Global Reinsurers Maintain Equilibrium

BEST’S MARKET SEGMENT REPORT
Welcome to AM Best’s annual commentary on the global reinsurance industry.
In April 2020, we announced that we were maintaining our outlook for the global reinsurance segment at Stable. This may seem counterintuitive during a
pandemic, but a number of factors are helping to mitigate the impact of COVID-19, which has created far-reaching economic challenges and tremendous
uncertainty worldwide. Momentum for renewals in the first half of 2020 was strong, with clear signs of a hardening market. However, there was growing
uncertainty about claims reserve development associated with prior years’ property catastrophe events and business interruption and casualty lines owing
to the pandemic.
For the non-life reinsurance segment, robust risk-adjusted capitalization, with significant excess capital, has positioned reinsurers to absorb both
underwriting losses and investment volatility resulting from COVID-19. On the life side, strongly capitalized companies with advanced modeling capabilities
have shown the ability to withstand a 1-in-200-year mortality event.
This year, Swiss Re remained in the top spot in our listing of the world’s 50 largest reinsurers, even expanding its lead over #2 Munich Re. Partner Re
returned to the top 10, while Korean Re slipped one place to #11.
A panel discussion featuring experts from Hannover Re, Swiss Re, and AM Best highlighted that, despite the many challenges arising from COVID-19,
offsetting positive factors have created an equilibrium of sorts. Even the pandemic-related challenges have been manageable, below stress-tested
thresholds.
The “total return reinsurer” is a relatively recent manifestation of the alternative capital concept. These reinsurers have the potential to generate
significantly higher investment returns than traditional reinsurers, although results thus far have been muted and volatile.
Mortgage reinsurers have braced themselves for mortgage-related losses, as customers face difficulty making their mortgage payments owing to high
unemployment and the severe contraction in GDP.
Cat bond issuance has been on a record-setting pace this year. Issuance volume in the first half, $6.6 billion, has already surpassed all of 2019 and may
be on its way to pass the $10.3 billion of 2017, a year beset with major hurricanes and record-setting wildfires in California.
The pandemic has reinforced the need for the Lloyd’s market to modernize and eased cultural resistance to change. The Lloyd’s Corporation has
heightened its focus on areas most likely to make an immediate difference to policyholders and market participants.
The IMF expects GDP in Latin America (which accounts for around 5% of global reinsurance premiums) to contract by 9.4% owing to the economic crisis
arising from COVID-19.
In Asia-Pacific, many reinsurers are reassessing their business strategies in light of COVID-19. The region’s reinsurance market is very competitive, as
large global players look to diversify their presence, while new domestic reinsurers enter the mix, causing weak pricing.
In the Middle East and North Africa, reinsurers remain pressured by competitive pricing, overcapacity, and the frequency of large losses, which have been
exacerbated by the pandemic and volatile oil prices. Performance in the sub-Saharan market has deteriorated due to competition and rising acquisition
costs.
We at AM Best are committed to sharing our expertise to address the ever-evolving spectrum of issues the industry faces. I hope you find this report
valuable to your understanding of our views on issues that impact the reinsurance industry, as well as our ratings, and welcome your thoughts. Please feel
free to reach out to me or any of my colleagues to discuss your thoughts.
Jim Gillard
Executive Vice President & Chief Operating Officer, AM Best
Copyright © 2020 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. No portion of this content
may be reproduced, distributed, or stored in a database or retrieval system, or transmitted in any form or by any means without the prior
SINCE 1899 written permission of AM Best. While the content was obtained from sources believed to be reliable, its accuracy is not guaranteed. For
additional details, refer to our Terms of Use available at the AM Best website: www.ambest.com/terms.
September 2, 2020
Global Reinsurers Maintain Equilibrium
through COVID-19 Turbulence
“In the midst of every crisis lies great opportunity.”
When market — Albert Einstein
uncertainty Far from implying that nothing has changed, AM Best’s Stable outlook on the Global
and economic Reinsurance industry reflects negative and positive forces that offset each other. Negative
factors include increased uncertainty on claims reserve development associated with
volatility previous years’ property catastrophe events, social inflation, and, more recently, business
translate to a interruption and casualty lines related to COVID-19. Combined with an overcapitalized
sector, these factors have translated into companies struggling to meet their cost of capital.
“stable” global On the positive side, reinsurance renewals during the first half of 2020 started to show strong
reinsurance momentum, with clear signs of a hardening market. This is reinforced by third-party capital
providers reassessing their role in the industry after being affected by loss creep, trapped
market outlook capital, and a perceived higher risk as a result of discrepancies between actual and modelled
claims experience.
Not all companies will be well positioned to take advantage of these improved market
conditions. Business mix and recent underwriting performance by line of business are key.
Flight to quality is also likely to play a role. Financial strength, reputation, market position,
Table of Contents:
product diversification, clean balance sheets, and consistent and transparent underwriting
COVID-19 Turbulence��1
performance may prove to be the main differentiators between winners and losers.
Ranking & Commentary��14
Reinsurance Panel��19
For reinsurers, meeting their cost of capital over time is critical if they want to survive and
Total Return.........................24
retain investor confidence. AM Best believes that the current market hardening will need to be
Trade Credit��32
sustained for at least the next year or two to have meaningful impact on the segment, but at
Lloyd’s Trends��35
Mortgage Market��37
this point, it is unclear how long these market dynamics will last. The pricing momentum will
Cat Bonds��49 have to be sufficient to offset the losses from previous years, including the uncertain impact
Life Reinsurance��59 from COVID-19 and the continued surge from social inflation.
Asia-Pacific��65
Latin America��72 AM Best’s 2018 Outlook Change from Negative to Stable
Middle East & North Africa��75 “My life seemed to be a series of events and accidents. Yet when I look back, I see a
Sub-Saharan Africa............. 81 pattern.”
– Benoît B. Mandelbrot
Analytical Contacts:
Carlos F. Wong-Fupuy, Oldwick It hasn’t been two full years yet since AM Best changed its Global Reinsurance market
+1 (908) 439-2200 Ext. 5344 outlook from Negative to Stable. Between 2014 and 2018, we kept a Negative outlook on the
Carlos.Wong-Fupuy segment owing to the deteriorating trends on underwriting, investment performance, and
@ambest.com
return on capital as a result of soft pricing conditions and excess capacity, driven by both an
Scott Mangan, Oldwick overcapitalized industry and the continued influx of third-party capital.
+1 (908) 439-2200 Ext. 5593
[email protected]
Our change of heart at the end of 2018 did not necessarily reflect increased optimism on the
state of the market, or a different direction in trends. We acknowledged that we would have
Contributor:
Steven Chirico, Oldwick to get used to a “new normal”, with operating returns below historical levels, but relatively
2020-150.1 stable. Despite the string of natural catastrophes and man-made losses that global reinsurers
SINCE 1899
1
written permission of AM Best. While the content was obtained from sources believed to be reliable, its accuracy is not guaranteed. For
Market Segment Report Global Reinsurance
Dedicated reinsurance capital is shown in Exhibits 1 and 2. This is the eighth year that
AM Best has compiled an estimate of dedicated global reinsurance capacity, working
in conjunction with Guy Carpenter. This estimate is not a simple aggregation of the
shareholders’ equity of all companies that write reinsurance, since some of that capacity is
allocated to the insurance business or other outside interests. AM Best and Guy Carpenter
have estimated the amount of capital dedicated to writing reinsurance by using AM Best’s
proprietary capital model, BCAR, and reviewing line-of-business allocations for the majority
of the top 50 reinsurance organizations, while giving consideration to reinsurance capacity
offered by smaller participants in the market.
Exhibit 1
Global Reinsurance – Total Dedicated Reinsurance Capital
550
450
88 86
75 87 95
60 68
350 48
(USD billions)
250
394 385
320 340 332 345 345 341
150
50
2013 2014 2015 2016 2017 2018 2019 2020E

-50
Third-Party Capital Traditional Capital
Note: Joint estimate by AM Best and Guy Carpenter.

Source: AM Best data and research
started to face in 2017, the reinsurance industry remained well capitalized and investor
appetite from alternative capital was not showing signs of abating.
The reinsurance segment saw a significant increase in traditional reinsurance capital in 2019
from the prior year even though most reinsurers were underwriting at, or just above, break-
even. The vast majority of companies were adversely impacted by mark-to-market unrealized
losses from both fixed-income securities and equity holdings toward the end of 2018. In 2019,
however, there was a reversal, as valuations on both equities and fixed-income securities
improved considerably. Notably, National Indemnity—given the scale of its balance sheet—was
a key driver in these movements, with unrealized losses of $11.4 billion in 2018 and unrealized
gains of $47.7 billion in 2019.
The estimate for 2020 is particularly challenging given the extraordinary levels of market
volatility brought on by the pandemic. Furthermore, COVID-19-related losses are still
developing and the hurricane season is in full swing. Partially offsetting the downward
pressure on capital has been the influx of capital raises, roughly half of which has come in the
form of equity. Capital management is expected to have a somewhat muted effect compared to
prior years, as many reinsurers have changed their plans for dividends and share repurchases
22
Exhibit 2
Global Reinsurance – Estimated Total Third-Party Capital
100
90 5
5 5
6
80
5 20 34
70 29
5 28
(USD billions)
60 21
5
18
50 14
4
40 8
30 62
56 55 52
45 49
20 41
36
10
0
2013 2014 2015 2016 2017 2018 2019 2020E
Direct Institutional Investors

Reinsurance Sponsored Managers (including sidecars)
Dedicated ILS Managers
Notes: Joint estimate by AM Best and Guy Carpenter. Rounded values may not add up to non-rounded total.
until there is more clarity in the capital markets and they have a better feel for the industry’s
COVID-19 losses.
During 2019, early signs of improving market conditions started to emerge, first driven by
the primary and retrocession sectors. The impact on reinsurance rates was still considered
insufficient to boost profits to the necessary level to meet cost of capital, but cautious optimism
could be perceived for future rate increases. At the same time, third-party capital providers
started to experience unexpected developments. Loss creep related to a number of property
catastrophe events generated doubt around the robustness of risk modelling. The drawn
out claims settlement process led to collateral being trapped longer than expected, further
deteriorating annualized returns of alternative capital vehicles. Climate change and its uncertain
effect on catastrophe activity, from hurricanes and typhoons to wildfires, added to that
skepticism. The main question was to what degree investor appetite might be affected.
Another year of material catastrophe losses (albeit below the previous 10-year average), adverse
reserve developments, and social inflation affecting casualty lines continued to pressure the
need for improved underwriting discipline. The collapse of interest rates in particular and
investment returns in general further exacerbated the pressure on underwriting discipline and,
by extension, risk-adjusted premium rates. The January 2020 renewals started a strong positive
trend in rate increases and third-party capital supply showed its first signs of retrenchment.
The pandemic has drastically accelerated those trends, while simultaneously adding significant
uncertainty on both sides of the balance sheet that may offset any predicted gains.
2020: Renewing AM Best’s Stable Outlook – Not Necessarily for the Same Reasons
Changes in risk perception from third-party capital are becoming evident. The 2020 April and
June renewals were accompanied by significant momentum in improving pricing, as well as
terms and conditions. Some reinsurance placements were either not fulfilled, or third-party
3 3
capital required returns were so high and unlikely to be met that cedants preferred to use
more traditional capacity or go without cover. A number of medium-sized reinsurers have been
raising equity capital. There also is talk of new company formations and M&A activity, given
the attractive pricing environment expected at least for the Exhibit 3
next couple of years (Exhibits 3 and 4). Global Reinsurance – Insurance
Industry 2020 Capital Raises
In early April 2020, just a few weeks into the pandemic, AM (USD billions)
Best renewed its Stable outlook for the global reinsurance
market. This is not to say, once again, that nothing has
changed over the last few months. On the contrary,
COVID-19 has become a catalyst for a number of factors,
both positive and negative, affecting the industry. It is too
early to tell what the ultimate impact of the pandemic will
Equity, 9.2
be. Some companies are clearly better positioned than Debt, 10.3
others to adapt to the new conditions. In the medium
term, we believe that the sector as a whole should be
able to manage this challenging—and promising—market
environment.
There has been much talk about negative developments

associated with COVID-19. On the liability side of the
balance sheet, early estimates of increases in loss ratios for Note: As of July 2020
the full year 2020 fluctuate from 5% on the low end to more
Exhibit 4
Global Reinsurance – ILS Fund Managers' Assets Under Management
(USD billions)
Assets Under Change in

Name Management AUM Funds Location ILS Fund Managers Acquisitions
Nephila Capital 10,000 ▼ Bermuda Purchased by Markel 2018
RenaissanceRe Holdings Ltd.* 9,730 ▲ Bermuda
Credit Suisse Insurance Linked Strategies Ltd. 7,200 ▼ Zurich
LGT ILS Partners Ltd. 6,800 ▼ Pfaeffikon, Switzerland
Fermat Capital Management, LLC 6,800 ▲ Westport, Connecticut
Stone Ridge Asset Management 6,630 ▲ New York
Securis Investment Partners LLP 5,900 ● London Northill bought out Swiss Re in 2012
Leadenhall Capital Partners LLP 5,500 ● London Purchased by Amlin 2014
AlphaCat Managers 4,200 ● Bermuda Purchased by AIG in 2018
Elementum Advisors, LLC 4,200 ▲ Chicago White Mountain purchased 30% stake in 2019
Aeolus Capital Management Ltd 4,000 ● Bermuda Purchased by Elliott in 2016
Twelve Capital AG 4,000 ● Zurich
Schroder Investment Management 3,000 ▲ London
Markel CATCo Investment Management 2,700 ▼ Bermuda Purchased by Markel 2015
Hudson Structured Capital Management Ltd 2,000 ▲ Bermuda
Top 15 Fund Managers 82,660

* Renaissance Re includes Top Layer, DaVinci, Langhorn, Vermeer, and Medici.
*As of July 2020.
Source: Artemis
44
than 20%. This wide range is explained by each company’s product mix—event cancellation,
non-US business interruption, D&O, workers compensation, and financial lines are the
most likely to be affected—but also by the different assumptions and degrees of prudence
embedded in these calculations. Some of the relevant business lines may not realize material
loss activity until later in 2020 or beyond, when the effects of the economic stimulus packages
are expected to have subsided, but before any litigation has been adjudicated.
On the asset side of the balance sheet, AM Best observed by the end of the first quarter of 2020
mainly unrealized investment losses that ranged from single-digit percentage points to almost
a third of policyholder surplus. The impact on each company depended on the concentration
in equity holdings and any extant relief from hedging strategies. Since then, stock markets
and credit spreads have significantly recovered to pre-COVID-19 levels, but AM Best believes
that volatility is here to stay for the foreseeable future. In the current economic environment,
optimism for a COVID-19 vaccine may boost stock prices one day only to be followed by fears
of a second wave of infections.
The level of uncertainty on both sides of the balance sheet is mitigated, however, by the
improving prospects for new and renewal business. Not only are reinsurance rates signaling
a clear hardening trend, but third-party capital—which in the past has been simultaneously
a competitor of and a partner to traditional capital—is reassessing its role in the industry. It
may be that the three main premises that made reinsurance attractive to third-party capital
investors (namely, perceived lack of correlation of the underlying risks with the rest of the
economy, accurate catastrophe risk modelling, and the ability to enter and exit the market
swiftly) are, for some, no longer valid. Or, better risk-adjusted return alternatives are being
identified (which may mean that, especially due to COVID-19 uncertainty, reinsurance risks
are being perceived as excessively high), or investors are more concerned about preserving
liquidity during these uncertain times. Third-party capital—at current rates at least—does not
always share the same level of enthusiasm for the hardening market that some equity capital
investors express. That situation may change, however, if prices continue to rise, although
from a protection buyer’s point of view, the proposal may reach a point where it becomes
economically prohibitive. In the interim, there appears to be flight to quality as cedants focus
on reducing counterparty risk.
What to Expect for the Rest of 2020?

“One never notices what has been done; one can only see what remains to be done.”—
— Marie Curie
It is clear that 2020 is a critical year for reinsurers, in terms of both challenges and
opportunities. Since 2014, average return on equity measures have declined consistently, down
to breakeven levels in the last three years. The situation is even more pressing when we note
that 3% to 4% of that performance is attributable to favorable loss reserve development. This
benefit to both the combined ratio and return on equity has steadily declined and without
prompt, corrective action, will be become a drag on earnings (Exhibits 5 and 6). The
underutilization of capital in the market (which AM Best estimated at around 80% in 2019),
already low investment returns in a recessionary economic environment, and COVID-19-related
claims uncertainty, all add pressure on players to improve underwriting discipline if they want
to survive.
The current hardening pricing conditions are creating a window of opportunity for reinsur-
ers. Property catastrophe, specialty lines, and some US casualty lines have been showing
much-needed improvement in pricing and coverage terms. The risk is that the positive market
momentum turns out to be short-lived, excess capacity starts expanding again, and we return
5 5
Exhibit 5
Global Reinsurance – Return on Equity
12
9.8
10
9.2
8.4
8
5-Year Average, 5.7

(%)
2
1.1
0.1
0
2015 2016 2017 2018 2019
ROE 5-Year Average
Exhibit 6
Global Reinsurance – Loss Ratios, Expense Ratios, Favorable Loss
Reserve Development
120 20
18
Favorable Loss Reserve Development (%)

33.8
100
33.8 33.2 16
34.0
34.9
34.3 14
80
76.5 12
Ratios
60 68.2 66.7 65.6 10

60.4
56.1 8
40
6
4
20
2
0 0
2015 2016 2017 2018 2019 5-Year Average
Expense Ratio Loss Ratio Favorable Loss Reserve Development

to where we started. For this reason, AM Best believes that the current market hardening must
be sustained long enough to offset the impact of prior inadequate market conditions.
The pricing momentum will have to be sufficient to offset the losses from previous years,
including the uncertain impact from COVID-19 (likely to have a long tail due to legal disputes).
If reinsurers do not accomplish this, they risk losing investor confidence.
66
There have been a number of capital raising initiatives over the last few months, but the
reasons behind them may not be fully explained solely by the intention to write more
attractive business volumes. Loss creep, social inflation, and declining reserve releases are still
ongoing issues. Retrocession conditions have been hardening ahead of the reinsurance sector,
as capacity is shrinking, which is forcing some protection buyers to increase their retention
limits. Risk exposures in several product lines may become lower due to the economic
slowdown, even if rates were to rise sharply. What is more, the US hurricane season is now
underway and COVID-19 losses are expected to be in line with losses related to an active
natural catastrophe year.
Not all reinsurers are created equal. Capital position, business mix, and recent underwriting
performance in particular lines of business are key factors in the relative success of reinsurers.
For some underperforming reinsurers, the rate increases so far, even if significant, may not be
sufficient to restore desired profitability. When it comes to business mix, some of the largest,
more globally diversified reinsurers tend to be more cautious about market trends. This may
simply reflect having more levers to pull when trying to improve performance, or, in particular
cases, having a lower cost of capital associated with less volatile performance compared to the
rest of the industry.
Companies’ individual abilities to take advantage of the hardening market conditions are
likely to be influenced by a flight to quality. After three years of significant industry losses,
those companies with a solid financial strength, robust reputation, and market position, as
well as stable, consistent, and transparent results, should be best positioned to optimize
their underwriting risk portfolio and continue to attract and deploy capital. There is some
discussion regarding “Class of 2020” start-ups emerging and, despite the advantages of a clean
balance sheet, AM Best believes that market recognition may prove to be a challenge and a key
differentiator between winners and losers. The more pronounced the differences, the more
likely they may become a driver behind certain rating actions.
Stress Testing and Government Intervention

AM Best’s COVID-19 Stress Test identified only a limited impact on balance sheet strength for
most global reinsurers. Based on current measures, these results are consistent with individual
discussions with rated companies and, given the level of overcapitalization in the industry,
confirm our view that, based on conservative estimates, this is most likely to be considered an
earnings event of a magnitude similar to an active US hurricane season, except with a longer
claims settlement period.
Reinsurers have been running stress scenarios based on pandemic risk for years, as part of
their enterprise risk management (ERM) framework. However, an important, albeit perfectly
understandable, omission in the modelling stands out: the exceptional degree of government
intervention, both in terms of economic stimulus packages and widespread lockdown
measures, not seen in any of the previous outbreaks—from the Spanish flu about a century
ago to the more recent SARS and Ebola outbreaks. Despite the significant human cost seen so
far, even the most conservative death estimates for the current pandemic remain below the
corresponding figures for a 1-in-200-year return scenario. Conversely, the worldwide shelter-
in-place measures have created a potential for non-life insured claims, which would have been
unthinkable just by referring to previous pandemics.
Government intervention has led to a more “balanced” impact between the life and non-life
(re)insurance segments. The mortality cost is being somewhat mitigated in exchange for
higher economic costs, a share of which will be absorbed by the industry—both as investment
7 7
losses and as non-life underwriting claims. Regarding the asset side of the balance sheet, fiscal
stimulus packages partly explain the recovery of the capital markets after a sharp decline
earlier in the year. Nonetheless, volatility is likely to stay, even for the typical reinsurers
for which this is not a matter of undue concern given their relatively low exposure to non-
investment grade credit, equities, and real estate, as evidenced by the average mark-to-market
investment loss for reinsurers, which was in the single digits during the first half of 2020.
Regulatory and rating agency risk-based capital requirements have contributed to the low risk
profile of most reinsurers’ investment portfolios. The depth and length of the pandemic and
economic recession, however, may still put pressure on the credit markets, affecting the high
quality and diversified fixed income portfolios that many companies currently enjoy.
As severe as COVID-19 may be, the reinsurance sector remains well positioned to manage
the associated losses. On the non-life side, the estimates exclude the possibility of retroactive
legislation extending business interruption coverage despite explicit exclusions. AM Best
believes that forcing insurers to pay for COVID-19-related business interruption claims, despite
any specific policy exclusions, could threaten many insurers’ solvency and would be subject to
vigorous legal challenges with a high likelihood of success.
Affirmative coverage or ambiguously worded contracts are more common in non-US markets
(especially in the UK and throughout Europe), with much lower aggregated exposures. Event
cancellation (the line whose loss estimates probably carry the least uncertainty) exposures
tend to be concentrated in the large European reinsurers and the Lloyd’s market. A number
of liability lines that may be affected, with lower exposure volumes—such as D&O, E&O,
and workers compensation—may still take a while to develop. Products associated with the
transport, travel, and leisure industries will see much-reduced business volumes, as well as
decreased claims activity.
Financial Lines and Life Reinsurance: When “Diversification” Leads to More Correlation and
Improved Opportunities
Financial lines (such as mortgage, trade credit, and surety), by definition, are highly
correlated to the economic cycle. They are likely to experience a material increase in loss
activity as a result of the pandemic, although the timeline is uncertain. In recent years,
they have been strong profit generators, even cross-subsidizing to some extent other loss-
making lines. Since the 2008 financial crisis, with the advent of Private Mortgage Insurer
Eligibility Guidelines (PMIERs), underwriting guidelines have become much more rigorous.
Risk monitoring has become tighter, pricing techniques are more sophisticated, and the
quality of the books generally is higher. The emergence of rising claims will take a while
to develop, until government-sponsored economic relief measures are fully utilized by
the insureds, and a reduced claims impact absorbed by the cedants. AM Best currently
estimates that the mortgage insurers it rates will be able to comfortably absorb claims
of 4% to 6% of their exposures. However, uncertainties abound regarding the ultimate
loan forbearance take-up rates, the ultimate unemployment rate, and the possibility of a
resurgence of the pandemic.
Reinsurers may re-evaluate their level of commitment to these risks, at a time where the
pandemic-related losses may trigger rate spikes and scarce capacity in terms of new business.
Conservative stress tests still indicate that the most exposed reinsurers generally should be
able to absorb the worst loss scenarios without experiencing a dramatic deterioration of their
risk-adjusted balance sheet positions.
88
On the life reinsurance side, the focus is on mortality risk. Let’s first remember that life
reinsurers may have a very different risk profile compared to primary carriers. The savings
component associated with primary life products typically is not reinsured. Life reinsurers
tend to be more concentrated on biometric risks than their direct writer peers. In addition to
extensive in-house medical expertise, life reinsurers use decades of data to aid in their pricing.
As a result, investment returns and interest rate assumptions are typically less of a pricing
driver for reinsurers when compared to primary writers. Morbidity risk, when reinsured,
is typically written on a stop-loss basis, with relatively high attachment points. The direct
pandemic impact on the primary market has been somewhat mitigated by lower non–COVID-
19-related claims activity. Longevity exposures, which could be a positive contributor to
earnings during an outbreak, remain limited.
As mentioned above, the most conservative COVID-related death estimates remain well below
the typical stress scenarios that companies use as part of their risk capital management.
Additionally, coverage tends to be more concentrated on working age groups, which are
generally less vulnerable to the virus.
In general, life reinsurance is written almost exclusively by the largest players in the market,
with a very well balanced book of business and the strongest levels of capitalization. Given
its long-term nature, life portfolios serve as a ballast, generating a steady flow of predictable
earnings that offset the fluctuations from P&C risks, which are vulnerable to low frequency,
high severity losses.
The current pandemic is a real life example of correlations that can dramatically increase
beyond normal expectations during times of crisis. That is the case between life and non-life
lines of business, as well as the asset and liability sides of the balance sheet. On the other
hand, the correlation between financial lines and the rest of the economy may be somewhat
mitigated—or its effect at least significantly delayed—thanks to unprecedented levels of
government intervention. The reinsurance segment may be negatively impacted by current
losses, but should benefit from improved market conditions during the next few years.
9 9
Appendix 1
Global Reinsurance Market*
(USD billions)
5-Year
Average 2019 2018 2017 2016 2015
NPW (Non-Life only) 144.7 167.3 150.0 144.5 130.3 131.7
Net Premiums Earned (Non-Life only) 142.1 162.3 147.3 143.3 128.0 129.7
Net Investment Income 21.9 28.2 16.1 25.8 20.4 18.9
Unrealized/Realized Investment Gains(Losses) 5.4 13.6 8.0 4.2 2.3 -0.9
Total Revenue 230.6 263.8 223.8 238.8 216.4 210.3
Net Income 11.7 20.9 2.2 0.3 16.7 18.5
Shareholders' Equity (End of Period) 205.8 225.3 191.4 207.8 204.2 200.2
Loss Ratio 65.6 66.7 68.2 76.5 60.4 56.1
Expense Ratio 34.0 33.2 33.8 33.8 34.9 34.3
Combined Ratio 99.6 99.9 101.9 110.3 95.3 90.4
Reserve Development - (Favorable)/Unfavorable -4.2 -1.1 -3.3 -4.3 -6.0 -6.2
Net Investment Ratio** 15.4 17.4 10.9 18.0 15.9 14.6
Operating Ratio 84.2 82.5 91.0 92.3 79.4 75.8
Return on Equity 5.7 9.8 1.1 0.1 8.4 9.2
Return on Revenue 5.1 7.9 1.0 0.1 7.7 8.8
NPW (Non-Life only) to Equity (End of Period) 70 74 78 70 64 66
Net Reserves to Equity (End of Period) 246 238 270 234 244 244
Gross Reserves to Equity (End of Period) 275 269 310 267 266 266
* AM Best's Reinsurance Composite changes over time as companies enter and exit the market or rating process. In some cases,
companies have been added or removed retroactively. When possible, historical data has been updated to reflect changes in companies'
segment reporting.
** Net investment ratio based on non-life NPE.
1010
Appendix 2
Global Reinsurance – European "Big Four" Market*
(USD billions)
5-Year
Average 2019 2018 2017 2016 2015
NPW (Non-Life only) 64.8 72.5 67.5 64.8 59.8 59.3
Unrealized/Realized Investment Gains(Losses) 2.3 4.7 2.6 2.0 1.5 0.6
Total Revenue 137.8 142.8 134.8 146.9 134.7 129.9
Net Income 6.2 5.7 4.6 2.4 8.2 10.0
Loss Ratio 67.5 69.6 68.1 76.7 63.4 59.9
Expense Ratio 32.3 31.8 32.6 32.2 32.8 31.9
Combined Ratio 99.8 101.4 100.7 108.9 96.3 91.8
Operating Ratio 75.8 74.9 84.6 79.9 72.0 67.5
Return on Equity 7.4 7.2 5.8 2.7 9.7 11.5
Return on Revenue 4.6 4.0 3.4 1.6 6.1 7.7
segment reporting.
1111
Appendix 3
Global Reinsurance – US & Bermuda Market*
(USD billions)
5-Year
Average 2019 2018 2017 2016 2015
NPW (Non-Life only) 48.1 61.1 50.0 46.1 42.0 41.2
Unrealized/Realized Investment Gains(Losses) 3.0 7.6 6.0 1.6 0.8 -0.9
Total Revenue 59.2 82.4 56.3 56.3 51.7 49.2
Net Income 4.5 11.9 -1.1 0.6 6.0 5.3
Loss Ratio 65.3 65.1 70.0 77.8 58.3 55.4
Expense Ratio 32.5 31.8 31.9 31.8 33.9 33.2
Combined Ratio 97.9 96.9 101.9 109.7 92.2 88.6
Operating Ratio 87.7 86.2 93.5 98.6 81.4 78.5
Return on Equity 5.1 12.2 -1.3 0.7 7.3 6.7
Return on Revenue 7.2 14.4 -2.0 1.1 11.5 10.8
segment reporting.
1212
Appendix 4
Global Reinsurance – Lloyd's Market*
(USD billions)
5-Year
Average 2019 2018 2017 2016 2015
NPW (Non-Life only) 31.8 33.6 32.5 33.6 28.4 31.2
Unrealized/Realized Investment Gains(Losses) 0.1 1.3 -0.6 0.5 0.0 -0.6
Total Revenue 33.6 38.6 32.7 35.5 30.0 31.1
Net Income 1.0 3.3 -1.3 -2.7 2.6 3.1
Loss Ratio 62.1 63.4 65.4 74.5 57.3 49.9
Expense Ratio 39.6 38.7 39.2 39.5 40.6 40.1
Combined Ratio 101.7 102.1 104.6 114.0 97.9 90.0
Operating Ratio 96.2 92.1 100.6 108.2 92.0 88.1
Return on Equity 3.0 9.0 -3.7 -7.3 8.1 8.9
Return on Revenue 3.2 8.6 -3.9 -7.6 8.6 10.1
segment reporting.
1313
September 2, 2020
World’s 50 Largest Reinsurers
For the second consecutive year, and the third time in four years, Swiss Re topped the list of
Swiss Re the world’s largest reinsurers, by year-end reinsurance gross premium written. Munich Re
came in at second, having previously topped the list in 2017.
retains top
spot in annual Swiss Re not only maintained its top position, but also expanded its lead after posting
GPW growth of 16% (USD 5.8 billion) in 2019. This growth was due to a 25.1% increase in
reinsurer non-life business, driven by large transactions in the Americas and EMEA, growth in the
ranking group’s natural catastrophe business, and rate activity in underperforming lines. Munich Re
reported a more modest 5.7% increase (USD 2 billion) in total reinsurance GPW, dampened
by depreciation in the euro of 2.2% against the USD. Munich Re reports its figures in euros
and Swiss Re, in USD. AM Best converts to US dollars using the foreign exchange rate that
coincided with the date of the financial statements. Currency exchange rate fluctuations have,
and will continue to have, a meaningful effect on companies’ rankings.
Munich Re has sizable primary insurance operations, which account for approximately
32% of its total GPW, leading to an exclusion from AM Best’s GPW calculation. Swiss Re’s
primary insurance business remains below the 25% threshold for separating the primary and
reinsurance premium.
World’s 50 Largest Reinsurers Ranking – Methodology

