Centrale de Reassurance 084052 B++ bbb Negative Airmed July 10, 2013Qatar Q-Re LLC 092611 A a Stable Assigned Nov. 26, 2012

Tunisia Societe Tunisienne de Reassurance 083349 B+ bbb- Stable Airmed July 10, 2013

Turkey Milli Reasurans Turk Anonim Sirketi 085454 B+ bbb- Negative Airmed April 5, 2013

United Arab Emirates Gul Reinsurance Ltd. 088930 A- a- Stable Airmed Aug. 2, 2013

Source: Bests Statement File Global; Ratings as of Aug. 16, 2013.


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Oshore Reinsurance Tax PlanStill Bears WatchingIn April 2013, a proposal to end some tax benefits enjoyed by most international (re)insurers doing business in the United States found its way into President Obamas budget.A month later, a bill to enact a similar measure was again introduced in the U.S. House andSenate. This long-standing tussle among domestic and foreign reinsurers can be character-ized by one of baseball philosopher Yogi Berras famed quotes: its dj vu all over again.

This subject has been argued for at least a decade, with very intense positions onboth sides. What has changed is the charged political atmosphere surrounding thischapter in the ongoing debate. The thirst for reducing effective corporate tax rates isfar from limited to the insurance industry or even U.S. soil.

As momentum for tax reform in the United States builds, so does concern among off-shore interests that the loophole benefiting foreign reinsurers with U.S. affiliates maybe tightened within broader tax-reform legislation, as opposed to a stand-alone bill.Another new aspect is the evolving presence of third-party capital as a reinsurancesolution, and whether this may quiet a rallying cry that foreign reinsurers capital isneeded to help sustain affordable pricing levels in catastrophe-prone areas.

Exhibit 19Global Reinsurance U.S. & Bermuda Market Trend Summary(2008-2Q 2013 YTD)(USD Billions)

2008 2009 2010 2011 20122Q YTD2013* 5yr Avg

NPW (Non-Lie only) $51.6 $50.3 $52.6 $55.0 $56.7 $31.1 $53.2

Net Earned Premiums (Non-Lie only) 52.1 51.1 52.4 54.4 55.5 26.3 53.1

Net Investment Income 7.6 8.2 8.1 7.6 7.1 3.1 7.7

Realized Investment Gains / (Losses) (6.0) 0.8 2.2 (0.1) 2.2 0.2 (0.2)

Total Revenue 55.9 63.1 65.7 64.6 68.6 33.3 63.6

Net Income (0.5) 12.4 11.2 0.9 10.1 5.7 6.8

Shareholders Equity (End o Period) 67.6 88.4 95.1 93.7 101.7 96.5 89.3

Loss Ratio 64.2% 56.1% 61.8% 77.3% 63.4% 56.1% 64.7%

Expense Ratio 29.4% 29.7% 30.9% 30.0% 29.8% 30.6% 30.0%

Combined Ratio 93.6% 85.8% 92.7% 107.3% 93.1% 86.7% 94.7%

Favorable Loss Reserve Development -7.3% -6.1% -6.2% -6.0% -5.8% -6.3% -6.3%

Net Investment Ratio 14.6% 16.0% 15.4% 14.0% 12.7% 11.8% 14.5%

Operating Ratio 79.0% 69.8% 77.3% 93.3% 80.4% 74.9% 80.1%

Return on Equity (Annualized) -0.7% 16.0% 11.9% 1.0% 10.6% 11.8% 7.7%

Return on Revenue (Annualized) -0.9% 19.7% 17.1% 1.5% 14.8% 34.6% 10.8%

NPW (Non-Lie Only/Annualized) to Equity (Endo Period)

76% 57% 55% 59% 56% 64% 60%

Net Reserves to Equity (End o Period) 168% 134% 128% 138% 130% 134% 138%

Gross Reserves to Equity (End o Period) 215% 167% 158% 169% 158% 160% 171%

* 2Q 2013 YTD excludes Alterra.Source: A.M. Best data & research


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Although this legislative issue warrants ongoing surveillance, A.M. Best does not believethe matter will lead to any ratings revisions over the near term. Depending on the finaloutcome, companies likely will continue to seek operating alternatives to ensure taxand capital efficiency if and when the tax benefits for foreign companies are eliminated.

Some companies already have reacted, while others will continue to take steps thatmitigate the impact of any potential tax exposure.

The current administration has tried but failed to eliminate this tax benefit inprevious budget proposals. The opposition on this issue has the support of manymembers of Congress, particularly from states that have considerable exposure tonatural catastrophes. Their concern is the possibility that a tax increase could leadto increased costs for (re)insurance coverage or possibly a decrease in allocated (re)insurance capacity for less profitable risks. Accordingly, any resolution of this issuestill could be years away.

Over the past several years, there have been various initiatives to increase insurancecapacity for catastrophe-prone states, the most recent being the relaxation of collateralrequirements in some states for foreign (re)insurers operating within those jurisdic-tions. The proposed elimination of the existing tax benefits would be in direct opposi-tion to such initiatives.


