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Seminar on Reinsurance

Seminar on Reinsurance. Stefan Holzberger Managing Sr. Financial Analyst A. M. Best Company June 2, 2003. Objective of Best’s Rating. Financial Strength Rating Opinion as to (Re)insurer’s Ability to Meet Obligations to Cedants / Policyholders Debt Rating

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Seminar on Reinsurance

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  1. Seminar on Reinsurance Stefan Holzberger Managing Sr. Financial Analyst A. M. Best Company June 2, 2003

  2. Objective of Best’s Rating • Financial Strength Rating • Opinion as to (Re)insurer’s Ability to Meet Obligations to Cedants / Policyholders • Debt Rating • Opinion as to (Re)insurer’s Ability to Service Debt and Meet Obligations to Security Holders

  3. Holding Company Non-Insurance Businesses Financial Strength of Insurance Operations Counterparty Rating Financial Strength Ratings Debt Ratings Counterparty Rating Approach

  4. Financial Strength RatingKey Components Balance Sheet Strength Operating Performance BusinessProfile Best’s Rating

  5. Best’s Rating EvaluationBalance Sheet Strength • Capitalization / Leverage • Capital Structure / Holding Company • Quality / Soundness of Reinsurance • Adequacy of Loss Reserves • Quality / Diversification of Assets • Liquidity

  6. Best Rating EvaluationOperating Performance • Profitability • Revenue Composition • Management Experience & Strategy • Ability to Meet Plan • Sustainability

  7. Rating Evaluation Business Profile • Market Risk • Competitive Market Position • Spread of Risk • Product • Geographic • Event Risk • Regulatory Risk • Sustainable Competitive Advantage

  8. Why Business Profile and Operating Performance? Strong Business Profile and Operating Performance Weak Business Profile and Operating Performance Last Balance Sheet Today Time

  9. Secure A++ B+ Vulnerable B D Balance Sheet Strength Outstanding Weak OperatingPerformance Very Stable/Strong Volatile/Poor Strong / Sustainable Advantages Well-Diversified Questionable ViabilityCompetitive DisadvantagesConcentrated Risk BusinessProfile Rating Considerations

  10. Best’s Rating Perspective • Capital Strength is Key • Sustainable, Stable Operating Profitability • Diversified / Strong Profile = Stability

  11. Reinsurance Trends The Bad News

  12. Reinsurance Rating Trends • Downgrades Outpace Upgrades • Superior Rated Companies Decline • Negative Rating Outlooks on the Rise • Ratings Move to Vulnerable Category • European Reinsurers Leave U.S. Market

  13. High Profile Rating Changes FromTo • American Re A++ A+ • Employers’ Re A++ A+ • St Paul Re (now Platinum) A+ A • AXA Corp. Solutions Re (US) A+ B • SCOR (US) A+ A- • Gerling Re (US) A- B-

  14. Effects of Hard Market Tempered in 2002 • Significant Reserve Shortfalls • Underlying Loss Cost Trends • Underpricing More Severe Than Anticipated • Underestimated WTC Losses • Asbestos Losses • Credit Losses

  15. Terrorism • Primary Companies Mandated to Offer Terrorism Cover • TRIA (US Terrorism Risk Insurance Act) • Excludes Reinsurers from Mandatory Coverage • Clash Potential Remains a Concern • Reinsurers Offer Cover • Cost is Prohibitive • In an Event – Will Rates be High Enough?

  16. Reinsurance Trends The Good News

  17. Reinsurance Financial Trends

  18. Reshaping the Market • Continued Rate Increases For Second Consecutive Year • Tighter Terms & Conditions • Limited Capacity for Certain Risks • Shift from Customer Focus to U/W Focus • Flight to Quality • Withdrawal of Capacity • Entry of New Capital

  19. New Capital – Bermuda

  20. Expectations & Rating Outlookfor theReinsurance Sector

  21. Future Expectations • Investor Expectations Remain High • So Far Have Been Unrewarded • Earnings Must Come From Underwriting • Adherence to Operating Fundamentals • Pricing Models Reestablished • Rates Continue to Rise Although Slower • Program Structures Amended • Focus on Capital / Risk Management

  22. Reinsurance Rating Outlook • Leaders Maintain Superior Financial Strength • Additional Reserve Strengthening • Weaker Players Continue to be Challenged • Favorable Market Sustained for Near-Term • In Most Lines of Business

  23. Thank You.

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