AM Best’s ranking of leading global reinsurers has continued to evolve over time. The
intention of the Top 50 exercise is to try to isolate a (re)insurer’s business profile using
GPW as the metric. To obtain the most accurate figures possible, we make a number of
assumptions and adjustments as we examine different financial statements, accounting
standards, and segment reporting. Capturing only third-party business, excluding affiliated
or intergroup reinsurance, and eliminating any compulsory business are perhaps the most
essential adjustments.
Another important adjustment is splitting out reinsurance and insurance premiums. Our
approach has been that if a company or group’s GPW for reinsurance is equal to or greater
than 75% of its entire gross premium volume, all of its GPW is counted in the ranking as
reinsurance premiums. Conversely, if a company’s or group’s reinsurance/insurance split
consists of less than 75% reinsurance premiums, only the reinsurance premiums are counted
and insurance premiums are excluded. The logic behind this adjustment is that if the
company’s book of reinsurance business is equal to or greater than 75% of its total book of
business, reinsurance represents its core book of business. Finally, in cases where financial
statements and supplements do not provide a proper breakout of reinsurance premiums, AM
Best seeks to obtain certain data points through a direct dialogue with the (re)insurer.
Swiss Re and Munich Re will likely continue to occupy the top two spots on the list, as they
Analytical Contact: accounted for 27.8% of the top 50’s total GPW in 2019 (Exhibit 1), further demonstrating
Dan Hofmeister, Oldwick
+1 (908) 439-2200 Ext. 5385
the dominance of large reinsurers at the top of the list. The top 10 accounted for 68.6%
[email protected] of the top 50’s total GPW (USD 197.5 billion), which is up from 67.9% in 2019 (Exhibit
2020-150.2 2). In recent years, this percentage has consistently been around 70%, reinforcing that
SINCE 1899
14
Exhibit 1
Global Reinsurance – Top 50 World's Largest Reinsurance Groups
Ranked by Unaffiliated Gross Premium Written in 2019
(USD millions)1
Total
Reinsurance Premiums Written Share-
Life & Non-Life Non-Life Only holders' Ratios3
2
Ranking Company Name Gross Net Gross Net Funds Loss Expense Combined
1 Swiss Re Ltd. 42,228 39,649 26,095 25,135 31,037 79.7 31.7 111.4
2 Munich Reinsurance Company 37,864 35,282 24,742 23,455 34,245 66.7 34.4 101.0
3 Hannover Ruck SE4 25,309 22,096 16,555 14,333 12,718 69.0 29.5 98.5
4 SCOR S.E. 18,302 16,176 8,005 6,826 7,139 68.1 30.9 99.0
5 Berkshire Hathaway Inc. 16,089 16,089 11,112 11,112 428,563 86.6 25.1 111.7
6 Lloyd's5, 6 14,978 10,433 14,978 10,433 39,150 71.0 34.5 105.5
7 Great West Lifeco 13,260 13,138 N/A N/A 19,549 N/A N/A N/A
8 China Reinsurance (Group) Corporation 13,161 12,196 5,218 4,820 13,881 65.0 36.4 101.4
9 Reinsurance Group of America Inc. 12,150 11,297 N/A N/A 11,601 N/A N/A N/A
10 PartnerRe Ltd. 7,285 6,909 5,792 5,439 7,270 72.4 28.0 100.4
11 Korean Reinsurance Company 6,963 4,785 6,157 4,079 2,124 85.9 14.9 100.8
12 General Insurance Corporation of India7 6,862 6,229 6,735 6,109 5,027 97.2 18.2 115.5
13 Everest Re Group Ltd. 6,356 5,732 6,356 5,732 9,133 66.9 28.4 95.4
14 XL Bermuda Ltd. 5,010 4,252 5,010 4,252 13,240 65.4 34.5 99.9
15 Transatlantic Holdings, Inc 4,946 4,495 4,946 4,495 5,243 68.4 32.5 100.9
16 RenaissanceRe Holdings Ltd. 4,808 3,381 4,808 3,381 5,971 62.8 29.5 92.3
7,8
17 MS&AD Insurance Group Holdings, Inc. 4,188 N/A 4,188 N/A 15,120 N/A N/A N/A
18 MAPFRE RE, Companía de Reaseguros S.A.9 3,313 2,690 2,716 2,100 1,956 77.8 24.2 102.1
19 AXIS Capital Holdings Limited 3,223 2,280 3,223 2,280 5,544 73.7 27.5 101.2
20 R+V Versicherung AG10 3,160 3,160 3,160 3,160 2,408 78.6 24.3 102.9
11
21 Arch Capital Group Ltd. 3,078 2,136 3,078 2,136 12,260 72.4 26.6 99.0
22 The Toa Reinsurance Company, Limited7,8 2,878 2,472 2,878 2,472 2,671 82.7 27.0 109.7
23 Assicurazioni Generali SpA 2,646 2,646 1,093 1,093 33,433 66.7 28.2 94.9
24 Sompo International Holdings, Ltd. 2,441 1,972 2,441 1,972 6,662 60.0 31.6 91.6
25 IRB - Brasil Resseguros S.A. 2,114 1,561 2,114 1,561 1,152 56.4 25.3 81.7
26 Pacific LifeCorp 2,072 1,625 N/A N/A 16,055 N/A N/A N/A
27 Taiping Reinsurance Co. Ltd8 2,040 1,787 1,255 1,064 1,161 64.5 34.8 99.3
28 Validus Reinsurance, Ltd. 1,991 1,296 1,991 1,296 3,447 73.8 21.1 94.8
29 Odyssey Re Holdings Corp. 1,849 1,783 1,849 1,783 4,590 66.7 27.1 93.7
30 Caisse Centrale de Reassurance 1,688 1,541 1,446 1,304 2,856 86.6 10.1 96.7
31 Peak Reinsurance Company Ltd 1,665 1,258 1,531 1,125 1,095 73.1 27.1 100.2
32 Aspen Insurance Holdings Limited 1,486 1,251 1,486 1,251 2,726 73.1 30.0 103.1
33 Sirius International Insurance Group, Limited 1,351 1,112 1,351 1,112 1,866 81.7 26.4 108.1
34 Deutsche Rueckversicherung AG 1,241 825 1,139 775 337 72.5 35.6 108.1
35 QBE Insurance Group Limited 1,179 984 1,179 984 8,153 76.2 27.5 103.7
36 Tokio Marine & Nichido Fire Insurance Co., Ltd.7 1,174 921 1,174 921 17,883 N/A N/A N/A
37 Markel Corporation 1,114 965 1,114 965 11,078 69.8 34.6 104.4
38 American Agricultural Insurance Company12 1,079 385 1,079 385 620 74.8 20.8 95.6
39 Qianhai Reinsurance Co., Ltd. 930 563 333 294 414 69.8 32.7 102.5
40 Hiscox Ltd 867 217 867 217 2,190 136.2 37.6 173.7
41 African Reinsurance Corporation 844 682 787 632 975 60.4 38.0 98.4
42 Allied World Assurance Company Holdings, AG 821 736 821 736 4,136 65.6 26.7 92.3
43 Qatar Reinsurance Company, Limited 749 654 749 654 696 80.7 38.1 118.8
44 Chubb Limited 719 649 719 649 55,331 53.8 31.2 85.0
45 W.R. Berkley Corporation 678 N/A 678 N/A 6,118 N/A N/A N/A
46 Nacional de Reaseguros, S.A. 662 529 553 421 438 63.1 29.7 92.8
13
47 Asia Capital Reinsurance Group Pte. Ltd. 656 565 656 565 794 75.3 33.9 109.2
48 Third Point Reinsurance Ltd 632 623 632 623 1,414 57.6 45.6 103.1
49 Central Reinsurance Corporation 558 518 458 423 524 73.0 28.6 101.6
50 Wilton Re U.S. Holdings, Inc. 543 420 543 N/A 4,105 N/A N/A N/A
1
All non-USD currencies converted to USD using the foreign exchange rate as of company's fiscal year-end.
2
As reported on balance sheet, unless otherwise noted.
3
Non-life only.
4
Net premium written data not reported; net premium earned substituted.
5
Lloyd's premiums are reinsurance only. Premiums for certain groups in the rankings may include Lloyd’s Syndicate premiums when applicable.
6
Total shareholders' funds includes Lloyd's members' assets and Lloyd's central reserves.
7
Fiscal year-end March 31, 2020.
8
Net asset value used for total shareholders' funds
9
Premium data excludes intergroup reinsurance.
10
Ratios are as reported and calculated on a gross basis.
11
Based on Arch Capital Group Ltd. consolidated financial statements and includes Watford Re segment.
12
Data and ratios based on US Statutory Filing.
13
Effective December 5, 2019, Asia Capital Re ceased writing new business.
N/A: Information not applicable or not available at time of publication.
15 2
the largest reinsurers house disproportionately Exhibit 2

sizable amounts of risk, despite cedants’ efforts to Global Reinsurance – Life and Non-
diversify their reinsurance panels and spread out Life GPW Distribution by Ranking,
their counterparty risk. The static nature of this Year-End 2019
weighting reflects the largest companies’ strong
long-term relationships with brokers and cedants. 2.4%
4.2%
Rank 1-10
The top 10 remained relatively stable, with some
shifting as Great West moved up two spots to 7.9% Rank 11-20
number 7, causing China Re and RGA to each move
Rank 21-30
down one from 2018. Notably, Hannover reported
GPW growth of 15.8%; China Re, 13.8%; and Great 16.9%
Rank 31-40
West, 71.4%. Hannover’s growth is highlighted 68.6%
Rank 41-50
by 20.8% organic growth in non-life business,
specifically traditional business and structured
reinsurance. China Re and Great West were both
aided by large transactions in 2019. China Re
benefitted from the addition of premium from its
acquisition of Chaucer towards the end of 2018.
Great West capitalized on two large longevity Source: AM Best data and research
deals in 2019, which resulted in the third-largest
premium increase and the largest increase among Exhibit 3
the life reinsurers. Global Reinsurance – Notable
Changes in Rankings
The new addition to the top 10 this year is Partner
Re, which surpassed Korean Re and GIC after posting Upwards Current Prior Change
GPW growth of 15.6%. This marks Partner Re’s return Validus 28 33 5
to the top 10 after falling just short in the prior three W.R. Berkley 45 50 5
years. The group’s growth in 2019 was driven by Peak Re 31 34 3
favorable rate activity on renewals and successful Great West 7 9 2
new business production. Partner overtakes Korean PartnerRe 10 12 2
Re, which recorded similar production in 2018, with IRB 25 27 2
growth of only 2.4%. The top 10 reported overall GPW Sirius 33 35 2
growth of 10.6%, in line with the overall sentiment Deutsche Rueck 34 36 2
that markets are hardening. QBE 35 37 2
Downwards Current Prior Change

The greatest rise in ranking this year was Validus
Qatar Re 43 26 -17
(Exhibit 3), which moved up five spots to 28. The
Tokio Marine 36 30 -6
group grew its GPW by 39.1% in 2019. Validus was
R+V 20 18 -2
able to effectively expand its non-property lines, as
Third Point Re 48 46 -2
well as grow its business relationship with AlphaCat to
China Re 8 7 -1
improve production totals. This is the highest Validus
RGA 9 8 -1
has been ranked since it came in at 24 in 2009.
Korean Re 11 10 -1
Renaissance Re generated the largest relative
premium growth, up a substantial 45.2% in GPW
and 58.6% in net premiums written (NPW). The increases were driven mainly by RenRe’s
acquisition of Tokio Millennium Re. Despite the substantial growth, Ren Re only advanced one
spot to 16. At the other end of the transaction, Tokio Marine dropped six spots following the
sale of Tokio Millennium. Tokio Marine’s was the largest decline in 2019, excluding the drop
in Qatar Re, which was due to corrections in the reporting of intercompany reinsurance in the
316
data. Tokio Marine’s GPW may continue to decline through 2020, as the transaction with Ren
Re was finalized in mid-2019.
The final highlights in this year’s ranking relate to three Asia-Pacific companies; Qianhai Re,
Taiping Re, and Peak Re. Qianhai Re ranked 39, despite only being in business since year-end
2016. As a new entrant to the top 50 just last year, Qianhai maintained its market share to move
up one spot, although growth could accelerate as the company continues to implement its
global diversification strategies. Taiping Re moved up one spot to cap off its 10-spot increase
over the previous five years. Taiping concluded 2019 with 17.9% growth in GPW, driven mainly
by growth in the life reinsurance business.
Although the rise of Qianhai and Taiping in the top 50 list has been significant, no company
has risen more than Peak Re over the past five years. Peak Re moved up three spots this year—
up 19 spots since 2016. The launch of Peak Re’s sidecar in 2019 allowed the company to deploy
more capacity, resulting in GPW growth of 20.5%.
New entrants to the list this year include Central Reinsurance Corp and Wilton Re. Central
last made the top 50 in 2018, and Wilton, in 2014. Falling off the list this year were Greenlight
Capital and Argo Group. Greenlight ended a three-year streak on the list, reaching as high as
45, while Argo dropped off after one year.
The top 50 list reported an average combined ratio of 102.4 in 2019, a modest deterioration
from the 2018 combined ratio of 100.9. Losses were driven primarily by social inflation in
the US casualty business and typhoons in Asia, as well as loss creep from 2018 storms. As
the market continues to harden, pricing changes should result in improvement in underlying
combined ratios. However, the impact of COVID-19 could lead to a wide variance in
performance metrics in 2020.
Top 15 Non-Life and Top 10 Life Global Reinsurers

AM Best also breaks out two additional sub-rankings, one non-life (Exhibit 4) and one
life (Exhibit 5), for (re)insurance groups with a truly global footprint or business profile.
These groups not only have diverse product offerings, but generally maintain a very strong
geographic spread of risk and provide material capacity to numerous markets. Nearly all of
these companies have somewhat modest origins, some going back over 100 years, as they have
evolved from being a regional or specialty player into a truly global reinsurer. Often, their
very strength as a regional or specialty reinsurer eventually created concentration risk and
compelled them to expand their footprint for geographic and product diversification. There is
no set rule to determine specifically when or how a reinsurer truly becomes global. As market
dynamics ebb and flow, so can a group’s profile. As the world’s largest reinsurance groups
enter new markets and provide capacity, we will accordingly add them to these lists.
17 4
Exhibit 4
Top 15 Global Non-Life Reinsurance Groups,
Ranked by Unaffiliated Gross Premiums Written in 2019
(USD millions1)
Total
Share-
Non-Life Only holders' Combined
Ranking Company Name Gross Net Funds Ratio
1 Swiss Re Ltd. 26,095 25,135 31,037 111.4
2 Munich Reinsurance Company 24,742 23,455 34,245 101.0
3 Hannover Ruck SE 16,555 14,333 12,718 98.5
4 Lloyd's 14,978 10,433 39,150 105.5
5 Berkshire Hathaway Inc. 11,112 11,112 428,563 111.7
6 SCOR S.E. 8,005 6,826 7,139 99.0
7 Everest Re Group Ltd. 6,356 5,732 9,133 95.4
8 PartnerRe Ltd. 5,792 5,439 7,270 100.4
9 XL Bermuda Ltd. 5,010 4,252 13,240 99.9
10 Transatlantic Holdings, Inc 4,946 4,495 5,243 100.9
11 RenaissanceRe Holdings Ltd. 4,808 3,381 5,971 92.3
12 MS&AD Insurance Group Holdings, Inc. 4,188 N/A 15,120 N/A
13 MAPFRE RE, Companía de Reaseguros S.A. 2,716 2,100 1,956 102.1
14 AXIS Capital Holdings Limited 3,223 2,280 5,544 101.2
15 Arch Capital Group Ltd. 3,078 2,136 12,260 99.0
1
All non-USD currencies converted to USD using the foreign exchange rate as of company's fiscal year end.
Note: Please see Exhibit 1 for other footnotes.
Exhibit 5
Top 10 Global Life Reinsurance Groups,
Ranked by Unaffiliated Gross Premiums Written in
(USD millions1)
Total
Share-
Life Only holders'
Ranking Company Name Gross Net Funds
1 Swiss Re Ltd. 16,133 14,514 31,037
2 Great West Lifeco 13,260 13,138 19,549
3 Munich Reinsurance Company 13,122 11,827 34,245
4 Reinsurance Group of America Inc. 12,150 11,297 11,601
5 SCOR S.E. 10,297 9,350 7,139
6 Hannover Ruck SE 8,754 7,764 12,718
7 Berkshire Hathaway Inc. 4,977 4,977 428,563
8 Pacific LifeCorp 2,072 1,625 16,055
9 Assicurazioni Generali SpA 1,553 1,553 33,433
10 PartnerRe Ltd. 1,493 1,470 7,270
1
All non-USD currencies converted to USD using the foreign exchange rate as of company's fiscal
year end.
Note: Please see Exhibit 1 for other footnotes.
518
September 2, 2020
Reinsurance Experts: Uncertainty
Adds to Rate Momentum
Reinsurers A panel of experts came together recently at AM BestTV to discuss the complex reinsurance
market. Although we typically focus on results from the preceding year in these panels,
navigate we would be remiss if we did not recognize the unique challenges imposed in 2020 by
the global the COVID-19 global pandemic. It has been a tug-of-war, with both positive and negative
factors competing in the reinsurance segment. Despite many unforeseen challenges, many
pandemic after reinsurers have adapted well to these unique conditions.
a solid 2019
AM Best’s Meg Green moderated the panel, which featured the following panelists:
• Carlos Wong-Fupuy, Senior Director of Global Reinsurance Ratings, AM Best

• Scott Mangan, Associate Director of Global Reinsurance, AM Best
• Silke Sehm, Executive Member of the Board, Hannover Re
• Jonathan Isherwood, CEO of Reinsurance Americas, Swiss Re
AM Best Outlook and Ratings

In April 2020, AM Best announced that, for a variety of reasons, it was maintaining the outlook
for the global reinsurance market at Stable, even as other rating agencies moved to Negative.
Carlos Wong-Fupuy opened the panel discussion by noting that our Stable outlook on the
reinsurance segment did not mean that nothing changed in the last year. On the contrary, a
number of developments, both positive and negative, offset each other. Between 2014 and
2018, the outlook for the reinsurance market was Negative. “Excess capacity from traditional
capital and a continued influx from third-party capital providers were pressuring rates. The
result was soft market conditions, low investment returns, and companies really struggling to
meet their cost of capital.”
Wong-Fupuy further noted that, at the end of 2018, “we changed the outlook to Stable, and it
wasn’t because we were seeing a dramatic change in trends or we were particularly optimistic
about what was happening. The whole point was that we were seeing things stabilizing at
a lower level. Expectations for return on equity were definitely lower than what historical
trends would have suggested.”
Wong-Fupuy pointed out that claims activity has been increasing the past four years. Natural
catastrophes—US hurricanes, Japanese typhoons, and wildfires—have caused third-party
Analytical Contacts: capital to look at insurance risks more closely. The different attitude was not just about losses;
Carlos Wong-Fupuy, Oldwick concerns from loss creep and trapped capital also emerged.
+1 (908) 439-2200 Ext. 5344
Carlos.Wong-Fupuy
@ambest.com Scott Mangan clarified that AM Best’s market segment outlook isn’t a ratings outlook. Despite
the Stable segment outlook, some reinsurers may not be able to weather the conditions due to
Scott Mangan, Oldwick
lagging ERM practices, business profile, capitalization, or operating performance.
+1 (908) 439-2200 Ext. 5593
[email protected]
2020-150.3
SINCE 1899
19
Hardening Market Attracts Capital

There has been some speculation in the market about the possibility that a class of 2020 could
enter with clean balance sheets and capital to take advantage of rising rates. Silke Sehm stated
that “we definitely see capital flowing into the reinsurance space. A number of insurers and
reinsurers have done capital raises.” She added: “New money has been coming in to start
new reinsurance companies. The number being mentioned is about four billion US dollars in
comparison to the Bermudian class of 2005, which was around five billion US dollars. So, state
money and the class of 2001, eight billion US dollars.”
Jonathan Isherwood pointed out “clearly, there is a change in rates across the world. We see
that. We actually saw it accelerating through the first half of the year, from January through
June/July renewals and across most lines.” He also pointed out that analysts need to look at
returns for the last few years. “There’s a lot of capital that is looking at returns that doesn’t
quite match what they were expecting the last few years.”
Mangan noted that there might be a “class of 2020 in terms of specialty and E&S-type business.
It’s possible in the reinsurance space, but specialty really seems to have a lot of the momentum
going forward, at least at this time.”
Wong-Fupuy added that the settlement process for losses is taking longer than expected.
Property cat risks have a tail because of loss creep, which affects the ability to swiftly enter
and exit the market. There may not be a dramatic decline in availability of third-party capital,
but growth could slow down a bit and investors will be more selective.
Sustainability of Rate Increases