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Global Re Outlook Remains Stable;Industry Positioned to Bear UncertaintyDespite increasing challenges, the rating outlook on the global reinsurance segment isbeing held at stable, supported by continued strong risk-adjusted capitalization, judi-cious enterprise risk management practices and a slow improvement in the global eco-nomic environment, underpinned by the United States, which represents the worldslargest insurance market. A disciplined underwriting posture has enabled reinsurers toproduce reasonable underwriting profits and benefit from favorable loss-reserve devel-opment, while helping to mitigate the continuing weakness in investment earnings.

From a capital perspective, global reinsurers are well capitalized and capable of absorb-ing significant losses from a combination of events. The fragility in the global economycontinues to present a meaningful level of uncertainty and challenges. Assuming contin-

ued stabilization in the global economy and a normal level of global catastrophe losses,A.M. Best expects reasonable organic growth in reinsurers capital for 2013, supportedby core earnings and new opportunities presented by their primary insurance and spe-cialty (re)insurance operations, and tempered by mark to market adjustments due to ris-ing interests rates and capital management strategies.

However, A.M. Best remains concerned that reinsurance pricing, terms and conditionsmay come under increasing pressure as excess capacity continues to build and the con-vergence between capital market capacity and traditional reinsurance capacity evolves.Furthermore, while loss-reserve releases have helped to bolster profits and likely willcontinue to do so, this crutch will provide steadily decreasing support.

The continuing low interest-rate environment, however, appears to be reinforcing afocus on underwriting discipline, which should translate into a positive for the seg-ment. Pricing, terms and conditions are important aspects of the overall equation, giventhat operating performance helps drive balance sheet strength. With operating returnspressured by low investment yields, underwriting profits must drive overall earnings forthe foreseeable future.


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senior viCe Presidents Manfr Nwacki, Matthw Mshr,Rita L. Tsc, Karn B. Hin

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Copyright 2013 by A.M. Best Company, Inc., Ambest Road, Oldwick, NewJersey 08858. ALL RIGHTS RESERVED. No part of this report or document maybe distributed in any electronic form or by any means, or stored in a database orretrieval system, without the prior written permission of the A.M. Best Company.For additional details, see Terms of Use available at the A.M. Best CompanyWeb site www.ambest.com.

Any and all ratings, opinions and information contained herein are provided as is, without anyexpressed or implied warranty. A rating may be changed, suspended or withdrawn at any timefor any reason at the sole discretion of A.M. Best.

A Bests Financial Strength Rating is an independent opinion of an insurers financial strengthand ability to meet its ongoing insurance policy and contract obligations. It is based on a com-prehensive quantitative and qualitative evaluation of a companys balance sheet strength, oper-ating performance and business profile. The Financial Strength Rating opinion addresses therelative ability of an insurer to meet its ongoing insurance policy and contract obligations. Theseratings are not a warranty of an insurers current or future ability to meet contractual obligations.

The rating is not assigned to specific insurance policies or contracts and does not address anyother risk, including, but not limited to, an insurers claims-payment policies or procedures; theability of the insurer to dispute or deny claims payment on grounds of misrepresentation orfraud; or any specific liability contractually borne by the policy or contract holder. A FinancialStrength Rating is not a recommendation to purchase, hold or terminate any insurance policy,contract or any other financial obligation issued by an insurer, nor does it address the suitabilityof any particular policy or contract for a specific purpose or purchaser.

A Bests Debt/Issuer Credit Rating is an opinion regarding the relative future credit risk of anentity, a credit commitment or a debt or debt-like security. It is based on a comprehensive quantita-tive and qualitative evaluation of a companys balance sheet strength, operating performance andbusiness profile and, where appropriate, the specific nature and details of a rated debt security.Creditrisk is the risk that an entity may not meet its contractual, financial obligations as they come due.

These credit ratings do not address any other risk, including but not limited to liquidity risk, market

value risk or price volatility of rated securities. The rating is not a recommendation to buy, sell or holdany securities, insurance policies, contracts or any other financial obligations, nor does it address thesuitability of any particular financial obligation for a specific purpose or purchaser.

In arriving at a rating decision, A.M. Best relies on third-party audited financial data and/or otherinformation provided to it. While this information is believed to be reliable, A.M. Best does notindependently verify the accuracy or reliability of the information.

A.M. Best does not offer consulting or advisory services. A.M. Best is not an Investment Adviserand does not offer investment advice of any kind, nor does the company or its Rating Analystsoffer any form of structuring or financial advice. A.M. Best does not sell securities. A.M. Bestis compensated for its interactive rating services. These rating fees can vary from US$ 5,000to US$ 500,000. In addition, A.M. Best may receive compensation from rated entities for non-rating related services or products offered.

A.M. Bests Special Reports and any associated spreadsheet data are available, free of charge,to all BestWeek subscribers. Nonsubscribers can purchase the full report and spreadsheet data.Special Reports are available through our Web site at www.ambest.com/research or by callingCustomer Service at (908) 439-2200, ext. 5742. Briefings and some Special Reports are offeredto the general public at no cost.For press inquiries or to contact the authors, please contact James Peavy at (908) 439-2200,

ext. 5644.

SR-2013-046

ContributorsRobert DeRose, OldwickGreg Reisner, OldwickScott Mangan, OldwickMariza Costa, Oldwick

Al Slavin, OldwickMahesh Mistry, London

Richard Hayes, LondonDavid Drummond, London

Yvette Essen, LondonVasilis Katsipis, DubaiIris Lai, Hong Kong


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