The panelists observed that reinsurance pricing has been improving lately, and this
time it has not been driven by capital depletion, as in 2001 and 2005, when capital
depletion had resulted in widespread market hardening. They were asked whether
this makes the current rate increases less sustainable and reliant on underwriting
discipline.
Mangan replied in the affirmative and noted that underwriting discipline was key
to this hardening market, in contrast to hard markets in the past. “I’m not quite sure
that the market hardening is as widespread as it was in 2001, and to some extent, “Now, with
2005. The underlying mechanics were quite different.... As we’ve already mentioned,
tremendous
there was a capital void where existing market participants were not deploying
capital. Now, we’ve been saying for a number of years that the industry is very well uncertainty about
capitalized and, to some extent, there’s excess capacity in the market.” COVID 19, this
means a lot of
Sehm agreed to a need for sustainable rate increases and mentioned that 2017, fuel for further rate
2018, and 2019 were challenging years for the reinsurance industry. “Now, with increases.”
tremendous uncertainty about COVID-19, this means a lot of fuel for further rate
Silke Sehm
increases.... [G]iven the uncertainty in the pandemic, a sustainable rate increase is
a logical consequence.” Amid the volatility and uncertainty, highly rated reinsurers
have value again. “Individual tailor-made reinsurance solutions are more requested. Sehm was
confident that the rate increases may be sustainable for the next two years.
According to Isherwood, “it is a different environment in many different ways. Each

marketplace is slightly nuanced. It is something that ... [has been] built up over the years....
We’re on the tail end of many years of softening. That’s not just in rates, but also terms and
conditions.” He thinks that “the thing that is fundamentally different though, and it will take
220
a different kind of leadership from the client base this time, is our yield environment. It is the
lowest it has ever been. If you look at some of the metrics around 10-year US Treasuries, for
example, there is no chance to rely on the asset side of the balance sheet over the next few
years performing.”
Life Reinsurance Diversification Despite COVID-19

The panelists next looked at life reinsurance, which has been seen as a balance that helps
reinsurers mitigate the volatility of risks such as property catastrophe and large commercial
lines. Panelists were asked whether this argument is still valid, in particular with the current
level of asset volatility and the number of deaths from the pandemic still far from stabilizing.
Mangan observed that much of the asset risk taken by life insurers versus life reinsurers is
different. Life reinsurers focus on mortality and morbidity and take less asset risk. They’re not
completely insulated from the asset volatility, but the risk profile on the primary side differs
from that on the reinsurance side.
Sehm concurred and said that, as a reinsurer engaged in life and P/C insurance, “[t]he current
situation indicates that the life and health losses are less severe than the losses arising from
business interruption, credit, event cancellation, workers comp, etc.... Therefore, the argument
of diversification for a reinsurer is still valid. This means that there is increased efficiency of
capital usage and, therefore, lower cost of capital.”
Low Interest Rates Add Momentum to Underwriting Discipline

Sehm emphasized that interest rates are now lower for a longer period. Insurers and
reinsurers need to consider this in their pricing. Investors are not buying insurance
and reinsurance shares, for their investment expertise. They want to invest in
underwriting skills and underwriting expertise. “That is our strength. That’s where
we want to have our focus.... There might be reinsurers which are trying to mitigate
lower ROE by investing more aggressively” but she noted that Hannover Re is still
being prudent and sticks to ALM principles, and that Hannover Re is a reinsurer, not
a hedge fund.
“In many ways,
Isherwood added: “In many ways, the low-yield environment, which we’re already
the low yield
facing, ... could be the longest-lasting legacy coming out of COVID for the next
environment, which
few years.... As we look ahead, this doesn’t feel like a short-term situation.... I don’t
believe there’s any easy fix on the asset side without significant risk or capital we’re already
issues.” As of 2018, US 10-year yields were close to 3% and are currently just over facing, could be
0.5%. “On a blended casualty book ... we would see, for every point of reduction, the longest lasting
somewhere between two and three points of combined ratio improvement required legacy coming out
to be equivalent ROE.... That is dramatic.” He felt that, unfortunately, that message of COVID for the
is taking time to get through to the marketplace and to the front-end underwriting
next few years. As
teams to actually make those changes.
we look ahead,
Isherwood also mentioned that other factors affect the momentum for casualty this doesn’t feel
rates: pricing uncertainty, tail volatility, and social inflation. “If you look at like a short term
the median of the top 50 claims in the US, they’ve doubled. That’s not a small situation.”
percentage increase that’s doubled over those years.... Then you’ve got all the Jonathan Isherwood
aspects on casualty, for example, the tail volatility that needs to be covered.” With
emerging risks like the reviver claims in this yield environment, we need to price
casualty like a short-tail volatile line. That’s fundamentally different than in the past.”
21 3
From a rating agency and a capital management perspective, Mangan cautioned that investment
risk consumes capital. If a reinsurer is holding capital to support riskier investments, it might
not have that same capital to deploy for underwriting opportunities, without it affecting AM
Best’s assessment of balance sheet strength. Wong-Fupuy agreed and mentioned that it was
not all about rates, but reinsurers need to keep an eye on limits and the terms and conditions,
which may have not been as tight in previous cycles.
Significant Uncertainty in Reserve Estimates

The panelists were asked whether the consistent decline in the benefit of reserve releases
across the reinsurance industry extended beyond US casualty. Wong-Fupuy responded that “six
points in 2015/2016 were attributable to these favorable loss reserve developments and the
ability to rely on these releases has declined over time.... On average, companies are struggling
to meet their cost of capital, and not having the ability to rely on these favorable loss reserve
developments just adds to the pressure.”
Isherwood observed that “reinsurance was coming in off a cycle where it’s clearly been
softening the source ... of funding to support the returns.” Reserving, the yield environment,
all these factors were coming together and “there is no panacea except focusing ... on
underwriting returns and not being carried away by one-quarter of a double-digit number.”
Mangan said that another area to focus on would be expenses. “One of the few areas other
than better underwriting and reducing the loss ratio, the only other real lever to pull there, is
on the expense side.... Companies will have to look at that. Technology has gone a long way to
help in that area and it’s probably an area we’ll see going forward where companies will have
to focus on in order to help get those combined ratios to more reasonable levels.”
Public-Private Partnership Solutions for Pandemic Risk

The panelists touched on whether insurance solutions for pandemic risk could be
written profitably. All agreed that the systemic nature of pandemic risk makes it a
non-insurable risk, and that there needs to be some public-private partnership to
help economies become more resistant to such risk.
Mangan said that “maybe the best takeaway would be that we learn from
COVID-19.” We see “how governments are reacting, what the shelter-in-place orders
translate into in terms of the economic impact.” No stress test would have predicted
the real experience. “Maybe the best
takeaway would be
Sehm further explained that public partnerships are necessary to cover systemic
risks such as COVID-19. The industry could draw from existing experience and that we learn from
frameworks “such as EXTREMUS in Germany, Pool Re in the UK, and GAREAT COVID-19. We see
in France.” The insurance industry can only play a limited role due to capacity how governments
restraints and the systemic nature of the risk. are reacting, what
the shelter in place
Isherwood remarked that “the systemic nature of the (pandemic) peril is why it’s
orders translate
excluded to date. The intention is not to cover it for the reasons we now see. It’s a
into in terms of the
global pandemic and you cannot diversify it away.” Isherwood believes there is a
role for the re)insurance industry to play given its experience in risk management, economic impact.”
claims assessment, and its expertise. Scott Mangan
422
Planning for a Second Wave of COVID-19

The final topic was the possibility of a second wave of COVID-19. Would it add to
uncertainty? What if a major natural catastrophe occurs simultaneously?
Sehm cautioned that COVID-19 is making 2020 a costly year. If there is a severe
second wave or any other large catastrophe, 2020 could well become one of the
costliest years for the industry. Still, capacity is very strong, as the industry entered
the pandemic with strong balance sheets, very strong ratings, and regulatory
regimes such as Solvency II, which emphasize risk management and stress testing.
“This could be a
Isherwood noted that “the capital is there to be able to absorb this long tail event… very costly year.
it’s clear that it’s another year of potential underperformance of the industry. The
It’s not just the
capital is not per se the issue right now but this flight to quality we’ve talked about.
People reassessing their partnerships and the accelerated hardening, not just in possibility of a
rates but in the way things are structured. Relooking at the core business and not second wave, but
relying on other aspects is going to be absolutely key.” we may have a
very active natural
Wong-Fupuy agreed: “This could be a very costly year. It’s not just the possibility of catastrophe year.”
a second wave, but we may have a very active natural catastrophe year, [if] all these
Carlos Wong-Fupuy
come back.... Fortunately, the industry remains very well capitalized.” He added
that it’s not just about preserving balance sheets, but about the industry remaining
relevant and playing a positive role as a supplier for the whole economy.
Mangan concluded by stating that outside of multiple events or another extreme event, the
industry was positioned to absorb losses. He was concerned more about the economic impact
of a second wave that would have to be considered in the calculus in terms of the prospects
for the industry going forward.
23 5
BEST’S SPECIAL REPORT Our Insight, Your Advantage.
Reinsurance
Trend Review
August 28, 2020 Emergence of “Total Return Reinsurers”
A “total return reinsurer” contemplates risk and returns from both sides of the balance
sheet, by deploying risk capital where the best opportunities present themselves, whether as
Total return
investments or reinsurance contracts. These opportunity sets are analyzed in tandem, under
reinsurers have the common assumption of low correlation between investment returns and reinsurance
results for most lines of business.
the potential
to generate AM Best views the total return reinsurer as a relatively recent manifestation of the alternative
capital concept, which started with the first issuance of catastrophe bonds in the mid-
significantly 1990s, following the Northridge earthquake and Hurricane Andrew. Most of the total return
higher reinsurers were formed in 2012, in a tenuous and deteriorating reinsurance rate environment,
as well as a historically very low interest rate environment.
investment
returns than Market Dynamics Driving the Total Return Reinsurer Concept
In some ways, the reinsurance and investment market dynamics following the financial crisis
traditional led to the total return reinsurer concept. Reinsurance pricing had softened from the hard
reinsurers, market after Hurricanes Katrina, Rita, and Wilma in 2005, with pricing on almost all lines
of business having declined below technical adequacy by 2012. Exacerbating the situation
although results were low investment yields, with 10-year US Treasury bond rates near 200 basis points, a level
thus far have not seen since before 1950. These market dynamics in effect halved the return on equity for
reinsurers as a group, from the mid-teens to the high single digits. Developed economies have
been muted and been in an anemic nominal and risk-adjusted interest rate environment for almost a dozen
years now. The rise in interest rates that many have predicted for several years has failed
volatile
to manifest, and the COVID-19 economic shut down will very likely prolong the low rate
environment—the “New Abnormal.”
Sovereign interest rates in some countries in Europe and Asia are negative, with the US 10-
year Treasury bond yield at 59 basis points as of this writing. The insurance industry relies
heavily on investment income to drive operating results. For the five-year period ended
December 31, 2019, investment income for this cohort accounted for 98.5% of net income,
and long-term fixed-income securities constituted 57.0% of the industry’s invested assets
and 48.7% of admitted assets. This asset allocation is essentially prescribed by regulators for
insurers and reinsurers licensed in the US. Offshore reinsurers are also exposed to the low rate
environment, but they generally have more investment flexibility.
The total return reinsurer emerged out of this environment. Traditionally, reinsurers take a
significant majority of enterprise risk on the liability side of their balance sheets by deploying
risk capital for reinsurance business and parking most of the float in highly rated, relatively
Analytical Contacts:
Steven M Chirico, CPA, short-duration fixed-income investments. However, hedge fund managers questioned
Oldwick why reinsurers would deploy capital writing underpriced reinsurance business just to
+1 (908) 439-2200 Ext. 5087 sustain market share and invest the float in low-yielding fixed-income instruments—and
[email protected]
how they could make money in such an environment. The solution they developed was to
Dan Hofmeister, CFA, CAIA, find adequately priced, longer-tail, low-volatility reinsurance business to generate float, to
CPCU, ARe, Oldwick invest for higher risk-adjusted asset returns. This business has been overweight on standard
+1 (908) 439-2200 Ext. 5385
[email protected]
casualty lines of business such as general liability, auto, accident and health, and workers’
2020-159
compensation, which are generally written on a quota share basis, compared with a more
Copyright © 2020 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. No portion of this content may
be reproduced, distributed, or stored in a database or retrieval system, or transmitted in any form or by any means without the prior written
24
permission of AM Best. While the content was obtained from sources believed to be reliable, its accuracy is not guaranteed. For additional
details, refer to our Terms of Use available at the AM Best website: www.ambest.com/terms.
Trend Review Reinsurance
traditional reinsurer. Large amounts of

Exhibit 1
excess capital are a positive in the total
Total Return Reinsurers – Net P/C
return model because that capital can be
Premiums Earned as a Percentage of
invested to earn a higher return while
simultaneously being available to ensure
the Market, 2019
policyholder security. (%)
A number of property/casualty and life Harrington,

insurers and reinsurers have deployed a 11.2
barbell investment strategy. AM Best does Third Point
not take into account these entities’ total Hamilton Re, Re, 28.3
return in the rating process because they 18.5
are not actively managing risk capital
across the balance sheet. They are trying
Greenlight, Watford Re,
to increase total investment returns by 19.5 22.5
deploying a portion of excess capital into
higher-yielding, higher-risk investments,
and are traditional (re)insurers in that they
underwrite first and invest excess capital Source: AM Best data and research
to increase enterprise returns.
Since 2015, the capital markets have experienced an increased level of volatility, especially in
2018 and 2019. Value equity investing in particular has generated some rocky results, as equity
pricing has seemed to deviate materially from intrinsic value (as calculated by fundamental
techniques). Additionally, the rise of algorithmic program trading, where speed is almost as
essential as identifying mispriced securities, has quickly absorbed any alpha that emerges.
At the same time, reinsurance pricing is starting to see positive momentum, after the heavy
property catastrophe loss activity in 2017 and 2018.
In response to these changes in investment market and reinsurance pricing dynamics, all
of the total return companies rated by AM Best (Exhibit 1) have decreased their risk asset
allocations materially and are deploying the newly freed excess capital to write reinsurance
business, which has experienced recent significant price increases and improved terms and
conditions. The change in risk allocation can be viewed as evidence that the total return
reinsurer concept does have the flexibility contemplated in the model.
Emergence of Several Total Return Reinsurer Models

Initially, a “Hedge Fund Re” was a configuration in which money was raised from private
investors who were known to a prominent hedge fund manager—the first generation of the
model. A CEO from the reinsurance industry was named as well as a chief financial officer and
a chief underwriting officer. The investments were run by the hedge fund manager, with a
separately managed account or a fund of one. Local management was charged with finding low
volatility standard casualty quota share reinsurance business (characterized by low premium
and reserve leverage) based on an investment strategy designed to go farther out on the
risk/reward continuum and incorporate publicly traded securities to provide liquidity. These
entities were named so that they could be easily identified with the hedge fund manager.
Greenlight Re and Third Point Re are examples of the first generation.
The second generation can be thought of as the partnership model, which used outside
expertise for investments and underwriting. This model sourced almost all reinsurance
business from underwriting partners, which have been large, highly rated reinsurers. The
25 2
investment side of these entities is managed by large, multi-strategy investment firms that
design investment portfolios with varying risk/reward and liquidity characteristics. Partnership
total return companies execute long-term partnership agreements with the investment
manager and the reinsurance partner. These partners also have material investments in their
“customer.” Harrington Re and Watford Re are examples of the second generation.
The potential third generation of the total return model takes the form of a special purpose
vehicle (SPV) designed to aggregate several unrelated alternative asset strategies with a
common source of reinsurance business. The SPV can be an “incorporated cell captive,” in
which asset managers “own” a cell capitalized by investors who are clients of the investment
manager. The underwriting entity may be from a rated reinsurer or from a managing general
agent or managing general underwriter. This third generation of the model has the advantage
of allowing the entity to match reinsurance business with multiple asset managers and
strategies, thus increasing diversification and limiting the influence of a dominant asset
manager. AM Best is aware of marketplace discussions on this third generation of total return
company, but none of these have been assigned a rating as of this writing.
Thus far, the total return companies rated by AM Best have been limited to primarily casualty
reinsurance lines of business. Regulated primary insurers have not embraced the total return
concept, possibly because of regulatory constraints, which can discourage material amounts of
risk asset investment allocations.
Theoretical Advantages and Disadvantages

The advantages and disadvantages of a total return reinsurer depend on one’s perspective.
From a reinsurer’s perspective, the potential for significantly higher investment returns
(say, 6% versus 3% over the long term) can allow the deployment of capital to diversify the
reinsurer’s earnings sources, which can have particular advantages during a prolonged soft
reinsurance pricing cycle. The total return reinsurer has the opportunity to toggle its risk
capital allocation between a risk asset portfolio and a portfolio of reinsurance opportunities.
These opportunities can be managed to maximize the return on equity compared to more
traditional reinsurers, by pushing the boundaries of the efficient frontier. Entities with more
traditional, lower-yielding investment strategies can be forced into deploying a much greater
percentage of capital into writing underpriced reinsurance business or shrinking their way
into oblivion by decreasing their writings and returning capital. In essence, the total return
model allows greater optionality.
From an asset manager’s perspective, a common assumption of a low correlation of

reinsurance to the capital markets, tax advantages, and a fee income stream on permanent
capital all represent significant advantages over other investment opportunities. The
correlation of reinsurance results with risk asset returns is relatively low, depending on the
line of business. Property catastrophe reinsurance has the lowest correlation to asset returns,
while workers’ compensation has a higher correlation. The sweet spot seems to be the general
casualty lines of business, which have a relatively low correlation to asset returns and a claim
tail that creates float with which investment income can be earned for multiple years. All but
one of the total return reinsurers are domiciled in tax-advantaged countries, mostly Bermuda,
which allow a reinsurers’ investment returns and reinsurance profits to accumulate tax-
free, further enhancing the return on equity. Passive foreign investment corporation (PFIC)
rules ensure that these entities are “real” reinsurers instead of a tax dodge. In fact, total
return reinsurers generally have less premium leverage than traditional reinsurers do. Risk
modeling tends to limit the premium and exposure levels driven by the risks taken on the asset
portfolios of total return reinsurers.
326
From an investor’s perspective, the low correlation of reinsurance to other investment

opportunities, coupled with tax advantages, can represent an accretive opportunity for
long-term investors such as pension funds, mutual funds, and family offices. Notably, smaller
investors can avail themselves of the expert investment management they would otherwise be
excluded from due to closed funds and buy-in minimums. By investing in shares of a publicly
traded total return reinsurer, smaller investors can also benefit from the significant long-term
outperformance of these investment managers.
The total return reinsurer model has two main disadvantages: operating performance volatility
and market acceptance. A total return reinsurer’s net income, operating ratio, and return on
equity will experience higher volatility (Exhibit 2). To offset this volatility, a total return
reinsurer retains excess capital in the form of less operational leverage, to absorb adverse
earnings and capital events that can be generated by risk asset portfolios. Although most of
the total return reinsurers secure known underwriting talent and CEO personalities, market
acceptance is a disadvantage. Due to operational volatility, relatively high investment manager
fees, and relatively small size and short tenure, market acceptance requires that a ceding
company or insured understand the value of placing business with a total return reinsurer.
Adverse operational volatility in 2015, 2018, and the first quarter of 2020, coupled with the
total return reinsurers’ relatively short tenure and relatively small balance sheets, can make
reinsurance panel acceptance challenging.
Viability of the Total Return Model

Whether the total return reinsurer model in its initial iteration is viable is questionable. The
reinsurer model has struggled in the recent environment. Recent investment return volatility,
coupled with the soft reinsurance pricing environment that lasted from 2012 until 2018—
which represent the first five years of most of these entities’ existence—has resulted in
volatile and muted operating results. These dynamics were a challenge to market acceptance,
affecting the entities’ ability to consistently write profitable reinsurance business, which
was exacerbated by struggling value investing opportunities and followed by an almost
complete shut-down of global economies in the first quarter of 2020, which punished almost
all investors. The long-term viability of the total return reinsurer model hinges primarily on
Exhibit 2
Total Return Reinsurers – Return on Equity, 2014-2019
8
6
6.6
4 5.6 5.1
2 3.2
0
-2
(%)
-4.2
-4
-6
-8
-10 -11.3
-12
-14
2014 2015 2016 2017 2018 2019
ROE 5-Year Average
27 4
management’s ability to realize the theoretical returns that can be generated by effectively
deploying capital and taking risk on both sides of the balance sheet.
Total Return Composite Results and Financial Analysis

AM Best has created a composite of five total return reinsurers that have operated for at least
five years. As of December 31, 2019, this composite had combined net premiums written of
$2.4 billion, shareholders’ equity of $5.2 billion, and total cash and invested assets of $9.6
billion, with net loss and loss adjustment expense (LAE) reserves of $4.0 billion.
Asset Composition and Liquidity

Invested assets for the total return composite as of December 31, 2019, were composed of
fixed- income securities of $2.2 billion, or 23%; other invested assets, including short-term
investments under the control of an alternative asset manager of $3.9 billion, or 41%; and cash
and cash equivalents of $3.5 billion, or 36%. These figures are quite different from the invested
assets of AM Best’s Bermuda reinsurance composite, which had fixed-income securities of $137
billion, or 61%; equities and alternative asset allocations of $29 billion, or 12%; and cash, cash
equivalents, and stand-alone short-term investments of $59 billion, or 27%. The cash and cash
equivalent figures for both the total return composite and the Bermuda composite indicate
ample liquidity, with fixed-income and cash and cash equivalents constituting 139% of net
loss reserves and 143% of LAE reserves. One of the main allocation differences between the
total return composite and the Bermuda composite is that the risk assets in the total return
composite are diverse by reinsurer and even within some reinsurers. The risk asset allocations
include long/short equity, private equity, distressed credit and leveraged loans, and real estate.
Four of the five reinsurers’ asset managers uses more fundamental investment analysis; the
fifth uses a programmatic trading platform. All of these asset managers use, at least in part, a
value-based approach that seeks to identify mispriced traded value versus intrinsic value.
Operational Leverage
As of December 31, 2019, the total return composite’s premium to surplus ratio (premium
leverage) was 0.46x, and its loss and LAE reserve leverage (reserve leverage) was 0.78x, for a
Exhibit 3
NPW & Net Reserve Leverage by Reinsurance Segment
Global US & Bermuda Total Return Reinsurers

400
350
300
250
278
(%)
200 256 251 251 244 238

150
135 139
121 121 118 117
100
67 78
47
50 25 24
68 69 69 75 83 74 62 67 72
59 60 59 8 40 44 46 46
25 31
0
Net Reserves as % of Shareholders' Equity NPW as a % of Shareholders' Equity
528
net leverage ratio of 1.24x. The figures compare very favorably to the Bermuda composite’s
premium leverage of 0.59x, reserve leverage of 1.17x, and net leverage of 1.76x (Exhibit 3).
Reserve Stability
The total return composite’s loss and LAE reserves for the years ended December 31, 2019,
and December 31, 2018, essentially indicate loss and loss expense reserve stability, with a
very small redundancy and a very small deficiency, both under 1%. The preceding three
years (2017, 2016, and 2015) were characterized by small deficiencies, reaching a high of 4.1%
for 2016. The total return composite’s business retention rate at the end of 2019 was 76%,
which indicates that total return reinsurers are using reinsurance as a capital and earnings
management tool.
Total Underwriting Performance

Total return reinsurers have significantly underperformed the (re)insurers that comprise the
Bermuda composite. The total return composite’s combined ratio for the year ended December
31, 2019, was 110.8, versus 96.9 for the Bermuda composite. Similarly, the total return
composite’s average combined ratio for the five-year period ended December 31, 2019, was
111.2 (Exhibit 4), versus 98.4 for the Bermuda composite. Several factors seem to be driving
the underperformance of the companies in the total return composite.
— Losses
The total return composite’s loss ratio was of 74.6, versus 65.1 for the Bermuda composite. The
total return composite’s average loss ratio for the five-year period ended December 31, 2019
was 74.2, versus 65.8 for the Bermuda composite. The higher loss ratio generated by the total
return reinsurers is driven partly by their concentrations in medium-term casualty lines, in
comparison to the Bermuda composite. Their relatively small balance sheets and short tenures
may also be contributing to the higher loss ratio. Additionally, loss ratios have not declined
materially from taking down prior year reserve redundancies—actions that lowered the
Exhibit 4
Total Return Reinsurers – Loss, Expense, and Loss Reserve
Development Ratios
140 50
120
40
35.8
Loss Reserve Development
41.2 34.4 36.3 37.0

100 37.1
Loss & Expense Ratios
40.8
30
80
80.4 20
75.5 74.6 74.2
60 70.8 69.6
64.1
10
40
-0.8 -0.1 0.1
-1.9 -1.7 -1.4
-3.4 0
20
0 -10
2014 2015 2016 2017 2018 2019 5yr Avg
Expense Ratio Loss Ratio Loss Reserve Development
29 6
Bermuda composite’s five-year average loss ratio by 4.1 points, versus a deficiency of 1.4 points
for the total return composite. The total return reinsurers have not been able to accumulate a
long-tenured reserve base from which they can mine annual realization of prior year reserve
releases. This last item is responsible for 5.5 points of the 9.5 loss ratio point difference
between the Bermuda and total return composites’ five-year average loss ratio.
— Expenses
The total return composite’s 2019 expense ratio was 36.3, versus 31.8 for the Bermuda
composite, and the average expense ratio for the five-year period ended December 31, 2019,
was 37.0 versus 32.6. Tenure may be driving the underperformance, as the companies in the
total return composite are somewhat younger than the companies in the Bermuda composite,
which been around for more than 15 years—many for much longer. Only one of the companies
in the total return composite has existed for 15 years; the other four did not have a first full
underwriting year writing business until after 2014. Building out an underwriting platform and
filling it with business takes time and requires funding to build the underwriting systems and
risk management platforms, as well as acquiring talent—expenses that are not immediately
matched by premium revenue streams. Growing premium too quickly could have significant
adverse operating performance consequences, so the prudent way is to grow slowly and
carefully and realize the detrimental expense ratio as the investment required to launch and
develop a new reinsurer.
Recent Adjustment of the Strategy

All of the total return reinsurers have adjusted their investment allocations, such that 20% to
50% of invested assets are allocated to risk assets, with the remainder allocated to safe harbor
assets such as cash, sovereign debt, and highly rated corporate debt. These allocations differ
significantly from the initial model’s, which allocated 80% to 90% of invested assets to risk
assets, with the remainder in cash and short-term, highly rated securities, representing three
to six months of outbound operating cash flow. The change could help diminish volatility in
investment results and increase market acceptance, given the claims-paying ability invested in
lower-volatility assets. Recent reinsurance rate hardening following the property catastrophe
events of 2017 and 2018, as well as the COVID-19 economic shut-down, could allow total
return reinsurers to deploy recently freed capital from their investment reallocations to write
profitable reinsurance business, which is how the model was designed to work—the proof will
be in the returns.
Rating Implications
The uniqueness and relatively short tenure of the total return model is taken into account in
the components of Best’s Credit Rating Methodology. All of the total return reinsurers have
been assigned and have maintained Financial Strength Ratings (FSR) of A-. Balance sheets are
assessed as Strong or Very Strong, supported by healthy Best’s Capital Adequacy Ratio (BCAR)
scores and holding companies that have only moderate amounts of financial leverage, although
interest coverage measures are lower than they are for other reinsurers. BCAR scores tend to
be high, as evidenced by the results of the simultaneous investment and underwriting stress
testing conducted by AM Best and companies’ risk managers.
Total return reinsurers’ operating performance has been less than optimal. Some of this
underperformance can be attributed to the relatively short tenure of total return reinsurers,
which haven’t had a long enough time to create a reserve base with built-in redundancies that
can buffer current accident year loss ratios. Additionally, total return reinsurers’ underwriting
books of business skew somewhat toward medium-term casualty, which has generated loss
ratios a few points higher than reinsurers that write more higher-margin business. Moreover,
730
investment returns on risk assets have not lived up to expectations. Several of the total return
reinsurers have been assessed at Marginal on operating performance, and none has been
assessed at Strong.
Total return reinsurers’ business profiles are all assessed at Neutral, reflecting management,
geographic and line of business spread of risk, and relatively short tenures. Earnings volatility
and its effect on surplus volatility has had a negative impact on the business profiles of two
of the total return reinsurers, which has resulted in Negative outlooks/implications. The risk
management functions of total return reinsurers have been assessed as Appropriate, as they all
employ professional risk managers and have developed risk management systems.
AM Best expects that the hardening reinsurance pricing environment will help float all boats
somewhat and that the underwriting performance of the total return reinsurers will improve
over the next few years, supplemented by the migration to higher-margin business. Also,
potentially accretive to underwriting performance is a perceived flight to quality, given that
most other forms of alternative capital are less “traditional” than total return reinsurers and are
not rated, licensed, or regulated legal entities expected to post collateral for extended periods.
The investment environment is the wild card with regard to the total return reinsurers’
operating performance and business profiles. As of mid-August 2020, the S&P 500 had
returned to all-time highs, and credit spreads for both investment grade and non-investment
grade fixed income have narrowed precipitously since April 2020, despite a tenuous economic,
political, and social environment.
31 8
September 2, 2020
Trade Credit Reinsurance During a
Global Economic Crisis
Trade credit insurance is a backstop for providers of goods and services to protect accounts
Trade credit receivable from customers either unable or unwilling to make payments. Transferring
credit risk gives businesses additional flexibility to deploy working capital and use insurers’
loss estimates expertise in evaluating the creditworthiness of their buyers. Standard trade credit insurance
is primarily a short-term working capital risk management product, but some insurers also
from COVID-19
offer longer-term credit products. Coverage may include political risk or it may be offered as a
for 1H 2020 stand-alone option.
vary greatly Historically, trade credit insurance has gained the most traction in Europe, but US companies
due to a are now seeing growth as well. Undoubtedly, this is the result of a more highly interconnected
world of complex dependencies and supply chain networks. Private Trade Credit Insurance
high level of is dominated by Euler Hermes (Allianz), Coface, and Atradius. Other significant trade credit
uncertainty insurers include Chubb, Axa XL, QBE, and Lloyd’s Syndicates.
Trade credit insurers are typically heavy users of reinsurance, using a combination of quota
shares and excess of loss treaties to protect their capital against increases in both frequency
and severity of losses. Unlike the concentrated primary market, the reinsurance trade credit
market is fragmented, with a large number of reinsurers maintaining a presence in this
segment.
The COVID-19 pandemic has sparked a global economic slowdown that has the potential to
lead to significant trade credit losses. Given the substantial amount of reinsurance used by the
primary writers of this business, AM Best expects a material share of trade credit insurance
losses to be transferred to reinsurers.
Exhibit 1
Trade Credit Insurance – Premiums, Claims, and Claims Ratio,
2006-2019
8 100
7 90
80
6
70
5 60
(€ billions)
4 50
(%)
3 40
Analytical Contacts: 30
Mathilde Jakobsen, Amsterdam 2
20
+31 20 308 5427
1 10
[email protected]
0 0
Sridhar Manyem, Oldwick
+1 (908) 439-2200 Ext.5612
[email protected]
TCI Premiums TCI Claims Claims Ratio (%)
Source: ICISA
2020-150.4
SINCE 1899
32
Market Segment Report Trade Credit Reinsurance
Trade credit insurance and reinsurance are cyclical lines, with strong correlation between
declines in GDP and increases in insolvency rates and trade credit losses. As a result, AM
Best expects the good performance of recent years to be interrupted by spikes in loss ratios
during the economic downturn. Very good performance can be expected post-crisis, following
the pattern exhibited most recently during the financial crisis of 2008-09, as illustrated by
Exhibit 1.
AM Best notes that trade credit insurers have reported increased loss ratios for the first half
of 2020. Likewise, a number of reinsurers have reported trade credit losses as part of their
COVID-19 loss estimates at half-year 2020. The loss estimates of reinsurers for this line vary
greatly, which illustrates the uncertainty that still exists around such loss estimates. A common
point made by reinsurers is that reported 2nd quarter loss estimates primarily reflect incurred
but not reported (IBNR) claims reserves.
AM Best expects further trade credit losses to materialize for both insurers and reinsurers
through the remainder of 2020 and into 2021 given the ongoing global economic crisis.
However, there are mitigating factors:
First, the short-tail nature of trade credit insurance should partly mitigate the impact on loss
ratios for both insurers and reinsurers. Trade credit insurers can reprice and de-risk their
portfolios in light of worsening economic conditions. AM Best notes that the leading trade
credit insurers have taken substantial portfolio actions, including both reductions in exposures
and increases in premium rate, since the onset of the COVID-19 crisis. The actions taken by the
primary writers will also help mitigate losses for their reinsurers.
Second, a number of countries have put in place government schemes for trade credit
insurance to bolster their economies and ensure that trade credit insurance cover remains
available. The schemes differ in the details but they all provide a government backstop to
ensure that the industry continues to provide insurance cover and forego their right to cancel
or reduce available limits significantly. At the time of this report, schemes were in place in a
number of European countries and Canada, while discussion is ongoing in other countries.
See the sidebar Representative Trade Credit Schemes for further details of a number of
the programs in place and under discussion. Where in place, the schemes will reduce the
net loss experience of trade credit insurers by transferring a share of losses to the state. The
schemes attach based on gross losses, so private reinsurers also are covered by this protection.
AM Best notes that there are other important markets, such as Spain, where schemes are now
unlikely. Moreover, the schemes are set to expire at the end of 2020, although there is already
discussion ongoing about potential extensions.
Despite these mitigating factors, AM Best expects trade credit reinsurance to experience
underwriting losses in 2020 and probably into 2021. The level of losses is expected to be
manageable for reinsurers, given the small size of this line relative to the balance sheets of
reinsurers. However, the impact will be more substantial from an earnings point of view, as
trade credit reinsurance was a profitable line for reinsurers before COVID-19. AM Best will
continue to monitor very closely the performance of the trade credit line for rated reinsurers.
33 2
Market Segment Report Trade Credit Reinsurance
Representative Trade Credit Schemes

Canada: The establishment of the Trade Protection Insurance product enabled by Export
Development Canada (EDC) and underwritten by the Receivables Insurance Association of
Canada provides support to Canadian businesses.
France: The EU approved under its state aid rules a €10 billion guarantee scheme to ensure
trade credit insurance can continue to be issued and the liquidity needs of businesses are met.
Germany: The government introduced a state guarantee scheme supporting the insurance
of trade between companies affected by the coronavirus outbreak. The German government
has agreed to guarantee claims payments of up to €30 billion in exchange for 65% of trade
credit premiums. The scheme is effective from March 2020 to the end of the year.
Netherlands: The government backstop means that Dutch trade credit insurers can maintain
their current level of protection. The guarantee is limited to cover trade credit originated
until the end of 2020. The reinsurance is in the form of risk sharing between the insurers
and the state, up to €1 billion, and provides an additional cover up to €12 billion in total.
United Kingdom: To support domestic businesses, the UK government has established a

trade credit reinsurance scheme that allows participation by eligible trade credit insurers.
The scheme provides capacity of up to £10 billion and is available until 31 December 2020.
It has been backdated to April 2020.
USA: US trade credit insurers provide cover for close to $400 billion of credit lines.
Insurance capacity could be severely constrained in an environment replete with high
levels of insolvency and financial distress. Efforts are under way for a US program similar to
those in place in Europe. On March 25, EXIM Bank unveiled four new initiatives to support
the US response to the pandemic. The Bridge Financing Program will allow exports to go
forward through short-term (e.g., one year) financing of these US exports, until private
sector liquidity returns. EXIM also will temporarily expand its Pre-Export Payment Policy
for a one-year term. Furthermore, EXIM will expand the Supply Chain Financing program by
relaxing its criteria and increasing its guarantee level. Finally, EXIM will modify its Working
Capital Guarantee Program.
334
September 2, 2020
COVID-19 Reinforces Lloyd’s Need to
Modernise
As a leading underwriter of specialty property and casualty risks, Lloyd’s occupies a strong
Improving position in the global insurance and reinsurance markets. The collective size of the Lloyd’s
market and its unique capital structure enable syndicates to compete effectively with large
conditions in international (re)insurance groups under the well-recognised Lloyd’s brand. Its competitive
core lines of strength derives from a reputation for innovative and flexible underwriting, supported by the
pool of underwriting expertise in London.
business, as
well as robust On July 15, 2020, AM Best affirmed the Best’s Financial Strength Rating (FSR) of A (Excellent)
and the Issuer Credit Rating (ICR) of “a+” on the Lloyd’s market. The outlook for each rating
remedial is Stable. The ratings reflect Lloyd’s balance sheet strength, which AM Best assesses as
actions, are Very Strong, as well as its Strong operating performance, Favourable business profile, and
Appropriate enterprise risk management.
expected to
support further Lloyd’s is expected to report strong operating performance across the underwriting cycle,
taking into account potential volatility due to its exposure to catastrophe and other large
incremental losses. During 2019, there were a number of natural disasters that resulted in meaningful
losses for the market but, in aggregate, major losses were lower than those experienced in
improvements
either 2017 or 2018. Recent underwriting performance has been below AM Best’s expectations
in attritional for a Strong assessment, demonstrated by a five-year (2015-2019) combined ratio of 102.2%. In
2019, the market’s attritional accident-year combined ratio (excluding major claims) improved
accident-year marginally, by 0.8 percentage points, to 96.0%. AM Best expects improving conditions in
performance the market’s core lines of business, as well as the robust remedial actions by the Corporation
of Lloyd’s and individual managing agents, to support further incremental improvements in
attritional accident-year performance over the next three years.
In response to increasing competitive pressures, the Corporation of Lloyd’s published The

Future at Lloyd’s prospectus in 2019, setting out proposals to increase access to the market
Analytical Contacts: while trimming the cost. Proposals include a digital platform for complex risks, a risk
Jessica Botelho-Young,
London
exchange to handle less-complex business, and more flexible use of capital.
+44 20 7397 0310
[email protected] The COVID-19 pandemic has reinforced the importance of modernising the market and has
helped soften some of the cultural resistance to change. For 2020, taking into account the
Catherine Thomas, London
+44 20 7397 0281 impact of the pandemic on operations, the Corporation has prioritised the development of
Catherine.Thomas areas that will make the most immediate difference to market participants and policyholders,
@ambest.com namely improving electronic placement, delegated authority services, and claims handling.
If the proposed reforms are successfully implemented, meaningful cost reductions should
Editorial Managers:
Richard Banks, London support profitability.
+44 20 7397 0322
[email protected] Lloyd’s is a leading player in the global reinsurance market, ranking as the sixth-largest risk
Richard Hayes, London carrier by 2019 reinsurance gross premiums written (GPW) and the fourth largest when life
+44 20 7397 0326 premiums are excluded. Lloyd’s has an excellent brand in its core markets, which are currently
[email protected] experiencing improving conditions. Reinsurance is Lloyd’s largest segment, accounting for
2020-150.5 32% of GPW in 2019, and comprises property (with property catastrophe excess of loss the
SINCE 1899
35
Market Segment Report Lloyd’s
largest segment), casualty (primarily non-marine Exhibit 1

excess of loss and US workers’ compensation), and
specialty reinsurance (marine, energy, and aviation
Lloyd's — Reinsurance Premiums, 2019
reinsurance) (Exhibit 1).
Energy
5% Life
In 2019, total reinsurance premiums written by Marine, Aviation, &
1%
Transport
Lloyd’s increased by 3.6% to GBP 11.4 billion. 12%
Property reinsurance, which accounts for over half
the reinsurance segment, reported a 0.5% decrease
in GPW. The impact on premium volumes of better
pricing on property treaty and facultative contracts
was offset by more prudent risk selection following Property
higher than average loss activity in recent years 56%
Casualty
and the adverse development of some prior-year 26%
catastrophe losses beyond expectations.
Lloyd’s reinsurance segment reported a loss in

2019. Prior-year reserve releases in the property
segment were lower than in recent years, mainly Source: Lloyd's Annual Report 2019
due to deterioration of Typhoon Jebi reserves.

In addition, the casualty book saw some strengthening of reserves driven by social inflation,
which has become more prevalent, particularly in the US. All three sub-segments (property,
casualty, and specialty) reported calendar-year combined ratios above 100%, with prior-year
reserve movements reducing the sector’s overall combined ratio by only 0.2 percentage points.
The market’s operating expense ratio is around 40%. While this is high compared with its
peers, the ratio has been largely stable over the past five years–though notably higher in this
period than previously (36% in 2011). An increase in acquisition costs due to a change in
business mix, with more business underwritten through coverholders, partly explains the step
change in the expense ratio. The actions being taken through the Future at Lloyd’s initiative to
reduce the cost of placing business at Lloyd’s should start to realise benefits over the short term.
Lloyd’s use of reinsurance is high compared with large specialty insurers and reinsurers.
This is due to the nature of the market, which consists of small to medium-sized businesses
that purchase reinsurance independently. The market as a whole ceded 28.5% of its GPW
in 2019. This figure includes premium ceded by syndicates to related groups, as well as
between syndicates.
Lloyd’s continues to analyse its reinsurance exposure through a range of submitted returns,
complemented by the monitoring of Realistic Disaster Scenarios and its Catastrophe Risk
Oversight Framework for individual syndicates. The security required by managing agents
for their syndicate reinsurance programmes is reviewed regularly, to address any issues that
have the potential to affect the financial strength of the overall market. In particular, total
outstanding reinsurance recoverables, counterparty concentration risk, and the purchasing
trends of individual syndicates are closely monitored.
236
September 2, 2020
Mortgage Reinsurance and the
COVID-19 Pandemic
The COVID-19 pandemic has significantly affected the mortgage-related activities of the
Reinsurers reinsurance industry, most notably the reinsurance programs of Fannie Mae and Freddie Mac
(the government-sponsored enterprises [GSEs]), and the reinsurance programs of private
brace for
mortgage insurers.
pandemic-
AM Best revised its outlook for the private mortgage insurance segment from Stable to
fueled wave Negative on April 7, 2020, owing to the expected increase in losses on mortgages due
of mortgage to higher unemployment and significant contraction in gross domestic product. Factors
that affect the primary mortgage market also influence the broad secondary markets,
losses encompassing mortgage-backed securities and mortgage reinsurance.
Over the past five years, reinsurers have been assuming incrementally more US mortgage
risk from two main sources: GSEs and private mortgage insurers. The GSEs transfer mortgage
credit risk to the reinsurance market through their reinsurance Credit Risk Transfer (CRT)
programs–Agency Credit Insurance Structure (ACIS), sponsored by Freddie Mac, and Credit
Insurance Risk Transfer (CIRT), sponsored by Fannie Mae.
The six US private mortgage insurers transfer mortgage risk to the reinsurance market
through quota share and/or excess of loss transactions. The fortunes of the private mortgage
insurers are tied to the GSEs because they provide insurance on mortgages that are purchased
by the GSEs, which effectively set capital standards and other requirements to which the
private mortgage insurers must adhere.
Key factors driving the increased involvement by reinsurers in the mortgage space include:
• the mandate by the Federal Housing Finance Agency (FHFA), in its role as conservator of
the GSEs, requiring the GSEs to cede a substantial portion of the credit risk of their pooled
mortgages to the private sector
• the need for the private mortgage insurers to meet risk-based capital requirements imposed
by the GSEs through the Private Mortgage Insurer Eligibility Requirements (PMIERs)
• the strategy of the private mortgage insurers to “originate, manage, and distribute” their
risk through the use of traditional reinsurance and reinsurance from the capital markets
• prolonged soft market conditions experienced by most lines of business in the property/
casualty reinsurance sector, driven by competition between reinsurers and from the
alternative capital sector
Analytical Contacts: • augmented knowledge of mortgage risks by large diversified reinsurers that use in-house
Emmanuel Modu, Oldwick mortgage experts to analyze extensive mortgage performance data released by the GSEs
+1 (908) 439-2200 Ext. 5356
[email protected] since the 2008 credit crisis
Michelle Li, Oldwick Obstacles to Estimating Impact of COVID-19 on Mortgage Risk

+1 (908) 439-2200 Ext. 5307
[email protected] The unprecedented nature of the COVID-19 pandemic and its economic impact make it
extremely difficult for reinsurers and insurers that take on mortgage-related risk to estimate
2020-150.6 ultimate claims. Our ongoing conversations with mortgage industry participants suggest that
SINCE 1899
37
Market Segment Report US Mortgage Reinsurance
it is still too early to estimate their exposures. Not enough time has elapsed in the reporting
cycle to gauge the full effect of the pandemic-induced economic hard stop. AM Best notes,
however, that private mortgage insurers and the two GSEs have all reported considerably
higher delinquency rates in the second quarter over the prior quarter. For example, Fannie
Mae’s second quarter 2020 financials revealed that 60 days+ delinquencies increased to 4.25%
from 0.98% at the end of the first quarter.
In addition, there are challenges in determining how an anticipated spike in mortgage

forbearance cases will necessarily lead to higher delinquency rates and, eventually, to more
claims. The GSEs have offered forbearance assistance to borrowers with liquidity issues arising
from either being furloughed or losing their jobs due to the economic fallout of the pandemic.
The forbearance period can last up to one year, after which the lender may offer to borrowers
further loan modifications or deferral options. This affects reinsurers because virtually all the
mortgage business they currently reinsure in the US is related to mortgages purchased by the
GSEs.
While the expected deluge in forbearance activity has not been as high as anticipated and, in
fact, has been declining, COVID-19-related forbearance for all loans still hovers close to 7.5%, as
reported by Mortgage Bankers Association (MBA). The figure is close to 5% for GSE-related loans.
Even though overall forbearance cases are declining, the share of borrowers still current on
their mortgage payments has been steadily declining as well since April 2020. As of the end of
June, roughly 25% of homeowners in forbearance had remitted their June payments. By way of
contrast, 46% of homeowners in forbearance in April and 30% in May remitted their payments
for those months. This adds uncertainty in determining the claims rate for loans in forbearance.
Despite the signs of improvement in forbearance activity, there remains uncertainty in the
ultimate forbearance number because the foreclosure moratorium under the Coronavirus Aid,
Relief, and Economic Security (CARES) Act was set to expire at the end of August 2020. In
addition, the extra $600 weekly unemployment benefit on top of the normal unemployment
benefits paid to laid-off workers has already ended. Any extension of the foreclosure
moratorium or supplemental unemployment benefits will depend on how Congress resolves
the impasse on COVID-19-related relief.
As discussed earlier, delinquencies dramatically increased in the second quarter of 2020 due
to the economic impact of COVID-19. While forbearance, loan modifications, and provisions
of the CARES Act will help homeowners weather the effects of the pandemic, borrowers who
take advantage of such forbearance programs likely will experience higher losses. In addition,
the sheer size of the cumulative jobless claims, resulting in a July unemployment rate of 10.2%,
points to higher losses associated with mortgages even if some of the unemployed get their
jobs back when this crisis finally ends.
This leaves both private mortgage insurers and traditional reinsurers struggling to find ways
to estimate the loss and loss adjustment expense reserves (loss and LAE reserves) they should
record on their mortgage exposures. With no exact historical precedence that duplicates
a widespread government-mandated economic hard stop and a disaster designation by the
Federal Emergency Management Agency (FEMA) in all 50 states, private mortgage insurers
have resorted to making their best estimate of losses based on some scenarios, including:
• a repeat of the 2008 credit crisis

• Moody’s Analytics economic scenarios
238
• Comprehensive Capital Analysis and Review (CCAR) adverse loss scenarios

• claims associated with prior severe storms in FEMA-declared disaster areas
• use of third-party models with built-in stresses on unemployment, housing prices, and
economic recovery periods
• other disaster scenarios that may relate to a combination of unemployment, housing prices,
and economic recoveries
Reinsurance of GSE Mortgage Risk

To comply with the FHFA’s mandate to de-risk their portfolios, the GSEs transferred single-
family mortgage credit risk on $709 billion of unpaid principal balance (UPB) with a total risk-
in-force of $24 billion in 2019 through three structures:
• Securities Issuance: These securities are issued by Connecticut Avenue Securities (CAS)
by Fannie Mae and Structured Agency Credit Risk (STACR) by Freddie Mac.
• Reinsurance: This involves traditional reinsurers providing coverage for the ACIS
transactions by Freddie Mac and CIRT transactions by Fannie Mae.
• Lender Risk Sharing: This involves a seller of loans to the GSEs taking back, through a
contractual arrangement, a portion of the associated credit risk.
Reinsurance credit risk transfer is an important tool available to the GSEs for managing
mortgage credit risk. Securities issuance constituted about 60% of mortgage credit risk transfer
in 2019, with reinsurance at 21% and lender risk sharing programs at 19%. It provides the
GSEs with another outlet for shedding credit risk in order to meet diversification goals, and
gives them some flexibility to move between markets if one leg of their de-risking triumvirate
becomes dislocated due to market conditions. From 2013 through the second quarter of 2020,
the GSEs transferred $27.8 billion of exposure limit to the reinsurance industry (Exhibit 1).
Effect of Current Economic Conditions on ACIS/CIRT Transactions

In 2019, credit risk transfer to the traditional reinsurance market was $4.8 billion and, so far
in 2020, it stands at $3.4 billion. It is unlikely that Securities Issuance, Reinsurance and Lender
Risk Sharing will continue at their normal pace given market conditions. In Freddie Mac’s
Exhibit 1
Limits of GSE Mortgage Exposures Transferred to Reinsurers
($ billions)
Fannie Mae (CIRT) Freddie Mac (ACIS) Combined
Total Initial Principal Limit of Total Initial Limit of Total Initial Principal Limit of
Year Balance Liability Principal Balance Liability Balance Liability
2013 0.0 0.0 2.9 0.1 2.9 0.1
2014 6.4 0.2 20.4 0.7 26.9 0.9
2015 40.3 1.0 50.8 2.8 91.1 3.8
2016 77.5 1.9 69.1 2.7 146.6 4.5
2017 100.4 2.3 93.6 2.9 194.1 5.2
2018 90.8 2.6 82.1 2.6 172.9 5.1
2019 89.2 2.7 68.2 2.1 157.4 4.8
2020* 70.3 2.3 28.6 1.1 98.9 3.4
Total 474.8 12.9 415.7 14.9 890.5 27.8
* Figure as of 2Q 2020
Based on AM Best estimates and data from FHFA, FHMLC, FNMA
39 3
second quarter 2020 10-Q filing with the SEC, the GSE stated the following about a decline in
CRT activity:
While we continued to successfully transfer multifamily credit risk throughout 2Q 2020,

our single-family CRT issuance amounts declined significantly during 2Q 2020 due to the
volatility in the CRT markets driven by the impact of the COVID-19 pandemic. However,
single-family CRT markets recovered substantially by the end of 2Q 2020 and demonstrated
an ability to support new issuances, and we successfully executed new single-family CRT
offerings in early 3Q 2020.
Fannie Mae also made a statement about a pause in the issuance market in its second quarter
2020 10-Q filing with the SEC:
We did not enter into credit risk transfer transactions in the second quarter of 2020 due
to continuing adverse market conditions resulting from the COVID-19 pandemic. This
contributed to the percentage of loans in our single-family conventional guaranty book
of business with credit enhancement declining from 53% as of December 31, 2019 to 49%
as of June 30, 2020. Although market conditions have improved, we currently do not have
plans to engage in additional credit risk transfer transactions as we evaluate FHFA’s re-
proposed capital rule, which would reduce the amount of capital relief we obtain from
these transactions.
For the reinsurance CRT structures to be fully resuscitated, the spreads on the STACR/CAS
deals would probably have to narrow considerably because the economics of the securities in
these transactions impact the ACIS/CIRT reinsurance transactions.
ACIS/CIRT Bouncing Back

The ACIS/CIRT transactions appear ready for a rebound. The first single-family reinsurance
transaction since the pandemic struck the US in March 2020 was ACIS 2020-DNA3 by Freddie
Mac. This reinsurance transaction was offered along with its accompanying securities
structure, STACR 2020-DNA3, in July 2020. According to Freddie Mac, both of these
transactions were oversubscribed, thus demonstrating “the resiliency of the CRT market and
the eagerness of investors to have a big, programmatic issuer back at work.”
The structure and terms of both transactions anticipate the heightened delinquencies that will
inevitably accompany the pandemic-induced forbearance and modification programs given the
current dynamics of high unemployment and GDP retrenchment.
Taking a closer look at the reinsurance transaction, ACIS 2020-DNA3 (“Post-Pandemic

Transaction”), we note some differences between this transaction and ACIS 2020-DNA2 (“Pre-
Pandemic Transaction”), which was completed in February 2020, just before the pandemic
became the central issue in the US. Both transactions cover low LTV loans, provide protection
to loans originated in 2019, and broadly have similar structures. Exhibit 2 shows a side-by-side
comparison of both transactions. We focus on the two main differences between the Pre-
Pandemic Transaction and the Post-Pandemic Transaction:
Credit Enhancement Has Increased: Overall credit enhancement has changed such
that the credit enhancement for the Post-Pandemic Transaction is higher than the credit
enhancement for the Pre-Pandemic Transaction for all corresponding layers. For example, the
credit enhancement for the M-2H layer for the Pre-Pandemic Transaction is 1.10% (or the sum
of the limits for the B-1H, B-2H, and B-3H layers) as shown in Column 3 of Exhibit 2. By way
440
of contrast, the credit enhancement for the M-2H layer for the Post-Pandemic Transaction is
1.75% (or the sum of the limits for the B-1H, B-2H, and B-3H layers) as shown in Column 4 of
Exhibit 2. Note that the first loss position held by Freddie Mac was 0.10% of pool losses in
the Pre-Pandemic Transaction (Column 1 of the B-3H Retained layer), but increased to 0.25%
in the Post-Pandemic Transaction (Column 2 of the B-3H Retained layer). Overall, higher
credit enhancement for all the layers in the Post-Pandemic Transaction provides more of a loss
cushion to investors than in the Pre-Pandemic Transaction.
Premium Rates Have Increased: The premium rates have increased for every layer in the
Post-Pandemic Transaction compared to the Pre-Pandemic Transaction. For example, the
M-2H layer’s premium rate for the Pre-Pandemic Transaction is 1.90% of the layer (Column
5 of Exhibit 2) compared to a premium rate of 2.9% of the corresponding layer in the Post-
Pandemic Transaction (Column 6 of Exhibit 2). Broadly speaking, higher premium rates
for all the layers in the Post-Pandemic Transaction are generally presumed to compensate
investors for taking on more risk in the Post-Pandemic Transaction than in the Pre-Pandemic
Transaction.
Transaction Structure in the COVID-19 Context
To understand how the economic conditions brought on by COVID-19 will affect the current
outstanding ACIS/CIRT transactions, it’s important that we fully explain their general structure
above and beyond the description of the Pre- and Post-Pandemic Transactions. Broadly
speaking, the pool of mortgages for which the GSEs seek credit protection consists of specified
origination dates, original loan-to-value ratios, mortgage types, and origination terms. The
coverage period for the reinsurance associated with the pools is normally between 10 and
12.5 years. Each ACIS transaction offered by Freddie Mac normally consists of multiple excess
of loss layers while each CIRT transaction offered by Fannie Mae consists of just one layer.
Exhibit 3 is an illustration of the structure of ACIS 2017-2, a Freddie Mac transaction, while
Exhibit 4 is an illustration of the structure of CIRT 2017-3, a Fannie Mae transaction. We note
that the ACIS/CIRT transactions are partially collateralized based on the credit rating of the
reinsurers providing the protection.
Over the past few years, AM Best has been determining specific net capital charges associated
with ACIS/CIRT transactions, as well as mortgage-related reinsurance agreements. The net
capital charges are then included in the reserves risk calculations for the reinsurers engaged
Exhibit 2
Features of ACIS 2020 DNA2 & DNA3 Transactions*
(1) (2) (3) (4) (5) (6)
Limit of Each Layer Credit Enhancement Premium Rate
Pre Post Pre Post Pre Post
Pandemic Pandemic Pandemic Pandemic Pandemic Pandemic
Layers (DNA2) (DNA3) (DNA2) (DNA3) (DNA2) (DNA3)
M-1H 1.25% 1.00% 2.50% 3.00% 1.00% 1.50%
M-2H 1.40% 1.25% 1.10% 1.75% 1.90% 2.90%
B-1H 0.50% 1.00% 0.60% 0.75% 3.50% 6.50%
B-2H 0.50% 0.50% 0.10% 0.25% 10.20% 11.00%
B-3H Retained 0.10% 0.25% 0.00% 0.00% NA NA
* Freddie Mac transactions: ACIS 2020-DNA2 closed in February 2020; ACIS 2020-DNA3 closed in July 2020
41 5
Exhibit 3
Freddie Mac Program: ACIS 2017-2
Example: Exposures Shown in Risk Tower1 Associated With $29.7B of UPB
1
Not drawn to scale
2
Exhaustion = $1.26B or 4.25% of UPB
Note: The dollar values in this exhibit are in terms of the entire reference pool, which includes STACR, ACIS, and retention components
Source: AM Best Criteria: Evaluating Mortgage Insurance
Exhibit 4
Fannie Mae Program: CIRT 2017-3
Example: Exposures Shown in Risk Tower1 Associated With $17.7B of UPB
1
Not drawn to scale
2
Exhaustion = $575 million or 3.25% of UPB
in the transactions. The process for determining the net capital charge and incorporating such
risks into reinsurers’ credit evaluations are fully described in AM Best’s criteria procedure,
Evaluating Mortgage Insurance.
The mortgage credit losses since the advent of the ACIS/CIRT transactions have been especially
low, primarily driven by good market conditions, better mortgage underwriting standards (and
the elimination of risky mortgage products), and the implementation of the PMIERs risk-based
capital requirements. Under benign circumstances, the limits of most transactions have been
reduced relatively quickly due to scheduled amortizations and prepayments, which have been
quite robust, especially in a low rate environment.
642
One can observe this phenomenon in the published AM Best risk factor calculations for ACIS/
CIRT transactions1, which are ultimately used in determining reserves risk, discussed further
in the last section of this report.
For example, ACIS 2017-2, which was placed in the reinsurance market in February 2017,
has M1 and M2 layers that were originally $297 million (1% of original UPB) and $667
million (2.25% of original UPB), but by June 2020, the limit had been reduced to zero and
approximately $645 million (or 2.17% of the original UPB). The B1 layer was exactly the same
as at inception due to the sequential nature of the paydown of limits based on amortizations
and prepayments. By June 2020, this transaction’s UPB had been reduced by approximately
38% due to scheduled amortization and prepayments.
CIRT 2017-3 also experienced a relatively quick paydown under benign market conditions,
although this is less noticeable as the Fannie Mae transactions consist of only one layer.
Specifically, this transaction was placed in the market in May 2017, but by the end of June
2020, the outstanding UPB for the transaction was 65% of the original UPB.
The prospect of a spike in losses caused by the COVID-19 pandemic, however, poses a real
threat of diminished total returns on the ACIS/CIRT deals, depending on the duration and
severity of the fallout from the crisis.
Regardless of how mortgage risk participants establish reserves and/or treat loans in
forbearance or delinquency, the ACIS/CIRT transactions will have higher realized losses, which
will ultimately erode at least a portion of the first loss layers in the transactions and may also
erode the upper layer(s), depending on the structure of the transactions in question. As noted
earlier, it is too early to predict the level of losses the ACIS/CIRT pools will experience.
The speed at which losses develop matters greatly. If losses are realized quickly in the pool, the
layer(s) will also be breached and portions will be written off, thus affecting earnings in the
near term and possibly increasing the net capital charges associated with the remaining layers
of the ACIS/CIRT transactions.
AM Best believes that forbearance, loan modifications, and foreclosure moratoria will slow
the speed of realized loss in the pools underpinning these transactions. At the very least,
forbearance will delay the realized losses in the pools simply because of the time needed to go
through the foreclosure process after the maximum forbearance timeframe expires.
Reinsurance of Private Mortgage Insurers

Prior to 2016, private mortgage insurers generally ceded mortgage exposures to reinsurance
affiliates and a small group of traditional reinsurers. The amount of mortgage exposures
ceded by private mortgage insurers to third-party traditional reinsurers (including total return
reinsurers) has been growing since PMIERs went into effect at the end of 2015. To date, all six
private mortgage insurers have a quota share and/or an excess of loss reinsurance contract in
place with traditional reinsurers.
As shown in Exhibit 5 (column G), the percentage of the total gross premiums written ceded
to all non-affiliated reinsurers has been 14.9% from 2016 to 2019, which is a significant increase
from an average of 5% prior to 2016. However, mortgage insurance-linked securities (MILS),
1
See Best’s Special Report, Net Capital Charge Tables for ACIS/CIRT Reinsurance Transactions (July 2020 Update), for net capital
charges that are in B5m (mortgage-related reserves risk) in Best’s Capital Adequacy Ratio (BCAR) model; the criteria procedure,
Evaluating Mortgage Insurance, fully explains how net capital charges are calculated and used in the rating process.
43 7
Exhibit 5
Gross and Ceded Premiums (Active Private Mortgage Insurers)
($ millions)
(A) (B) (C) (D) (E) = (C)/(A) (F)=(D)/(A) (G) = (E) + (F)
Ceded Premium Ceded Premium to
Gross Ceded to Non Affiliates Ceded
Premiums Premiums Premium to Non Affiliates Ceded Premium to (Traditional Premium to
Written Ceded to Non-Affiliates (Traditional Non Affiliates (MILS) Reinsurers) Non Affiliates
Year (GPW) Affiliates (MILS) Reinsurers) as % of GWP as % Of GWP as % of GWP
2012 3,522 560 0 232 0.0% 6.6% 6.6%
2013 3,890 530 0 214 0.0% 5.5% 5.5%
2014 4,025 592 0 219 0.0% 5.4% 5.4%
2015 4,443 912 8 142 0.2% 3.2% 3.4%
2016 4,595 850 24 511 0.5% 11.1% 11.7%
2017 4,764 1,195 30 674 0.6% 14.1% 14.8%
2018 5,041 1,021 82 724 1.6% 14.4% 16.0%
2019 5,406 931 179 735 3.3% 13.6% 16.9%
2012-2015 15,880 2,594 8 807 0.1% 5.1% 5.1%
2016-2019 19,807 3,998 316 2,644 1.6% 13.4% 14.9%
Note: Figures may not foot due to rounding
which have been adopted by private mortgage insurers as an efficient method to transfer
significant portions of their mortgage risk to the capital markets, are included in column G.
Column F in the exhibit shows that the percentage of the total gross written premiums ceded to
traditional reinsurers alone has been 13.4% from 2016 to 2019, still a significant increase from an
average of 5% prior to 2016. Private mortgage insurers have dubbed their new business model in
which they now make extensive use of both traditional reinsurance and the MILS reinsurance
transactions as “originate, manage, and distribute” rather than “originate and hold”. Their
systematic use of reinsurance is designed to help stabilize their earnings against unfavorable
mortgage market conditions and provide capital credit to fulfill the requirements of PMIERs.
This new business model of the private mortgage insurers has increased their demand for
traditional reinsurance in recent years. The reinsurers, meanwhile, had also been eager to
supply reinsurance capacity given the favorable pre-pandemic mortgage insurance market
conditions, resulting in improved bottom lines. In addition, some of the larger reinsurers
recognized the diversification benefit of adding mortgage risk to their portfolios and taking
advantage of the perceived low correlation of mortgage and non-mortgage reserves risk
(further described in the last section of this report).
The reinsurance of private mortgage insurers is normally placed through quota share and
excess of loss coverages. The scheduled termination date of the reinsurance generally is 10
to 11 years after the policy effective date. Exhibit 6 illustrates the reinsurance split between
quota share and excess of loss contracts associated with five of the six active private mortgage
insurers. Even though the cumulative number of quota share and excess of loss transactions
are close, the actual risk transfer by the quota share contracts dominates reinsurance coverages
for private mortgage insurers.
Effect of Current Economic Conditions on Reinsurance of Private Mortgage Insurers

For quota share reinsurance, a private mortgage insurer cedes a predetermined percentage of
mortgage risk in force to a reinsurer and, in return, the reinsurer receives a percentage of the
844
mortgage insurance premium. Some private mortgage insurers cede business to reinsurers
based on future policy in-force dates. For example, at the end of 2019, one private mortgage
insurer had a quota share reinsurance agreement that covers risk on eligible policies written
between January 1, 2020 and December 31, 2021.
Quota share reinsurance ceding commissions generally range from 20% to 25% and the reinsurer
margins range from 18% to 20%. Profit commission provides for profit sharing payback to private
mortgage insurers if lifetime gross loss ratios are below about 60%. Therefore, quota share
agreements provide reinsurers with a steady margin due to the profit commission mechanism as
long as this ratio does not exceed 60%. The 60% lifetime gross loss ratio is generally considered
to be high, so it will take a substantial amount of losses to breach that level on a portfolio basis.
This means that reinsurers are somewhat insulated from all but the more extreme loss scenarios.
Time will tell if the economic fallout of the pandemic will increase realized losses beyond losses
produced by the disaster scenarios devised by these reinsurers.
For excess of loss reinsurance, a reinsurer agrees to indemnify a private mortgage insurer for
mortgage claims within the boundaries of an attachment and detachment point. Some private
mortgage insurers set these attachment and detachment points to help them reduce the level
of Minimum Required Assets2 as they perform calculations required by PMIERs. In general,
attachment points vary from 2% to 3% of risk-in-force of a private mortgage insurer’s reference
pool and detachment points vary from 6% to 8%. Reinsurers that cover the mortgage risk of
private mortgage insurers must post some collateral (based on their credit ratings) in order for
these insurers to receive credit for their reinsurance transactions under PMIERs.
Whether the reinsurance contracts are of the quota share or excess of loss variety, the pool
of mortgages covered by in-place agreements have become much more susceptible to higher
losses than when the agreements were first consummated, due to the economic impact of
the pandemic. Of course, this new view of risk based on the onset of the pandemic was not
priced into the premiums negotiated with reinsurers at the time the contracts were signed.
However, new reinsurance agreements (including new agreements that cover forward
originations) should produce improved terms and conditions and higher margins because
of the heightened mortgage risk profile that is certain to result from the current economic
conditions. In addition, private mortgage insurers are likely to tighten underwriting
standards and are currently implementing price increases in segments of their product lines.
This will ultimately mitigate
some of the effects of future Exhibit 6
heightened claims on new Traditional Reinsurance Sought by Active Private
reinsurance agreements. Mortgage Insurers*
As with GSE ACIS/CIRT Policy Effective Year Quota-Share Excess of Loss Total
transactions, heightened
2015 1 2 3
mortgage risk will result in
2016 2 1 3
reinsurers recording higher
2017 1 1 2
reserves, thereby reducing
surplus. AM Best believes that 2018 3 2 5
forbearance and subsequent 2019 2 2 4
loan modifications will delay the 2015-2019 9 8 17
potential claims to be paid by *Excludes Arch Mortgage Insurance Company
private mortgage insurers as well Source: AM Best data and research
2
PMIERs requires private mortgage insurers to calculate Available Assets (AA) and Minimum Required Assets (MRA). AA must
exceed or equal MRA for private mortgage insurers to be in compliance with PMIERs.
45 9
as their reinsurers. Ultimately, however, AM Best has to determine the mortgage risk assumed
by reinsurers covering private mortgage insurers just as with the GSE ACIS/CIRT transactions.
This determination is made with a third-party mortgage model3, where applicable.
In a broad sense, private mortgage insurers can engage in risk transfer with either the
traditional reinsurance market or the MILS market, which provides excess of loss mortgage
reinsurance protection.
The MILS market had been temporarily dislocated during the peak of the COVID-19 pandemic,
though there are signs that the capital markets are slowly reopening for private mortgage
insurers to fully reenter and issue MILS transactions. As of August 2020, four MILS transactions
were issued by private mortgage insurers, compared to six at the same time last year. Two
out of the four MILS transactions were issued during the first two months of 2020, before
the COVID-19 outbreak in the US. In June 2020, Arch Capital Group (Arch) issued an MILS
transaction (Bellemeade Re 2020-1 Ltd.) that transferred about $529 million of its mortgage
risks to the capital markets. This was Arch’s second attempt this year; it tried to seek
reinsurance from the MILS market earlier this year but had to withdraw it due to the widening
rate spreads caused by the pandemic.
Bellemeade Re 2020-1 Ltd. is quite different from Arch’s prior MILS transactions. On average,
the attachment point was 2.5% of original UPB and the detachment point was 8.7% of original
UPB for the company’s prior Bellemeade Re transactions, before COVID-19 pandemic became
the top issue in the US. The attachment and detachment points for Bellemeade Re 2020-1 Ltd.
are 7.5% and 12.5% of original UPB, respectively, indicating that the purpose of the transaction
was not for PMIERs capital relief and thus may not fully point to the full restoration of the
typical MILS issuance environment. As this document was going to press, it was reported that
Arch is in the market with another MILS transaction, Bellemeade Re 2020-2 Ltd., expected to
close in September 2020.
Another encouraging sign of the resumption of the typical MILS transaction is National
Mortgage Insurance Corporation’s (NMI’s) return to the capital markets. NMI issued its first
MILS transaction of the pandemic period in July 2020. The $322 million transaction (Oaktown
Re IV Ltd.) covers credit risk of mortgages originated from July 2019 through March 2020.
Unlike Bellemeade Re 2020-1 Ltd., Oaktown Re IV Ltd.’s attachment (2.5%) and detachment
(8.0%) points of original UPB are more in line with those found in the typical MILS transaction.
Overall, the re-entry of Arch and NMI back into the MILS market indicates a thawing of
conditions. However, because the MILS market has not fully restored to pre-pandemic
condition and traditional reinsurance capacity remains available, AM Best believes that
reinsurance of private mortgage insurers will continue, albeit with different terms and
conditions and higher rates.
At the very least, some private mortgage insurers need to continue buying reinsurance for
purposes of reducing their PMIERs-related Minimum Required Assets (and mitigating the
effect of the anticipated rise in claims) because the private mortgage insurers want to maintain
substantive cushions for their PMIERS sufficiency ratios4, which currently range from a low
of 131% to a high of 177%. Therefore, AM Best believes traditional reinsurance will still be a
AM Best uses Andrew Davidson and Co.’s “LoanKinetics” application, where applicable, to calculate reserves risk associated with
3
US private mortgage insurers and their reinsurance agreements.
4
The PMIERs sufficiency ratio is the ratio of the Available Assets to Minimum Required Assets. A sufficiency ratio above 100%
indicates the amount of cushion a private mortgage insurer has in complying with PMIERs.
1046
necessary risk management tool for these insurers, particularly those currently on the lower
rung of the PMIERs sufficiency ratio range.
Effect on Capitalization and Operating Performance

AM Best’s method for determining capitalization levels for insurers and reinsurers is anchored
to Best’s Capital Adequacy Ratio (BCAR). The BCAR score, as fully described in the Best’s
Credit Rating Methodology, is the ratio of the excess of Available Capital over Net Required
Capital to Available Capital. The major component of Available Capital for multi-line reinsurers
is surplus. Net Required Capital is an amalgamation of various risks (B1 through B8) associated
with the asset and liability side of the balance sheet (Exhibit 7).
Introducing mortgage risk to a reinsurer’s book of business generates B5m, Mortgage-related

Net Loss and LAE Reserves Risk, shown in Exhibit 7. For the ACIS/CIRT programs, AM
Best calculates net capital charges using a factor-based approach described in the criteria
procedure, Evaluating Mortgage Insurance. AM Best uses a third-party mortgage model to
calculate risk charges on the reinsurance programs covering private mortgage insurers. The net
capital charge calculations for both the ACIS/CIRT risk and the mortgage risk associated with
reinsuring private mortgage insurers constitute the B5m in the Net Required Capital formula.
The ultimate reserves risk, B5, is achieved by correlating B5m and B5nm (Non-mortgage-related
Net Loss and LAE Reserves Risk). For diversified reinsurers, B5nm will generally be much higher
than B5m. Therefore, it is a mathematical truism that under our base assumption of a 10%
correlation between these two reserves risk components, mortgage-related reserves risk should
play a relatively minor role in the overall calculation of B5. However, this may not be the case
as we stress5 the correlations to much higher levels based on current economic conditions.
Highly or moderately diversified reinsurers that engage in mortgage-related risks are unlikely
to face high incremental Net Required Capital based solely on higher B5m risk due to the after-
effects of the pandemic. However, a diversified reinsurer’s Net Required Capital may also be
affected by the 50% correlation AM Best assumes between B5m and the non-affiliated equity
and asset risk charges (B1n and B2n). AM Best currently does not anticipate that reinsurers will
Exhibit 7
NRC Formula
NRC ൌ ‫ͳܤ‬ଶ ൅ ‫ʹܤ‬ଶ ൅ ‫͵ܤ‬ଶ ൅ ‫ͳܤ‬௡ ൅ ‫ʹܤ‬௡ ‫ܤ כ‬ͷ௠ ൅ሺͲǤͷ‫ܤ‬Ͷሻଶ ൅ሺͲǤͷ‫ܤ‬Ͷ ൅ ‫ܤ‬ͷሻଶ ൅‫ܤ‬͸ଶ ൅ ‫ܤ‬ͺଶ ൅ ‫ܤ‬͹
(B1) Fixed Income Securities Risk

(B1 n) Non-affiliated Fixed Income Securities Risk
(B2) Equity Securities Risk
(B2 n) Non-affiliated Equity Securities Risk
(B3) Interest Rate Risk
(B4) Credit Risk
(B5) Net Loss and LAE Reserves Risk (10% correlation applied to B5m and B5nm)
(B5 m) Mortgage-related Net Loss and LAE Reserves Risk
(B5 nm) Non-mortgage-related Net Loss and LAE Reserves Risk
(B6) Net Premiums Written Risk
(B7) Business Risk
(B8) Potential Catastrophe Losses
5
This is different from Stress Testing Rated Companies for COVID-19, released on May 18, 2020.
4711
face an unmanageable effect of the Net Capital Charge produced by the correlation of B5m and
B5nm or the correlation between B5m and asset risk charges.
On the other hand, reinsurers that exclusively write mortgage-related risks may see their Net
Required Capital noticeably increase due to the fact that they lack the diversifying effect of
non-mortgage-related reserves risk. Furthermore, these reinsurers may experience a noticeable
drop in risk-adjusted surplus and, ultimately, balance sheet strength if mortgage-related losses
increase sharply.
Capitalization of reinsurers can be enhanced or diminished by their operating performance.

Reinsurers have enjoyed significant underwriting income generated from writing mortgage
reinsurance over the last few years. Combined ratios recorded in accordance with current
accounting pronouncements on mortgage insurance underwriting activities have been very
low and return on equity contributions have been very high compared to almost all other
lines of property/casualty business. AM Best anticipates that some reinsurers may experience
significant incurred losses from their mortgage books of business that are hard to estimate
at this time, but should become clearer over the next two quarters. We remain vigilant in
monitoring the impact on these reinsurers’ operating performance and the overall economic
fallout of the COVID-19 pandemic.
1248
September 2, 2020
Catastrophe Bonds in the COVID-19 Era
Cat bonds are used by (re)insurance companies to transfer insurance risks to the capital
Capital markets’ markets, typically through four types of bonds: traditional property/casualty 144A cat bonds,
cat bond lites, life/health cat bonds, and mortgage insurance-linked securities (MILS).
participation
The traditional P/C 144A cat bond allows (re)insurance companies to offload their P/C
in the cat
insurance risks—named storms, earthquakes, floods, and wildfires—to the capital markets.
bond segment An alternative to the traditional P/C 144A cat bond offerings, cat bond lite transactions are
private transactions designed to fund smaller catastrophe reinsurance programs efficiently, by
continues to allowing capital market participants to take advantage of Regulation D, Regulation S, and Rule
grow despite 4(a) (2) of the US Securities Act of 1933. Life/health cat bonds are similar to P/C cat bonds
except that they transfer life and health risks such as medical benefit and mortality. Mortgage
the COVID-19 insurance-linked securities transfer their mortgage risk to the capital markets.
pandemic
Cat bonds are issued for a number of reasons, among them, providing excess-of-loss coverage
for exposures over defined zones; increasing retrocession capacity; diversifying the source of
reinsurance coverage; providing multiyear cover; and obtaining fully collateralized protection.
Traditional P/C 144A Cat Bond

Capital market participation in the traditional P/C 144A cat bond segment continues to grow
in volume, the range of perils covered, and the number of insurance company sponsors. Since
their appearance in the capital markets in late 1996, the volume of 144A catastrophe bonds has
grown annually, but has been quite volatile. For example, from 2017 to 2019, issuance volume
dropped nearly 50%. However, despite the impact of the COVID-19 pandemic, volume in the
first half of 2020 surpassed all of 2019, increasing to approximately $6.6 billion, as Exhibit 1
Exhibit 1
Traditional Property/Casualty 144A Cat Bonds
12,000 40
35
35
10,000 31 31
28 30
25
8,000 25 25
22 22 25
(USD millions)
20
Analytical Contacts: 6,000 20
Asha Attoh-Okine, Oldwick
+1 (908) 439-2200 Ext. 5716 10,348
Asha.Attoh-Okine@ 9,084 15
4,000 8,126
ambest.com 7,202
6,272 6,568 10
5,855 5,590
Emmanuel Modu, Oldwick 5,344
2,000 4,267
+1 (908) 439-2200 Ext. 5356
5
Emmanuel.Modu@
ambest.com
0 0
Wai Tang, Oldwick 2011 2012 2013 2014 2015 2016 2017 2018 2019 1H 2020
+1 (908) 439-2200 Ext. 5633
Amount No. of Transactions
[email protected]
2020-150.7 Sources: Artemis, AM Best data and research
SINCE 1899
49
Market Segment Report Catastrophe Bonds
shows. The increase can be attributed primarily to the need to replace about $6.2 billion of cat
bonds that matured in the first half of the year.
Two notable transactions took place in the second quarter of 2020: the Sierra Ltd
($225 million) cat bond and the Stratosphere Re Ltd ($100 million) cat bond. The Sierra Ltd
cat bond was issued for the benefit of Bayview Asset Management LLC, an asset management
firm that invests in mortgage-related securities. The bond provides protection against mortgage
Exhibit 2
Traditional P/C 144A Cat Bond Transactions
As of June 30, 2020
(USD millions)
Group Vehicle Sponsor Amount
Alamo Re II Pte. Ltd. (Series 2019-1) Texas Windstorm Insurance Association (TWIA) 400
Sutter Re Ltd. California Earthquake Authority 700
Government Everglades Re II Ltd. Citizens Property Insurance 110

Backed/ Catahoula Re Pte. Ltd. Louisiana Citizens Property Insurance Corporation 60
Residual International Bank for Reconstruction and Development FONDEMN/AGROASEMEX S.A. 485
Market (IBRD)
FloodSmart Re Ltd. (Series 2019-1) FEMA / NFIP via Hannover Re 400
Subtotal 2,155
Windmill II Re Ltd. Achmea Reinsurance Company N.V. 113
Matterhorn Re Ltd Series 2020-3 Swiss Re 215
Atlas Capital Reinsurance 2020 SCOR Global P&C SE 200
Retro
Transactions
3264 Re Ltd. Hannover Re 150
Stratosphere Re Ltd. Markel Bermuda Limited 100
Mona Lisa Re Ltd. Renaissance Re 400
Subtotal 1,783
Sanders Re II Ltd. 2020-2 Allstate 200
Sanders Re II Ltd. 2020-1 Allstate 250
Large
Nationwide Residential Reinsurance 2020 Limited USAA 100
US Primary Merna Reinsurance II 2020-1 Ltd State Farm 250
Insurers Caelus Re VI Ltd. Nationwide Mutual Insurance Company 490
Subtotal 1,290
Blue Halo Re Ltd. (Series 2020) -1 Allianz Risk Transfer 175
Japanese,
Herbie Re Ltd. Fidelis Insurance 125
European and
Bermuda Akibare Re Pte Ltd. Mitsui Sumitomo Insurance Co. Ltd 100
Primary Nakama Re Ltd. Zenkyoren 200
Carriers & Sierra Ltd Bayview Asset Management, LLC 225
Others
Subtotal 825
Casablanca Re Ltd. Avatar Property and Casualty Ins. Company 65
Small to MetroCat Re Ltd. First Mutual Transportation Assurance Co. 100

Medium-Sized Integrity Re II Pte Ltd. American Integrity Insurance Company of Florida, Inc. 150
US Domestic via Hannover Rück SE
Insurers Bonanza Re Ltd. American Strategic Insurance Group 200
Subtotal 515
Grand Total 6,568
250
loan defaults due to earthquakes. Sierra Ltd is unique in that the new sponsor is an asset
management firm and not the usual insurer or reinsurer.
The Stratosphere Re Ltd cat bond, sponsored by Markel Bermuda Ltd. (also a new sponsor),
provides tail risk protection that State National retains through its affiliation with Nephila,
against US named storms, earthquakes, winter storms, and severe thunderstorms. This
transaction will benefit and provide protection for the portfolio of primary property insurance
underwritten for the ILS funds of Nephila Capital. It is one of a very few cat bonds to achieve
an investment grade rating.
Other notable new cat bond transactions since the second quarter of 2020 include the following:
• SD Re Ltd Series 2020-1 on behalf of Sempra Energy for protection against liability rising
from California wildfires (USD 90 million) is the first pure wildfire cat bond in two years
• Azzurro Re II Ltd Series 2020-1 on behalf of Unipol Assicurazioni for protection against
European earthquakes with a focus on Italy (EUR 100 million)
Cat bonds can generally be grouped into five broad segments:
• Government-backed transactions (“residual markets”), including Citizens Property

Insurance Corporation of Florida, California Earthquake Authority, State Wind Pools, and
the World Bank/IBRD, as sponsors of these transactions, which amounted to $2.2 billion
(33%) of $6.6 billion cat bonds issued during the first two quarters of 2020
• Retro Transactions (per occurrence or per aggregate transactions) based on industry loss
triggers from reinsurers, which came to approximately $1.8 billion (27%)
• Large nationwide US primary insurers, with approximately $1.3 billion (20%)
• Japanese, European, and Bermuda primary carriers & others, which accounted for $825
million (13%)
• Small to medium-sized US domestic insurers, generally Florida insurers, with approximately
$515 million (8%)
Exhibit 2 breaks down issuance for these five segments through the second quarter of 2020.
The market expects issuance of approximately $8 billion-$10 billion for 2020, an increase
of as much as 90% from last year’s $5.3 billion and in line with issuance in 2017 and 2018.
This expectation is driven in part by the demand for additional reinsurance protection
from primary insurers, reinsurers seeking retro cover from the cat bond market due to the
tightening of retro capacity, the approximately $6.2 billion of cat bonds that matured in the
first half of 2020, and the growing acceptance of the cat bond market as a way to transfer risk
to capital market participants.
Defaulted Catastrophe Bonds

Hurricanes Harvey, Irma and Maria, as well as the California wildfires and Windstorm Riley,
led to an increase in the number of cat bonds triggered in 2017 and 2018. Exhibit 3 shows
the defaulted cat bond losses, approximately $1.7 billion, due to loss events from 2017 through
2019. Heritage Property Ins. Company, the cedant, expects recoveries of approximately $451
million from the Citrus Re cat bond series, while USAA expects recoveries of approximately
$263 million from Residential Re cat bonds. Two cat bonds in the retro cat bond market
defaulted, for approximately $88 million: SCOR’s Atlas IX Capital Ltd ($42 million) and Argo
Group’s Loma Reinsurance Ltd ($45.8 million).
51 3
Exhibit 3
Traditional P/C 144A Defaulted Cat Bond Losses – by Cedant, 2017-
2019
Avata Property and Casualty Ins. Co. 6.8
Safepoint Insurance Company 20.0
SCOR Global PC 42.0
Argo Group 45.8
Allianz Risk Transfer 48.0
IBRD/Republic of Peru 60.0
Frontline Insurance 65.0
Nationwide Mutual and Subsidiaries 150.0
AGROASEMEX S.A./FONDEN 150.0
PG&E Corporation 200.0
Mitsui Sumitomo Ins. Co. Ltd. 200.0
USAA 262.6
Heritage Property & Casualty Ins. Co. 451.1
0 100 200 300 400 500
(USD millions)
Sources: Trading Risk, AM Best data and research
Exhibit 4
Traditional P/C 144A Defaulted Cat Bond Losses
1,400
1,176.3
1,200
1,000
(USD millions)
800
612.2
600
465.0
400
200 117.0 145.0

70.0 60.0
0.5 12.7
0
2001 2008 2009 2010 2011 2016 2017 2018 2019
Sources: Trading Risk, AM Best data and research
The approximately $1.7 billion of defaulted cat bond losses from 2017 through 2019 surpasses
the approximately $1 billion recorded during the entire 21-year period before 2017. Overall,
since the inception of cat bonds, defaulted cat bond losses have amounted to around $2.7
billion, or 2.85% of the approximately $94.6 billion of cat bond issuance from 1996 through
2019. Exhibit 4 shows actual losses from the first loss year of cat bond losses from 2001
through 2019. The spike in 2017 was due mainly to the three major hurricanes and the
California wildfires; in 2018, defaults were the result of Typhoon Jebi and California wildfires.
452
Price/Return Dynamics
Catastrophic events from 2017 through 2019 have not only caused a spike in the number of
cat bond defaults but they also increased the cat bond return demanded by insurance-linked
securities (ILS) investors. In addition, COVID-19 has caused considerable volatility in the
capital markets and disruption in the (re)insurance markets, affecting both the primary and
secondary cat bond markets, as is evident in changes in the metrics used to evaluate the risk
and return of a cat bond transaction.
Two metrics used by ILS investors to gauge the perceived risk/reward scenario are (1) the
expected excess return, the difference between the spread and the expected loss percentage,
and (2) the loss multiple, the ratio of spread to expected loss. The spread is the compensation
or premium to noteholders.
Exhibits 5 and 6 show that the loss multiple declined each year from 2013 to 2017, which
underscores cat bond investors’ willingness to accept reduced compensation for taking on
the same level of risk. The trend was similar in the overall traditional reinsurance market,
where the rate on line (the premium-to-limit ratio) for property catastrophe reinsurance had
been in the doldrums in prior years. However, this changed after 2017 following losses due to
Hurricanes Harvey, Irma, and Maria, and the California wildfires.
On top of the major cat losses in 2017, a number of cat events in 2018 and 2019, including
Japan Typhoons Jebi, Hagibis, and Faxai, the Camp Fire, Windstorm Riley, and Hurricane
Michael, also led to significant property losses for (re)insurance companies and ILS investors.
As a result, spreads for most cat bonds issued in 2019 widened. The higher coupons were
a reflection of the market hardening and investors’ demand for higher cat bond returns on
similar risks.
The loss multiple continued to rise from 2019 through the first half of 2020. As of June 2020, the
loss multiple (dollar-weighted) was 3.00x, up significantly from 2.35x in 2019. The widening of
the spread paid on bonds issued in 2020 was driven mainly by the additional uncertainties and
disruptions caused by COVID-19 on top of the already hardening market conditions.
Exhibit 5
Loss Multiple – Spread to Expected Loss
#of Tranches
# of with Expected Expected Excess Loss
1 1
Year Tranches Loss Information Spread Loss Spread Multiple2
(1) (2) (3) (4) (5) (6) = (4) - (5) (7) = (4) / (5)
2Q 2020 47 46 6.86 2.29 4.57 3.00x

2019 31 29 8.65 3.68 4.97 2.35x
2018 41 41 4.90 2.14 2.76 2.29x
2017 69 66 5.33 2.59 2.74 2.06x
2016 36 36 5.57 2.61 2.95 2.13x
2015 38 31 5.31 2.19 3.13 2.43x
2014 46 35 4.81 1.60 3.21 3.00x
2013 46 41 5.82 1.68 4.14 3.47x
1
Dollar weighted.
2
Loss multiple = Ratio of spread to expected loss.
53 5
Exhibit 6
Loss Multiple, Spread, and Expected Loss
10 4.00
8.65
9
3.50
8 6.86
3.00
7
5.82 2.50
4.90
Loss Multiple
6 5.57
5.31 5.33
4.81
5 2.00
(%)
3.68
4
1.50
2.61 2.59
3 2.19 2.14 2.29
1.68 1.00
1.60
2
0.50
1
3.47 3.00 2.43 2.13 2.06 2.29 2.35 3.00
0 0.00
2013 2014 2015 2016 2017 2018 2019 1H 2020
Loss Multiple Spread* (%) Expected Loss* (%)
* Spread and expected loss are dollar-weighted.

(Re)insurance companies have used catastrophe bonds to seek protection from the capital
markets to ensure their financial stability. Projected COVID-19-related US insured losses
from business interruption and specialty coverage, including event cancellation and travel
insurance, range from USD 2 billion to USD23 billion, according to Willis Towers Watson. Many
(re)insurance companies are facing not just financial uncertainty because of the pandemic, but
also the 2020 US hurricane season. The potential weakening of financial strength could spur
some (re)insurance companies to seek additional insurance protection by issuing cat bonds in
the capital markets. As Exhibit 5 indicated, 47 cat bond tranches were issued as of June 2020,
compared with 31 in 2019. In May-June 2020, 16 tranches were issued, up from 10 in the same
period in 2019. The strong pace of cat bond issuance in the first half of this year was also due
to the large volume of cat bonds set to expire in 2020. Around $6.2 billion of cat bonds have
scheduled maturities in the first half of 2020 and would need to be replaced through either the
capital market or the traditional reinsurance market.
The capital market has exhibited significant volatility due to COVID-19. Even though cat bond
losses are tied directly to covered perils, the market value of these bonds still experienced
market pressure because they are more liquid than other ILS instruments. Investors were
willing to trade cat bonds to bolster their liquidity because of the financial distress caused by
the pandemic. As a result, prices in the secondary market declined owing to the high trading
volume from those investors. The price pressure in the secondary market has influenced the
primary market, as ILS investors demanded higher returns, in line with the secondary market.
As of June 2020, the loss multiple is at the same level as in 2014.
Cat Bond Lite

One notable development in the cat bond marketplace is the evolution of “cat bond lite”
transactions, which are gaining traction due to the efforts of the major insurance brokers,
insurance managers, and the Florida take-out companies formed through the depopulation
program of Citizens Property Insurance Corporation.
654
Exhibit 7
Cat Bond Lite
1,200 35
31
30
1,000
26
25
25
800
20
(USD millions)
# of Deals
20
600 15
13 1,063 12
995 15
873
400
10
6 562 533
200 2 351 5
1
181 146
104 23
0 0
2011 2012 2013 2014 2015 2016 2017 2018 2019 1H 2020
Cat Bond Lite Capacity # of Deals
Sources: Artemis, AM Best data and research
The dollar volume—often below USD 50 million per transaction—and number of cat bond lite
offerings have generally been rising since 2013 (Exhibit 7). However, in the first half of 2020,
only 12 cat bond lites were issued, amounting to USD 146 million, partly reflecting a pause in
transactions due to the pandemic.
Life/Health-Related Cat Bonds

L/H-related cat bond issuance volume is relatively small in comparison with the P/C segment,
despite growing interest and the sheer volume of longevity risk exposures. The last decade has
seen, on average, two cat bond transactions covering mortality and health risks (Exhibit 8)
a year. The US market has been more focused on reserving financing needs for capital relief/
redundant reserves transactions and health risks, while the UK market has been focused on
longevity risk transactions using swaps to mitigate the risks.
The 2017 $320 million IBRD Capital-At-Risk Notes 111-112 cat bond sponsored by the World
Bank’s Pandemic Emergency Financing Facility was triggered as a result of COVID-19,
resulting in a loss of $132.5 million to investors. The bond was designed to provide funding for
developing countries in response to a global coronavirus outbreak. The World Bank has since
postponed plans for additional rounds of pandemic bonds.
The Vitality Re cat bonds, covering health/medical benefits sponsored by Aetna Life Insurance
Company, are at risk of loss due to the pandemic that would result in severe morbidity stress.
The potential losses associated with Vitality Re cat bonds (risk capital of $800 million),
Vitality Re XI Ltd ($200 million), Vitality Re X Ltd ($200 million), Vitality Re IX Ltd ($200
million), and Vitality Re VIII ($200 million) could lead to payouts to Health Re Inc. and,
ultimately, to Aetna Life Insurance Company. According to Trading Risk, secondary market
trading of these bonds has been discounted, with markdown prices of 94 to 98 cents on
the dollar for some of the most remote tranches and around 83 to 85 cents on the dollar for
others. However, despite the impact of COVID-19, the medical benefit claims ratio reported
55 7
Exhibit 8
Catastrophe Bond Transactions – Life and Health Risk Transactions
Catastrophe and Non-Catastrophe Events
(USD millions)
Issue Rated Unrated
1
Year Date Vehicle Sponsor Amount Debt Debt Type of Peril Modeler Trigger
2020 Jan-20 Vitality Re XI Ltd. Aetna Life Insurance Co. 200.00 200.00 Health - Medical Benefit Milliman Inc. Indemnity
2019 Jan-19 Vitality Re X Ltd. Aetna Life Insurance Co. 200.00 200.00 Health - Medical Benefit Milliman Inc. Indemnity
2018 Jan-18 Vitality Re IX Ltd. Aetna Life Insurance Co. 200.00 200.00 Health - Medical Benefit Milliman Inc. Indemnity
2017 Jul-17 IBRD Capital at Risk World Bank's Pandemic 320.00 320.00 Pandemic AIR Non-Indemnity
Notes 111 - 112 Emergency Financing
Facility (PEF)
2017 Jan-17 Vitality Re VIII Ltd. Aetna Life Insurance Co. 200.00 200.00 Health - Medical Benefit Milliman Inc. Indemnity
2016 Jan-16 Vitality Re VII Ltd. Aetna Life Insurance Co. 200.00 200.00 Health - Medical Benefit Milliman Inc. Indemnity
2015 Dec-15 Vita Capital VI Ltd. Swiss Re 100.00 100.00 Extreme mortality RMS Non-Indemnity
2015 Apr-15 Benu Capital Ltd. AXA Global Life 324.39 2 324.39 Excess mortality RMS Non-Indemnity
2015 Jan-15 Valins I Ltd. Aurigen Reinsurance 175.00 3 175.00 Embedded Value - Oliver Wyman Indemnity
Mortality and lapse risk
2015 Jan-15 Vitality Re VI Ltd. Aetna Life Insurance Co. 200.00 200.00 Health - Medical Benefit Milliman Inc. Indemnity
2014 Dec-14 Chesterfield RGA 300.00 300.00 Embedded Value - Towers Indemnity
Financial Holdings Pandemic & Mortality Watson
Risks
2014 Jan-14 Vitality Re V Ltd. Aetna Life Insurance Co. 200.00 200.00 Health - Medical Benefit Milliman Inc. Indemnity
2013 Sep-13 Atlas IX Capital Ltd SCOR Global Life SE 180.00 180.00 Extreme mortality RMS Non-Indemnity
2013 Jan-13 Vitality Re IV Ltd. Aetna Life Insurance Co. 150.00 150.00 Health - Medical Benefit Milliman Inc. Indemnity
2012 Jul-12 Vita Capital V Ltd Swiss Re 275.00 275.00 Extreme mortality RMS Non-Indemnity
2012 Jan-12 Vitality Re III Ltd. Aetna Life Insurance Co. 150.00 150.00 Health - Medical Benefit Milliman Inc. Indemnity
2011 Dec-11 Vecta I Ltd. Aurigen Reinsurance Ltd 117.10 4 117.10 Mortality Risk & Lapse Oliver Wyman Indemnity
Risk
2011 Aug-11 Vita Capital IV Ltd Swiss Re 180.00 180.00 Extreme mortality RMS Non-Indemnity
2011 Apr-11 Vitality Re II Ltd. Aetna Life Insurance Co. 150.00 150.00 Health - Medical Benefit Milliman Inc. Indemnity
2010 Dec-10 Kortis Capital Ltd. Swiss Re 50.00 50.00 Longevity Risk (UK-US) RMS Non-Indemnity
2010 Dec-10 Vitality Re Ltd. Aetna Life Insurance Co. 150.00 150.00 Health - Medical Benefit Milliman Inc. Indemnity
2010 Oct-10 Vita Capital IV Ltd Swiss Re 175.00 175.00 Extreme mortality RMS Non-Indemnity
2010 May-10 Vita Capital IV Ltd Swiss Re 50.00 50.00 Extreme mortality Milliman USA Non-Indemnity
2009 Nov-09 Vita Capital IV Ltd Swiss Re 75.00 75.00 Extreme mortality Milliman USA Non-Indemnity
2008 Feb-08 Nathan Munich Re 100.00 100.00 Extreme mortality Milliman USA Non-Indemnity
2007 Jan-07 Vita Capital III Ltd Swiss Re 520.95 5 520.95 Extreme mortality Milliman USA Non-Indemnity
2006 Dec-06 Vita Capital III Ltd Swiss Re 179.39 6 179.39 Extreme mortality Milliman USA Non-Indemnity
2006 Nov-06 OSIRIS Capital PLC AXA Cessions 446.95 7 446.95 Extreme mortality Milliman Inc. Non-Indemnity
2006 May-06 Tartan Capital Ltd. Scottish Annuity & Life 155.00 155.00 Extreme mortality Milliman Ltd. Non-Indemnity
Co. (Cayman) Ltd
2005 Dec-05 ALPS Capital II PLC Swiss Re 370.00 370.00 Embedded value from Milliman Inc. Indemnity
closed block of life
insurance and annuity
business
2005 Apr-05 Vita Capital II Ltd. Swiss Re 362.00 362.00 Extreme mortality Milliman USA Non-Indemnity
2005 Jan-05 Queensgate Special Swiss Re 245.00 245.00 Embedded value from Milliman Inc. Indemnity
Purpose Ltd. closed blocks of life
insurance
business/policies
2003 Dec-03 Vita Capital Ltd. Swiss Re 400.00 400.00 Extreme mortality Milliman USA Non-Indemnity
TOTALS 7,100.78 6,005.78 495.00
1
Includes both rated and unrated amount.
2
USD equivalent of EUR85 million at closing date (1 euro = 1.1382 USD).
3
USD equivalent of CAD210 million at closing date.
4
USD equivalent of CAD120 million at closing date.
5
USD equivalent of EUR210 million at closing date, plus USD250 million (1 euro = 1.290238 USD).
6
7
856
by Aetna for the first quarter of 2020 was well below levels that would trigger its Vitality Re
Series cat bonds.
The 2015 $100 million Vita Capital VI Ltd. extreme mortality bond, sponsored by Swiss Re, may
also be under duress. Noteholders will be at risk from an increase in age- and gender-weighted
mortality rates that exceed a specified percentage of the reference mortality index value for
Australia, Canada, and the UK. The bond, which has been placed on negative watch, has been
removed and extension of the risk period beyond December 2020 is highly unlikely. However,
the probability of triggering of the bond may have increased because of the pandemic.
Mortgage Insurance-Linked Securities (MILS) Exhibit 9

MILS are mostly excess of loss structures, MILS Issuance by PMIs, 2015-2Q2020
with the private mortgage insurers
(USD millions)
(PMIs) retaining a portion of the risk and
# of Initial Balance at % of Original
ceding a segment to the capital markets. PMI Transactions Balance 6/30/2020 Remaining
As Exhibit 9 shows, $10.14 billion was
Arch 11 5,190 3,065 59.06
ceded to the capital markets from 2015
NMI 3 803 408 50.78
through the first half of 2020. The MILS
Essent 4 1,727 1,280 74.10
transactions, which are highly effective
for reinsuring private mortgage insurers’ MGIC 2 634 426 67.23
books of business, are currently difficult Radian 3 1,484 1,149 77.38
to consummate due to capital market Genworth 1 303 303 100.00
dislocation resulting from the pandemic. Total 24 10,142 6,631 65.38
MILS Reportedly Triggered Events
Five of the six PMIs (Radian Guaranty, National Mortgage Insurance Corporation, MGIC
Investment Corporation, Essent Guaranty, and Arch Mortgage) have all reported that their
outstanding MILS transactions are now subject to trigger events after a sharp increase in
mortgage delinquencies owing to COVID-19, and the amortization of principal of the notes has
been suspended due to heightened delinquencies.
The following is the list of MILS reported to have triggered events:

• Radian Guaranty’s $434 million Eagle Re 2018-1 Ltd., $562 million Eagle Re 2019-1 Ltd., and
$488 million Eagle Re 2020-1 Ltd.
• MGIC Investment Corporation’s $319 million Home Re 2018-1 Ltd. and $316 million Home
Re 2019-1 Ltd.
• National Mortgage Insurance Corporation’s ($211 million Oaktown Re Ltd. 2017, $265
million Oaktown Re II Ltd., and $372 million Oaktown III Ltd.)
• Essent Guaranty’s $424 million Radnor Re 2018-1 Ltd., $473 million Radnor Re 2019-1 Ltd.,
$334 million Radnor 2019-2 Ltd., and $496 million Radnor Re 2020-1 Ltd.
• Arch Mortgage’s $342 million Bellemeade Re 2019-1 Ltd. and $621 million Bellemeade Re
2019-2 Ltd.
However, no losses to note principal for these transactions have been reported or appear likely
at this point, unless market conditions deteriorate significantly.
MILS Issuance During COVID-19

Two MILS transactions have been issued since the COVID-19 outbreak. One was Bellemeade Re
2020-1 Ltd sponsored by Arch Mortgage in June 2020 despite volatility in the capital markets;
57 9
the other was Oaktown Re IV Ltd. sponsored by NMI holdings, Inc. closed in July 2020. The
structure of Bellemeade Re 2020-1 Ltd is quite different from a typical MILS transaction, as it
was for rating agency capital relief. The attachment point was 7.5%, and the detachment point,
12.5%, which were increased from a respective 2.25% and 10.25% from the prior Bellemeade
Re transaction. For the Oaktown Re IV Ltd. deal, the attachment point was 2.5% and the
detachment point, 8.0%, which are more in line with a typical MILS transaction.
Singapore’s Grant Scheme

Over the last few years, Singapore has attracted cat bond issuance owing to its grant scheme, which was due to
expire at the end of 2020. The Monetary Authority of Singapore will extend its ILS grant scheme through the
end of December 31, 2022. This scheme, which funds 100% of certain upfront costs for cat bonds up to SGD 2
million, is aimed at expanding the growth of the ILS market and boosting the number of cat bonds issued in Asia.
The cat bonds provided coverage of perils for Australia, Japan, and North America. Exhibit 10 lists the cat bonds
issued through Singapore’s ILS grant scheme.
Exhibit 10
Cat Bonds Issued In Singapore
(USD millions)
Issue
Date Vehicle Sponsor Amount Peril Type
Jun-20 Alamo Re II Pte. Ltd. Texas Windstorm Insurance Assn. (TWIA) 400 Texas named storms and severe
(Series 2020-1) thunderstorms
May-20 Catahoula Re Pte. Ltd. Louisiana Citizens Property Insurance 60 Louisiana named storm & severe
Corp. thunderstorm
Mar-20 Akibare Re Pte Ltd. Mitsui Sumitomo Insurance Co. Ltd 100 Japan Typhoon, Japan Flood
Mar-20 Integrity Re II Pte Ltd. American Integrity Insurance Company of 150 Florida named storms
Florida, Inc. via Hannover Rück SE
May-19 First Coast Re II Pte. Ltd. Security First Insurance 100 Florida named storm & severe
(Series 2019-1) thunderstorm
Feb-19 Orchard ILS Pte Ltd Insurance Australia Group (IAG) 54 Australia and New Zealand
catastrophe risks
1058
September 2, 2020
COVID-19 Presents New Challenges
for Global Life Reinsurers
The global life reinsurance market entered 2020 much as it had in 2019. Reinsurers were well
capitalized and both established market participants and new entrants were optimistic they
Reinsurers would successfully execute their business plans. The global COVID-19 outbreak and resulting
could benefit economic and financial market conditions that followed made it clear early on that 2020 would
not go according to plan.
as active
pipeline of In many ways, global life reinsurers were better positioned than primary carriers to face the
pandemic. From the start, COVID-19 disrupted financial markets and sources of liquidity. While
legacy life/ there has certainly been an uptick in unexpected mortality due to COVID-19, the life primary
annuity blocks carriers felt most of their financial pain in their asset-intensive business models. Life reinsurers
tend to be less asset-intensive than their primary writer counterparts and typically have strong
of business underwriting expertise built on analyzing massive data sets, supplemented by relying on
comes to medical experts. As such, AM Best revised the life and annuity sector outlook from Stable to
Negative in March 2020 but did not take a similar action for the life reinsurance sector.
market
Impact of COVID-19 on Global Life Reinsurers
From the beginning, life reinsurers have seen COVID-19 as being less severe than the 1-in-200
year event described by their stress test scenarios. Based on these models, one would expect
excess deaths to be upwards of ten million worldwide. While the current number of deaths
due to COVID-19 is both alarming and rising, mortality is still expected to be below this
potential level.
In April 2020, AM Best announced that the outlook for the global life reinsurance segment
would remain at Stable. The primary factors driving this included the segment leaders
being strongly capitalized and able to handle severe mortality events and financial market
conditions. The life reinsurance market is dominated by large, well-known global players with
advanced modeling capabilities that offer services beyond risk transfer. These dynamics create
a high hurdle for competitors seeking to build scale or take market share in this disruptive and
uncertain environment.
Mortality insurance products tend to focus on working age individuals as opposed to the
retired elderly population that has represented a disproportionate number of COVID-19
Analytical Contacts: fatalities. Nonetheless, the actual geographical coverage of each reinsurer’s portfolio can
Michael Porcelli, FSA, Oldwick
+1 (908) 439-2200 Ext. 5548 make an important difference, given the variations in age distributions and other factors that
[email protected] have led to widely varying mortality rates by country. Regarding morbidity risk, reinsurers
are expected to be less affected by COVID-19 than are primary writers. Life reinsurers have
Michael Adams, Oldwick
+1 (908) 439-2200 Ext. 5133 a relatively low—albeit increasing—exposure to the health segment, high attachment points,
[email protected] and business models focused on cash flow management and administration services.
Bruno Caron, FSA, Oldwick

+1 (908) 439-2200 Ext. 5144 Enhanced enterprise risk management (ERM) has also contributed to the life reinsurance
[email protected] industry’s ability to understand and weather this pandemic. Many of the top global life
reinsurers have ERM capabilities assessed at the Very Strong level by AM Best. Current ERM
2020-150.8 capabilities allow for best-in-class stress testing and reporting of results to key stakeholders,
SINCE 1899
59
Market Segment Outlook Life Reinsurance
including senior management, regulators, company boards of directors, and the outside investor
community. This is largely due to added emphasis on ERM since the 2008 financial crisis.
Global Life Reinsurer Market Dynamics

Almost all of the largest global reinsurers write both life and non-life business. Life reinsurance
business accounts for at least 30% of gross premiums written, with the US representing the
lion’s share of global life reinsurance premiums. Five reinsurers—Swiss Re, Munich Re, SCOR,
RGA, and Hannover Re—dominate the US life reinsurance market and account for over 90%
of the total US individual life inforce that is reinsured (Exhibit 1). These top tier players have
been able to defend their strong market positions by consistently providing innovative market
solutions, maintaining strong
relationships with existing Exhibit 1
customers that have resulted in Top US Life Reinsurers by Individual Life
significant recurring business Insurance in Force, 2019
over decades, and adhering Total Individual
Amount in Force
to disciplined pricing and
Company Name ($000s)
underwriting practices.
SCOR Life US Group 1,812,035,002
RGA Reinsurance Company 1,792,183,058
The US traditional life
reinsurance market has been Munich American Reassurance Company 1,350,313,605
pressured by historically Hannover Life Reassurance Co of America 1,276,370,135

low cession rates for over a Swiss Re Life & Health America Inc 1,051,715,422
decade, although there has Canada Life Assurance Company USB 264,764,274
been a notable rise in business London Life Reinsurance Company 174,857,538
ceded over the past few
Employers Reassurance Corporation 85,283,608
years (Exhibit 2). Factors
Optimum Re Insurance Company 75,170,133
driving this trend include
Wilton Reassurance Company 71,304,080
the introduction of principle-
based reserving, the 2017 PartnerRe Life Reinsurance Co of America 64,112,426
CSO mortality table, and the General Re Life Corporation 16,943,304
increasing use of automated Source: AM Best data and research
Exhibit 2
Reinsurance Ceded
35 350
30 300
Face Amount Ceded ($ trillions)
Reinsurance Ceded ($ billions)
25 250
20 200
15 150
10 100
5 50
0 0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Face Amount Ceded Reinsurance Ceded
260
•
underwriting, which includes the use of more sophisticated tools such as data analytics. The
long-term trend, however, has been a decline in cession rates. Possible causes include an
increased appetite from primary insurers to recapture ceded business due to rate increases by
some reinsurers and the general lack of organic growth in the US life insurance industry.
To offset the relatively low cession rates, the largest life insurers pursued redundant reserve
financing and have since been seeking new sources of revenue, including offering their clients
underwriting services such as predictive modeling, E-underwriting, and other technology- •
driven initiatives. There has also been a trend toward reinsurers assuming flow business in
the fixed annuity market. Likewise, new companies entering the market have been actively
developing technology-based solutions. While established reinsurers tend to see fixed annuities
as a growth opportunity and a way to diversify their books of business, the new participants
have approached the market with strategies that are tied to expectations of better investment
performance than their cedants.
•
Throughout the current COVID-19 crisis, there remains no shortage of existing players and
hopeful new entrants into the block reinsurance/acquisition business. Market participants
have been very active, often quite aggressively searching for growth in areas such as annuity
reinsurance or other spread businesses. Typically, their focus is to out-earn the asset portfolios
of cedants and they are less focused on the biometric component of risk which they may
choose to hedge away.
Several announced management teams looking to deploy the capital they have raised have
yet to execute on their first transaction. The precipitous drop in interest rates has made
deal execution difficult as the chasm between expectations of sellers/cedants and buyers/
reinsurers has widened. This is largely due to differing pricing assumptions. Cedants tend to
use mean reverting interest rate assumptions to discount reserves that suggest the low interest
rate environment will reverse itself and return to historical norms over a long time horizon.
Reinsurers, on the other hand, are likely to assume the current interest rate environment is
here to stay when pricing a block transaction. Further compounding this is the secondary
effect of mortality uncertainty surrounding the impact of COVID-19. With these widely
differing assumptions, the likelihood of disciplined, patient reinsurers transacting in this
market is reduced. On the other hand, newer reinsurers seeking to establish a track record are
more likely to pursue block trades if they can reach agreement with cedants on the appropriate
set of actuarial assumptions.
Given the capital-intensive nature of the life and annuity business, coupled with the
competitive environment, direct writers will most likely continue to turn to the reinsurance
community for its ability to provide capacity to absorb new business, regulatory capital
relief, underwriting expertise, volatility management, tax strategies, and concentration risk
mitigation. The ratios most often used to measure reliance on reinsurance to support capital
needs are reinsurance leverage and surplus relief.
The reinsurance leverage ratio is defined as aggregate reserves ceded plus amounts
recoverable and funds held, divided by surplus. The surplus relief ratio, defined as reinsurance
commissions and expense allowances on reinsurance ceded (reported as income on the
statutory statement) divided by statutory surplus, illustrates the degree to which a company
depends on reinsurance to maintain its surplus ratios (e.g., NAIC RBC/AM Best’s BCAR).
With the exception of 2016, the industry has maintained a surplus relief ratio in a narrow band
of 4.5% to 6.5% (Exhibit 3). In 2016, several companies had some large cessions that resulted
61 3
Exhibit 3
L/A Industry – Reinsurance Leverage & Surplus Relief
250 12
10
200
Reinsurance Leverage (%)
Surplus Relief (%)

150
100
4
50
2
0 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Reinsurance Leverage Surplus Relief Adjusted Surplus Relief
in elevated commissions and expenses on reinsurance ceded business, thus raising the surplus
relief ratio to roughly twice the longer-term average. In 2019, both ratios increased, suggesting
an increase in activity for reinsurers, consistent with the slight increase in the face amount
ceded in 2019.
Adjusted surplus relief simply nets out expenses and commissions on reinsurance assumed
(recorded as a statutory expense) before dividing by surplus. As a result, the adjusted ratio for
the industry is less volatile and reports at an overall lower level. However, 2016 once again
shows an elevated ratio reflecting some large ceded transactions without a corresponding large
offset in business assumed.
Life Reinsurance in a Low-for-Long Rate Environment

Interest rates have generally been on a declining trend for the last four decades, which
continues to impact direct writers and reinsurers, although the latter are generally affected to
a lesser extent than the former. Reinsurers tend to focus more on underwriting/biometric risk
and take less risk on the asset side of the balance sheet. As a result, the investment returns on
their asset portfolios are less of a driver of earnings, while both direct writers and reinsurers
chase similar pricing metrics and returns on capital. Reinsurers typically benefit from scale,
in-depth expertise, and less pressure to meet sales targets, allowing them to generate higher
profit margins on underwriting.
In addition to a more conservative investment portfolio through higher allocations to bonds

and cash, the credit portfolios of the larger, established life reinsurers’ bond portfolios are also
of higher quality, with larger allocations to NAIC-1 bonds and smaller allocations to below-
investment-grade bonds, consistent with prior years (Exhibit 4). Furthermore, reinsurers’
exposure to mortgage loans—an asset class that particularly poses uncertainty in the current
COVID-19 environment—is lower than that of direct writers (8.8% vs. 12.9%) (Exhibit 5).
Despite the conservativeness of reinsurers’ portfolios relative to direct writers, net yields do
not differ greatly between the two groups. This can be explained by the higher duration of
462
Exhibit 4
Bond Portfolio Quality
100
4.3 5.8 4.7 5.9 4.0 6.0 3.5 5.7 3.3 5.3 4.1 5.2
90
23.4 25.4 27.3 28.6 30.3
80 30.8 31.8
31.7 31.6 32.4 34.3 34.3
70
60
(%)
50
40
72.3 69.9 68.7 67.9 66.4
63.4 62.4 62.3 62.0 64.1
30 60.3 60.5
20
10
0
US L/A Industry
US L/A Industry
US L/A Industry
US L/A Industry
US L/A Industry
US L/A Industry
Reinsurers
Reinsurers
Reinsurers
Reinsurers
Reinsurers
Reinsurers
2014 2015 2016 2017 2018 2019
NAIC-1 NAIC-2 BIG
assets in reinsurers’ portfolios, lower investment expenses incurred by reinsurers, and various
reinsurance structures that can alter net yield calculations.
PRT as a Growth Area

AM Best sees Pension Risk Transfer (PRT) as an area of growth for reinsurers. Given their
underwriting and biometric expertise that is utilized to assume mortality risk, it would be
natural to use this same knowledge to underwrite longevity risk. Mortality and longevity
risks are two natural offsetting risks, but they are not perfect counterweights, as the insured
populations are different and potential shocking events may not emerge in the same way.
Nevertheless, reinsurers have started to dip their toes in the PRT market and we expect this
trend to continue. Given the current lack of popularity of single premium immediate annuities
and deferred income annuities, coupled with the complexity of variable and fixed income
annuities, PRT remains the main pure longevity risk opportunity for the segment. Various
structures already exist, including coinsurance and longevity swaps, which have been popular
in Europe for some time but are now starting to gain traction in the US.
There is uncertainty with regard to longevity risk charges in some capital models, which could
trigger direct writers to seek additional capital relief. Furthermore, the recent swings in the
equity markets may have provided a wakeup call to corporate plan sponsors that continue to
back a large portion of pension liabilities with equities. This may serve as a catalyst to transact
and increase overall PRT activity.
63 5
Exhibit 5
Distribution of Invested Assets - 2019
Bonds 76.9
71.3
Mortgage Loans 8.8
12.9
BA Assets 4.0
4.7
Cash & Short-Term 5.5
2.7
Stocks 3.0
2.5
Contract Loans 1.6
3.0
Derivatives 0.1
1.8
Real Estate 0.004
0.5
Other 0.1
0.6
0 10 20 30 40 50 60 70 80 90
(%)
Top 11 Reinsurers L/A Industry
Other Developments
In April 2020, Global Atlantic established the Ivy Co-Investment Vehicle LLC to provide
financial flexibility by co-investing approximately $1 billion in qualifying reinsurance
transactions. Opportunities that could take advantage of the Ivy vehicle would include the
reinsurance of life and annuity blocks and PRT transactions. The creation of Ivy closely follows
last year’s establishment of the Athene Co-Invest Reinsurance Affiliate (ACRA), an insurance-
linked sidecar vehicle that enables third-party investors to participate in private deals alongside
Athene.
Also in 2020, Swiss Re exited its life capital business which was originally conceived as the
reinsurer’s gateway into the primary market. The group was created in 2016 and included the
ReAssure business unit. With the announced sale of ReAssure to the Phoenix Group Holdings
Plc—expected to close in the second half of 2020—Swiss Re has elected to disband its life
capital group. This enterprise was positioned as a Business to Business to Consumer (B2B2C)
market participant. This re-evaluation suggests that even for large, well established reinsurance
brands such as Swiss Re, it remains a challenge to enter new markets.
664
September 2, 2020
Asia-Pacific Reinsurance: Will
COVID-19 Catalyse Change in
Underwriting Discipline?
Asia-Pacific remains an important component of the diversification and growth strategies of
Macroeconomic many international reinsurers, resulting in a highly competitive operating environment for
most reinsurers in the region. The entrance of new domestic participants and the increased
and investment capacity of international reinsurance players are among the key factors that have led to
impacts from prolonged weak pricing trends in the reinsurance market. Compounding the challenge are
the climbing retrocession costs from the rising frequency and severity of global natural
the COVID-19 catastrophes, and the as yet undetermined full impact of the COVID-19 outbreak (which has
pandemic could spiralled into the current pandemic for most of 2020). As such, AM Best is of the opinion that
the outbreak of COVID-19 could be a trigger for reinsurance players in Asia to reassess their
place further business strategies.
pressure on
COVID-19 continues to be an evolving challenge for the Asia-Pacific reinsurance sector;
the profitability beyond direct underwriting exposures, the pandemic has also had far-reaching effects on
regional and global economies, as well as investment markets. In particular, many Asia-
of Asia-Pacific
Pacific reinsurers’ investment portfolios were impacted by the stock market shocks that
reinsurers were triggered by pandemic developments; in the case of some Southeast Asian reinsurers,
the market volatility during the first half of 2020 created significant movements in reported
shareholders’ equity and consequently drove heightened variability in capital adequacy ratios.
However, aside from grappling with the volatility brought on by COVID-19 the issue of
deteriorating underwriting profitability continues to be a challenge faced by reinsurers in
Asia-Pacific. AM Best notes that the operating performances of Asia-Pacific non-life professional
reinsurers (whose business is solely focused on reinsurance) have deteriorated over the last
few years due to increasing underwriting losses, and this trend of declining technical results
Analytical Contacts: has accelerated in 2019 and 2020. Furthermore, with falling interest rates in many economies,
Christie Lee, Hong Kong reinsurers will need to refocus on underwriting discipline in order to meet their cost of capital.
+852 2827 3413
[email protected] Thus, with expectations of a challenging investment landscape and a prolonged low interest
Myles Gould, Singapore rate environment, AM Best is of the view that reinsurance companies in Asia-Pacific will likely
+65 6303 5020 have to accept lower and more volatile investment yields, or take on higher asset risks, at
[email protected] least over the near term. In light of this, reinsurers may choose to revisit the management of
Doniella Pliss, Singapore their core business to deliver more profitable technical results, which will serve to reduce the
+65 6303 5024 pressure on meeting investment return targets.
[email protected]
This report reviews the operating performance of rated and non-rated reinsurance legal entities
Contributor:
Tran Nhat Trung, Singapore domiciled in Asia-Pacific. Branches of reinsurers operating in the region were not included.
Editorial Manager: Declining Performance

Dawn Sit, Singapore Based on AM Best’s research, only a few non-life reinsurance companies in Asia-Pacific
+65 6303 5015
[email protected] managed to achieve a combined ratio below 100% in fiscal year 2019, despite many smaller
2020-150.9 reinsurers in the region not being materially impacted by the Japan catastrophe losses in
SINCE 1899
65
Market Segment Report Asia-Pacific Reinsurance
2019 and loss creep from 2018 events. The average combined ratio of Asia-Pacific reinsurers
exceeded 100%, due to a high frequency of large-scale natural disasters, heavy agricultural
losses in China and India, as well as inadequate pricing as a result of intense competition due
to abundant capacity. While the impacts of the ongoing COVID-19 pandemic on regional and
global reinsurance markets are still uncertain, it is safe to assume that the final outcome is
likely to put further pressure on Asian reinsurers’ operating results.
Japan’s insurance industry incurred a gross total of USD 25 billion in catastrophe losses
during 2018 and 2019 (according to the General Insurance Association of Japan),–the costliest
two years on record for the Japan market–in which a material portion of the losses was
transferred to the global reinsurance market. This subsequently led to solid increases in rates
for Japan loss-impacted reinsurance treaties in the 2019 and 2020 April renewals. However,
relatively benign loss activity over the same period in other Asia-Pacific markets continued to
favour risk-adjusted pricing pressure that generally hampered the hardening momentum of
rates in the region.
AM Best notes from past observations of reinsurance renewals that any rate increase from large
catastrophe losses was often a local effect and limited to loss-impacted accounts, and did not
translate to an overall increase across the region. Non-affected markets or loss-free accounts
were reluctant to share in the loss payback (and cedents and their brokers were usually
successful in arguing the disconnection). Given the excess reinsurance capacity in the market,
reinsurers’ underwriting discipline is often undermined by a fear of losing business as cedents
tend to be price sensitive in their reinsurance decisions. Brokers have also played an important
role in leveraging that excess capacity to the benefit of the reinsurance buyer. But with the
economic fallout from the pandemic potentially worsening, it begs the question of what may
happen to the supply and allocation of capacity across market segments in Asia-Pacific if
reinsurers are to face greater challenges in producing results that meet, or exceed, their cost of
capital.
Against this backdrop, Asia-Pacific reinsurance market players must consider whether the
positive rate momentum can be continued and extended to markets or lines of business that
are inadequately priced. Alternatively, reinsurance companies will need to apply greater
flexibility in their business strategies to respond nimbly toward market developments, as well
as rationally plan and execute these strategies from a more holistic perspective.
High Retrocession Dependency to Pressure Reinsurers’ Profitability

Small to medium-sized reinsurers in Asia-Pacific have high retrocession ratios (retroceded
premium to inward reinsurance premiums)–averaging around 40%–relative to the average
ratios (14%) of Asia-Pacific reinsurers on the list of global top 50 reinsurance companies. Due
to their small capital bases and geographically concentrated business profiles–especially those
subject to natural catastrophe accumulation risk in their domestic markets–these small to
medium-sized players are highly dependent on retrocession to stabilise their bottom line.
However, the major catastrophe losses incurred by the global reinsurance market in 2019
exacerbated the prior accident year’s loss creep from events such as Hurricanes Irma, Michael
and Typhoon Jebi, which resulted in the erosion and trapping of ILS capital for a third year in a
row. As such, traditional retrocession capacity (especially aggregate capacity) for the property
catastrophe line, has been under pressure since the 2019 reinsurance renewal season. AM Best
notes that many reinsurers have had to retain a greater portion of risks to manage retrocession
costs, which rose materially during the last renewal season, while some have restructured
their retrocession arrangements to achieve more economical retrocession protection.
266
AM Best expects that retrocession capacity will remain under pressure and rate increase
momentum will continue in view of expected COVID-19 losses to the global non-life
reinsurance industry. Smaller Asia-Pacific reinsurers that lack bargaining power in their
retrocession negotiations, or which are unable to pass on the retrocession cost hikes to their
cedents in the (re)insurance value chain, are likely to face a material squeeze on profitability.
Lower Expected Investment Yields Pose Greater Challenge to Bottom Lines

Historically, AM Best notes that reinsurers in Asia-Pacific have largely banked on investment
returns to prop up their operating results and deliver on bottom lines, given challenging
underwriting conditions (Exhibit 1). However, reinsurance companies will increasingly face
difficulty in sustaining this solution as quantitative easing measures in various economies
are continuing to drive down interest rates, together with lower returns from other asset
classes; consequently, non-life reinsurers in Asia-Pacific are likely to see lower expected total
investment returns over the long term.
Given that a majority of the investment assets held by Asia-Pacific reinsurers are allocated
to cash and deposits, as well as fixed income securities, a prolonged low interest rate
environment in most Asia-Pacific markets will pose challenges to market players that may not
be able to offset their underwriting losses of similar magnitude without taking on additional
asset risk. AM Best notes that some reinsurers have already taken actions to increase their
asset risk exposures over the past few years in response to decreasing interest rates in their
home markets, such as raising their asset allocations in alternative investment instruments
and loans and receivables (including unlisted trust plans, debt schemes, or infrastructure fund
investments). Despite the higher expected returns, AM Best is of the view that companies that
hold undiversified, illiquid, and/or speculative assets amid volatile capital market conditions
Exhibit 1
Asia-Pacific Reinsurers' Underwriting and Investment Returns
2,500
2,000
1,500
1,000
500
(USD millions)
-500
-1,000
-1,500
-2,000
-2,500
2011 2012 2013 2014 2015 2016 2017 2018 2019
Net Technical Profit Net Investment Income (including gains)
Note: The scope of study covers selected non-life reinsurers and non-life focused composite reinsurers domiciled in Asia-Pacific.
Underwriting results include life underwriting profit/loss, which accounts for a relatively small proportion of the total underwriting
results.
67 3
and a competitive underwriting environment may expose their earnings and capital positions
to increased volatility.
The balance sheets of the region’s larger reinsurers (with conservative investment strategies
and bond-heavy asset portfolios) are generally well-placed to absorb unrealised losses from
investment market volatility. Some reinsurers have even enjoyed capital boosts from the
unrealised capital gains on their highly-rated bond portfolios, driven by the decrease in bond
yields that were exacerbated by the pandemic. However, the same may not be said of some of
their smaller-sized counterparts. In particular, domestic reinsurers based in emerging Asia-
Pacific markets–which mostly hold a greater composition of ”growth” assets, such as equities,
relative to their mature market counterparts–have seen significant volatility in their balance
sheets and capital adequacy ratios as market values of their investment assets were jolted
during the first quarter of 2020. A partial stock market recovery during the second quarter of
the year provided some relief to market players and reduced the loss impacts on investment
returns, albeit the potential for further volatility remains a very real threat.
It is also worth noting that fixed income instruments (whether issued by corporates or
governments), continue to be subject to potential deterioration in credit quality. In some
instances, sovereign ratings in the region have already experienced negative rating actions
in response to recent economic and political challenges, while corporate debt in the travel,
tourism, and energy sectors are particularly susceptible to an increased risk of default.
Capacity
Reinsurance capacity in Asia-Pacific is unlikely to shrink materially as long as there continues
to be abundant capacity in the global reinsurance market. Within Asia-Pacific, the insurance
markets of Japan, South Korea, Australia, New Zealand, and China consume the most
reinsurance capacity.
Due to the large capacity required by a highly concentrated market, Japan’s reinsurance needs
have traditionally been supported by long-term partners, including national reinsurer Toa
Re, global reinsurance players, as well as large regional reinsurers, while Korean Re provides
capacity for over 50% of the reinsurance needs of its direct cedents in its home market.
For Australia and New Zealand, the degree to which these markets are exposed to catastrophe
events, including flood, cyclone, earthquake, wildfire, and hailstorm, as well as the absolute
size of insured risks emanating from these countries, result in the significant use of global
reinsurance capacity to cater to these needs. While there is domestic and regional reinsurance
capacity provided to these markets, this tends to be in a following capacity with international
participants remaining the lead on key reinsurance placements.
The Chinese reinsurance market has also grown from having just one national reinsurer
in 2015, to adding four more onshore reinsurers, which materially increased the aggregate
supply of capacity despite reduced reinsurance demand since the implementation of the China
Risk Oriented Solvency System (C-ROSS) in 2016. (The four additional reinsurers are Taiping
Re, Qianhai Re, PICC Re, and AXA XL Re China, which was recently granted the mainland’s
first foreign reinsurer subsidiary licence.) For example, the non-life reinsurance capacity
collectively offered by Taiping Re, Qianhai Re, and PICC Re already exceeds 40% of the non-life
reinsurance portfolio of China Property & Casualty Reinsurance Company Ltd. Competition
has further stiffened with domestic non-life direct insurers increasingly participating in
facultative (and to a lesser extent, treaty) reinsurance business, and the entrance of Korean Re
which received regulatory approval to establish a branch in December 2019. However, AM Best
468
notes that updated capital requirements from the expected introduction of C-ROSS Phase 2
will further alter reinsurance market dynamics.
There is also a large number of small to medium-sized reinsurers in the region that are focused
on serving niche market segments, although their value propositions have begun to diminish
with the influx of capacity from regional and global reinsurance players. But even as some
reinsurers exit or reduce their capacity offering to Asia-Pacific, the gaps in capacity are easily
filled by other market players if technical pricing and risk appetites are congruent. Given these
circumstances, it might be unrealistic to expect a meaningful improvement from capacity
reduction that will bring rates back to technically sound levels over the short term. As such,
Asia-Pacific reinsurers may be better served in reconsidering their capital allocation by market
segment and line of business from a capital consumption perspective, rather than chasing the
already soft traditional market segments.
Impact of COVID-19
For reinsurers operating in Asia-Pacific, an early assessment of loss exposure from the
pandemic indicates that the region may have fared well relative to other parts of the world. In
particular, loss experience to date in Asia-Pacific has benefited from typically lower infection
and death rates compared with many western countries, including the US and parts of Europe.
In a number of instances, governments in the region have also assumed protectionist positions
for their citizens and sought to undertake the costs of diagnosis, treatment, and rehabilitation
related to COVID-19. As a result, health and medical coverages have typically not seen
significant accumulation of losses to date. Furthermore, the prevalence and market penetration
of corporate products that are susceptible to COVID-19 exposure, such as event cancellation,
business interruption, D&O, and E&O, are generally low for emerging markets in Asia-Pacific.
Where these coverages are more prevalent in mature Asia-Pacific markets, reinsurers will no
doubt be monitoring exposures very closely, albeit given the nature of these products there is
often a high level of cession to international reinsurers and Lloyd’s of London, resulting in low
regional retention.
Notwithstanding these points, given that the pandemic remains an ongoing event and is likely
to persist for some time, the ultimate loss exposure to be borne by the Asia-Pacific reinsurance
sector is far from final. The implications of this unprecedented event are also much broader for
the region’s reinsurers than simply underwriting loss exposure. As previously discussed, the
impact of the pandemic on reinsurers’ investment operations during the course of 2020 has
been a key challenge for the sector and is expected to remain an area of ongoing volatility at
least over the near term.
Economic headwinds in the region also cannot be overlooked as presenting an obstacle

to both mature and emerging markets in Asia-Pacific. The region’s economic growth
fundamentals over the years have been a key area of attraction and development for the (re)
insurance sector, as this has supported increased insurance penetration. Furthermore, a
near-term challenge for reinsurers to contend with emanates from operational disruption.
For the most part, Asia-Pacific (re)insurers have been able to continue their critical
operations unencumbered during the COVID-19 pandemic; however, that is not to say that a
level of disruption has not arisen. Reinsurers, like many businesses, have been disrupted by
periods of lockdown in Asia-Pacific countries, as well as by wide-ranging travel restrictions.
As reinsurance services have traditionally been transacted with a high degree of face-to-face
interaction, the current environment has driven a need for this approach to shift, at least for
the near term.
69 5
Asia-Pacific Headwinds
The Asia-Pacific reinsurance landscape continues to be subject to a number of evolving
dynamics that will shape future pricing, terms, and capacity, which in turn affect the
operating results of market players. Catastrophe activity and large losses will continue to
be important drivers of underwriting performance. Although the frequency and severity of
catastrophe losses for the region in the second half of 2020 are undetermined, economic and
insured losses from the floods in China since June 2020–its worst flood disaster in 30 years–
continue to climb. While the final loss amount will depend on the period of inundation and
whether it has ultimately impacted the more urban areas of the country, insured losses are
expected to be passed on to reinsurers, given that Chinese non-life insurers generally have
very low retention levels in their catastrophe excess-of-loss programmes.
There is no doubt that a significant and sustained hardening of reinsurance rates is required
in order to allow reinsurers to achieve better pricing adequacy (and, ultimately, profitability),
although whether this will take place remains to be seen. In 2019, Asia Capital Re Group
abruptly ceased writing new business as part of a transaction with an international run-off
group as the company’s founding investors sought to exit the market. This was a significant
piece of news for the industry and demonstrated the severity of the prevailing market
conditions for Asia-Pacific reinsurers.
Nonetheless, robust capitalisation remains a strength for most reinsurers in the region. Almost
all AM Best rated reinsurers domiciled in Asia-Pacific have an assessment of “strongest”, based
on Best’s Capital Adequacy Ratio, and are well-capitalised on a risk-adjusted basis.
Capital requirements are typically driven by underwriting risk, although some reinsurers in
the region have opted for more aggressive investment strategies that can also be a significant
driver of required capital. Counterparty credit risk emanating from retrocession is typically a
small component of required capital, reflecting the use of well-rated retrocessionaires.
670
Southeast Asian Reinsurers Seek Growth in Health and Life

There has been a shift in the business mix of Southeast Asian domestic reinsurers over the
past five years. The robust growth of the primary health insurance segment has created
significant pressure on solvency margins for direct underwriters, which has subsequently
led to a rising demand for reinsurance support as capital relief.
As such, AM Best notes that local reinsurers in a number of emerging markets in Southeast
Asia have leveraged the significant increase in direct health insurance premiums to grow
their business. This has helped them to counter the strong competition from global
reinsurance peers that have a significant edge in the traditional businesses in terms of credit
ratings, underwriting capacity, and pricing expertise. At the same time, the shift in local
reinsurers’ business focus to life and health segments has also allowed them to rebalance
their underwriting portfolios, gradually reducing their exposure to complex catastrophe
risks while growing the lower risk health business. However, it should be noted that even
under favourable scenarios, the potential profitability of the health business is relatively
modest.
To illustrate, the life and health premiums of National Reinsurance Corporation in

the Philippines have more than trebled between 2015 and 2019, and now account for
approximately 30% of the reinsurer’s portfolio.
In Indonesia, despite a slowdown in its overall premium growth, PT Reasuransi Indonesia

Utama recorded an average growth rate of 13% for its life and health business between
2016 and 2019; the segment is its largest line of business, and made up about 40% of the
reinsurer’s gross premium written (GPW) in 2019.
Although the health reinsurance pace of growth in Thailand lags behind its Southeast Asia
peers, this line of business remains the largest share of local reinsurer Thai Reinsurance
Public Co. Ltd.’s underwriting portfolio and accounted for approximately 60% of GPW over
the past three years (2017-2019).
The demand for health products in Southeast Asia has risen further amid the COVID-19
pandemc as consumers become increasingly aware of the benefits of health insurance. As
such, AM Best expects that the growth of health premiums will continue to outpace other
classes of business in the region. Local reinsurers also plan to increase their collaboration
with cedents by offering greater operational support, including underwriting and product
innovation among others.
AM Best views these developments as positive for domestic and regional reinsurers’
business profiles due to the lower product risk and growing premium volume. In addition,
as reinsurers tend to retain a higher share of health premiums compared to other classes of
business, the decline in levels of retrocession dependency may have a positive impact on
the companies’ balance sheet strength especially for those with a history of heavier reliance
on lower quality counterparties. However, the health insurance segment generally has lower
profitability and may potentially present a challenge for reinsurers to manage at robust
profit margins over the long run.
71 7
September 2, 2020
Latin American Reinsurers Weathering
Pandemic Stress
The International Monetary Fund expects GDP for the Latin American region to contract by
Latin America 9.4% as a result of the global economic crisis caused by the COVID-19 pandemic. Deteriorating
economic, political, and social conditions affect the underlying industries that rely on
remains insurance, which may lead to adjusted reinsurance treaty terms (including coverages, prices,
attractive to and adjustments to overall programs) as the economies respond to the pandemic. Regional
insurers, however, rely on reinsurance as a capacity provider, business partner, and safety
reinsurers net, particularly for participants with capital efficiency strategies and those exposed to
even as catastrophic events.
conditions AM Best estimates the Latin American reinsurance market at USD16.7 billion in ceded
harden due premium, or roughly 5% of global reinsurance premiums.1 The countries most prone to
natural catastrophes or with large GDPs—including Mexico, Brazil, and Chile—are the largest
to economic, Latin American reinsurance markets. Results for Latin America’s primary insurance market
were mixed, with healthy real growth rates (in local currencies) in Peru (7.6%), Colombia
political,
(5.8%), Mexico (3.8%), Guatemala (3.6%), and Brazil (2.0%). Countries such as Panama
and social (0.2%), Chile (-1.8%), and Argentina (-14.0%) continue to struggle with domestic economic,
political, and social challenges. AM Best thinks that rising reinsurance growth opportunities
vulnerabilities will be centered in those countries expecting a sharp economic recovery or prone to natural
catastrophes (Exhibit 1).
Some Latin American insurance markets may contract by as much as 25% in 2020, mostly
reflecting a drop in premiums in the personal lines, which tends to be less reinsurance-
intensive. A substantial part, however, also is expected to come from large risks and specialty,
which are highly dependent on reinsurance capacity.
Key contributing factors currently challenging the Latin American reinsurance market include
adjustments to the demand for reinsurance as a result of lower insurer cash flows, contracting
economic activity in underlying industries, and declining infrastructure spending. Restrictions
on industrial production and travel also have disrupted supply chains and economic flows,
limiting the reinsurance acquiring capacities of some clients. Coverages for industries
that have come to a virtual halt, including air travel and industrial production, have been
particularly challenging during the pandemic. The Economic Commission for Latin America
and the Caribbean (ECLAC) notes the severe impact that COVID-19 has had on tourism and
the hospitality sector, as well as the significant effect on the mining, construction, and utility
sectors. Many Latin American countries have redirected spending from infrastructure projects
to tackle the effects of the pandemic.
Despite the current challenges facing Latin American reinsurers, there may be cause for
Analytical Contact: optimism on the horizon, in the form of developing opportunities. Cuts in interest rates and
Eli Sánchez, Mexico City depreciating local currencies could create conditions for repatriation of capital from foreign
Tel. +52-55-1102-2720 insurance subsidiaries in an effort to safeguard its value. This could increase demand for treaty
Ext.122
[email protected]
2020-150.10 1
Does not include cost of excess of loss contracts excluded from ceded premium by local reporting standards for some countries.
SINCE 1899
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Market Segment Report Latin America Reinsurance
programs to provide capital relief Exhibit 1

for selected insurers. Additionally, Ceded Premiums and GDP Expectations
coverages for contingencies (business
interruption), liabilities, and arising Ceded Premium GDP Growth GDP Growth
2019 2020 Forecast 2021 Forecast
risks (such as cyber) could be in
Country (USD millions) (%) (%)
higher demand due to new working
Mexico 5,865.4 -6.6 3.00
environment dynamics (remote
Brazil 2,756.8 -5.3 2.90
and onsite), creating innovation
opportunities. CAT coverage needs Chile 2,027.4 -4.5 5.30
will persist to safeguard productive Colombia 1,833.6 -2.4 3.70
assets in the region, but could Peru 990.1 -4.5 5.20
open opportunities for parametric Panama 625.3 -2.1 4.00
alternatives (in which a triggering Ecuador 617.1 -6.3 3.90
event occurs or a specified threshold Argentina 423.3 -5.7 4.40
is reached) as a cost-efficient strategy
Guatemala 346.4 -2.0 5.50
for insurers. The strengthening of
Costa Rica 315.2 -3.3 3.00
solvency regulations and minimum
ratings for foreign reinsurers will Dominican Republic 300.9 -1.0 4.00
continue to provide local insurers Bolivia 283.3 -2.9 2.90

with solid reinsurance providers to El Salvador 259.5 -5.4 4.50
protect their balance sheets. Honduras 229.0 -2.4 4.10
Uruguay 119.6 -3.0 5.00
Latin America represents a small Nicaragua 79.0 -6.0 0.00
part of the global risk portfolio, but
Source: AM Best data and research; local regulators; National Association of Insurers Data
leading global reinsurers and brokers
maintain both a presence and an
interest in the region. Many reinsurers are proceeding cautiously in deploying their capacities
and, in some specific cases, divesting from stakes in insurance companies. Willis Re reported
that in the first four months of 2020, reinsurers in Latin America stood firm in maintaining
capacity, neither expanding nor cutting it as rates adjusted. Lloyd’s has maintained a steady
presence in the Americas the last five years, accounting for 7% of its business on average.
Historically, reinsurers provided an alternative for better returns in comparison to other asset
classes during bearish markets. Nevertheless, industry results in previous years have made
investors wary of the risks, limiting additional capacity. Alternative risk capital in the region is
still low, with very limited insurance-linked securities and CAT bonds used only by sovereigns.
The effects of COVID-19 on income statements globally remain uncertain, although AM Best
expects policy exclusions to be followed throughout Latin America.
Although Latin America is prone to natural catastrophes, no significant market-hardening

events have occurred since 2013. The biggest insured loss—USD5.1 billion in 2017—was due
mostly to Hurricanes Irma and Maria in Puerto Rico. Insured losses in 2019 for the region came
to USD5.2 billion, representing 8.7% of global insured losses, according to Swiss Re. Up until
the first half of 2020, we estimate the region’s insured losses to be about USD1.25 billion based
on AON’s Global Catastrophe Recaps.
Latin American reinsurers may return to known turf

Over the past few years, some Latin American reinsurers that perceive themselves as having
excess capital have diversified by expanding into Europe, the Middle East, North Africa,
and Asia, through vehicles such as Lloyd’s syndicates or by setting up their own operations.
However, the experience has not been entirely positive, as implementation costs and loss
73 2
Market Segment Report Latin America Reinsurance
experience have not met participants’ projections. AM Best expects these participants to
return to familiar ground to stabilize results. Global development institutions have been active
in terms of due diligence throughout Latin America and may constitute an extra resource to
support the growth and expansion of Latin American companies worldwide.
Best’s Market Segment Report

Stable Outlook for Reinsurance in Latin America
Latin America remains attractive to reinsurers, although conditions are hardening. The
economic, political, and social vulnerabilities of the region make it more susceptible to a
deeper economic crisis than other regions, a factor weighed heavily by global reinsurers, as
well as the usual risks in the region. AM Best expects primary companies to continue their
profitable risk selection for future business, but the effects of claims from the pandemic on
reinsurers portfolios remain to be seen. Although insured losses may have been low in recent
years, market participants remain aware of the region’s susceptibility to earthquakes and
weather volatility.
Published by AM Best Best’s Financial Strength Rating (FSR): an independent opinion of an

insurer’s financial strength and ability to meet its ongoing insurance policy
BEST’S MARKET SEGMENT REPORT and contract obligations. An FSR is not assigned to specific insurance
policies or contracts.
A.M. Best Company, Inc.
Oldwick, NJ Best’s Issuer Credit Rating (ICR): an independent opinion of an entity’s
CHAIRMAN, PRESIDENT & CEO Arthur Snyder III ability to meet its ongoing financial obligations and can be issued on either a
SENIOR VICE PRESIDENTS Alessandra L. Czarnecki, Thomas J. Plummer long- or short-term basis.
GROUP VICE PRESIDENT Lee McDonald
Best’s Issue Credit Rating (IR): an independent opinion of credit quality
A.M. Best Rating Services, Inc. assigned to issues that gauges the ability to meet the terms of the obligation
Oldwick, NJ and can be issued on a long- or short-term basis (obligations with original
PRESIDENT & CEO Matthew C. Mosher maturities generally less than one year).
EXECUTIVE VICE PRESIDENT & COO James Gillard
SENIOR MANAGING DIRECTORS Edward H. Easop, Stefan W. Holzberger, Andrea Keenan Rating Disclosure: Use and Limitations
SENIOR VICE PRESIDENT James F. Snee
A Best’s Credit Rating (BCR) is a forward-looking independent and objective
AMERICAS opinion regarding an insurer’s, issuer’s or financial obligation’s relative
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Version 010320
SINCE 1899
74
September 2, 2020
MENA Reinsurers Strive to Adapt to
Testing Conditions
Regional reinsurers operating in the Middle East and North Africa (MENA) are no strangers to
In general, challenging operating conditions. In recent years, the region’s reinsurance market has been
characterised by competitive pricing pressures, overcapacity and increased incidence of large
MENA regional losses. In 2020, the fallout from COVID-19 and a volatile oil price environment have added to
reinsurers have the challenges faced by local reinsurers.
demonstrated Market Landscape Stabilising

resilience The composition of the region’s reinsurance market is beginning to stabilise following
turbulence in recent years. The renewal periods in 2019 and 2020 were the first to follow the
in a difficult high profile difficulties faced by Trust International Insurance and Reinsurance Co., and the
operating exit of Arab Insurance Group from the market – formerly two of the region’s largest players.
Prior to this, the region saw the run-off of a number of local reinsurers, including Asia Capital
environment Retakaful MEA (Bahrain), Emirates Retakaful, and Takaful Re.
Following this shift in regional capacity offerings, cedants reshuffled their reinsurance panels,
which allowed existing participants to cement their positions and provided others with new
opportunities to gain access to market premiums.
Unsurprisingly, given the regional footprint and diversification drive of many MENA reinsurers
and international reinsurers’ appetite to maintain a presence in the region, reinsurance
capacity is plentiful and competition remains high.
Some MENA primary insurers also participate in the local reinsurance market, leveraging
their balance sheets and rating levels to write inward facultative business. Despite losses
incurred on inward facultative portfolios in recent years, capacity for this business appears
Analytical Contacts: readily available and primary carriers’ appetite to write this business persists, adding to
Emily Thompson, London
Tel: +44 20 7397 0291 overall competition. Certain markets, such as Algeria, have structural features to prioritise,
[email protected] or mandate, local reinsurance placements, however, in general the region as a whole remains
open, with few reinsurance regulatory restrictions.
Alex Rafferty, London
Tel: +44 20 7397 0312
[email protected] Strain on Underwriting Performance Persists
In general, MENA regional reinsurers have demonstrated resilience in a difficult operating
Catherine Thomas, London environment. Aside from strong competition, the region’s reinsurers face performance challenges
Tel: +44 20 7397 0281
catherine.thomas arising from a lack of both scale and diversification when compared with their international
@ambest.com competitors. Additionally, they often participate as followers on reinsurance programmes,
particularly those outside of their home market, which restricts their ability to dictate terms.
Editorial Manager:
Richard Banks, London
Tel: +44 20 7397 0322
The strategies adopted by MENA reinsurers vary considerably. Certain reinsurers benefit
[email protected] from long-standing legal cessions in their domestic markets, while others focus on providing
proportional capacity. Strategic shifts are ongoing, with some looking to increase non-
Richard Hayes, London proportional and facultative business, as well as improve regional and international
Tel: +44 20 7397 0326
[email protected] diversification.
2020-150.11
SINCE 1899
75
Market Segment Report MENA Reinsurance
Exhibit 1
MENA Reinsurers – Technical Performance, 2017-2019
Loss Ratio - Non-Life (%) Combined Ratio - Non-Life (%)
3yr 3yr
AMB # Company Name Country 2019 2018 2017 Avg 2019 2018 2017 Avg
89190 Arab Reinsurance Co. SAL Lebanon 71.1 69.6 76.7 72.4 105.7 105.4 107.4 106.1
85013 Arab Insurance Group (B.S.C.) * Bahrain 59.5 84.0 69.0 70.9 96.4 118.3 103.8 106.2
90777 Compagnie Centrale de Réassurance Algeria 59.4 52.7 51.3 54.4 84.3 83.3 82.3 83.3
78849 Hannover Re Takaful B.S.C. (c) Bahrain 63.7 69.1 61.1 64.6 102.7 101.6 95.1 99.8
85585 Kuwait Reinsurance Co. K.S.C.P. Kuwait 65.9 63.9 67.4 65.7 96.5 96.2 98.0 96.9
85454 Milli Reasurans Turk Anonim Sirketi Turkey 89.2 93.9 75.8 86.3 122.4 128.9 110.8 120.7
93609 Oman Reinsurance Co. SAOC Oman 66.5 55.2 62.3 61.3 106.6 93.7 105.6 102.0
90005 Saudi Reinsurance Co. Saudi Arabia 63.6 63.2 67.2 64.7 95.4 98.1 100.4 98.0
84052 Société Centrale de Réassurance Morocco 35.1 51.0 62.2 49.4 81.8 93.2 94.9 90.0
83349 Société Tunisienne de Réassurance Tunisia 62.3 73.3 65.2 66.9 99.2 113.2 105.2 105.9
86326 Trust International Insur & Reins Co. BSC Bahrain NA 73.0 69.0 71.0 NA 102.9 101.7 102.3
Note: Excludes companies for whom financial data were not available
* Aug. 13, 2020: Arab Insurance Group (B.S.C.) announced that it would cease writing further reinsurance
business and seek to carry out an orderly run-off of its existing portfolio
Source: Best's Financial Suite - Global, AM Best data and research
Exhibit 2
MENA Reinsurers – Investment Yield and Return on Equity, 2017-2019
Investment Yield (%) Return on Equity (%)
3yr 3yr
AMB# Company Name Country 2019 2018 2017 Avg 2019 2018 2017 Avg
89190 Arab Reinsurance Co. SAL Lebanon 7.4 5.9 5.6 6.3 -3.1 5.3 4.4 2.2
85013 Arab Insurance Group (B.S.C.) (C) * Bahrain 3.4 1.3 2.8 2.5 8.7 -23.0 3.2 -3.7
90777 Compagnie Centrale de Réassurance Algeria 4.6 4.2 3.5 4.1 8.3 9.0 9.2 8.8
78849 Hannover Re Takaful B.S.C. (c) Bahrain 7.0 0.6 2.3 3.3 14.9 2.0 0.4 5.8
85585 Kuwait Reinsurance Co. K.S.C.P. Kuwait 3.9 3.3 2.8 3.3 9.3 7.1 6.9 7.8
85454 Milli Reasurans Turk Anonim Sirketi Turkey 16.2 15.7 12.1 14.6 10.5 13.1 12.1 11.9
93609 Oman Reinsurance Co. SAOC Oman 4.0 1.5 2.4 2.6 3.6 3.0 0.4 2.3
90005 Saudi Reinsurance Co. Saudi Arabia 2.4 0.7 3.9 2.3 5.3 0.1 3.1 2.8
84052 Société Centrale de Réassurance Morocco 2.8 2.6 4.3 3.2 11.3 11.8 20.2 14.4
83349 Société Tunisienne de Réassurance Tunisia 8.7 8.1 6.8 7.9 5.8 8.7 6.4 7.0
86326 Trust International Insur & Reins Co. BSC Bahrain NA 1.1 2.0 1.6 NA -11.7 1.2 -5.2
Note: Excludes companies for whom financial data were not available
* Aug. 13, 2020: Arab Insurance Group (B.S.C.) announced that it would cease writing further reinsurance
business and seek to carry out an orderly run-off of its existing portfolio
Source: Best's Financial Suite - Global, AM Best data and research
It is not uncommon for reinsurers to report comparatively strong performance in their local
market, reaping the benefit of local expertise and long-standing relationships with market
participants. In contrast, attempts to diversify geographically are often accompanied by
thinner margins and increased volatility, a function of smaller participations, “follower”
positions and varied risk exposures, which differ from those in their home markets.
Consistent, strong underwriting returns appear to be the exception rather than the rule. Of
the regional reinsurers presented in Exhibit 1, all but three have seen their non-life combined
ratios swing above 100% at least once in the past three years.
An increasing volume of natural catastrophe losses has affected performance in recent

years. The frequency of flooding in the region is increasing. While notable flood events have
occurred recently in the United Arab Emirates (UAE), Bahrain and Kuwait, the risk is still
276
not appropriately modelled and priced into policies despite recent improvements in regional
catastrophe risk modelling. Oman has also seen several large cyclone losses, and the region is
exposed to earthquake risk.
Despite general pressure on underwriting margins, overall returns have remained robust for
MENA reinsurers, with returns on equity (ROE) largely sitting around the mid-single digits.
Investment performance continues to be a core component of operating results. However, with
the exception of Turkey and to a lesser extent Tunisia, interest rates across the region remain
low, and volatility in the fair value of assets is prevalent. In the near-term, the economic fallout
of the COVID-19 pandemic and low oil price environment are likely to add to the strain on
investment returns and total operating earnings for regional reinsurers.
Firming Reinsurance Market

In line with the broader reinsurance market, there are signs and expectations of hardening
reinsurance pricing across the MENA region. However, opinions diverge as to whether there
will be material rate increases.
The extent and pace of rate increases – and the ability of regional reinsurers to benefit from
them – will be dictated by a number of factors. With many MENA reinsurers typically acting
as “followers” on programmes, this may inhibit their ability to drive extensive rate change,
especially if lead markets are willing to accept only modest price increases.
Whether hardening or firming, the landscape appears to have shifted between the January
2020 renewals and the summer renewal period. This dynamic is perhaps best highlighted
by the renewal experience of non-loss affected accounts. These saw discounts at the turn
of the year, but rates appear to have stabilised, and in some cases increased, at the mid-year
renewals.
COVID-19 and the Oil Price Environment

If firming reinsurance market conditions provide positive momentum for the MENA
reinsurance sector, the COVID-19 pandemic and the current oil price environment provide
fresh headwinds. A combination of these factors was instrumental in AM Best’s decision to
revise its Market Segment Outlook for the Gulf Cooperation Council (GCC) – a significant, and
largely oil-reliant, sub-section of the MENA region – to negative from stable in early June 2020.
In AM Best’s view, increased economic and investment risk pose a greater threat to MENA
reinsurers than the expected underwriting hit from COVID-19. In many instances, state-led
public health responses have borne the brunt of COVID-19 related medical costs. Additionally,
mortality losses remain low – a function of life reinsurance being a small component of the
market, coupled with strong virus containment measures in the region to date. Nonetheless, in
recent months it has become standard to add explicit COVID-19 policy exclusions in primary
and reinsurance contracts.
Many of the economies in the MENA region remain reliant on oil revenues. Oil prices took
a steep negative turn in March 2020, given weakened demand due to the COVID-19-driven
economic slowdowns and significant excess supply. Despite an agreement by OPEC+ to
cut oil output in April 2020, prices have remained volatile and, although having recovered
somewhat, oil prices at the time of writing remain below the fiscal break-even point of the
region’s oil exporting nations. Oil price volatility has a direct impact on economic output and
governments’ fiscal capacity across the region.
77 3
Port Explosion In Beirut

On 4 August, 2020, the port of Beirut, Lebanon, was hit by a devastating explosion, which
resulted in many casualties and caused significant damage to large parts of the city. At the
time of writing, ultimate loss estimates arising from the blast remain uncertain. Reports
indicate insurance claims exceeding USD 400 million had been received by mid-August. AM
Best notes that this figure has the potential to rise significantly.
Property classes - including business interruption - and marine exposures within the
port are expected to drive insured losses from the blast. AM Best notes that insurance
penetration in Lebanon is generally low. Property insurance represents only a small
fraction of market premiums. However, the extent of the damage in one of the busiest and
wealthiest areas of the country magnifies the insured loss potential.
While the impact on the region’s (re)insurers remains to be fully quantified, AM Best
expects MENA reinsurers to carry exposure to this event. The ceding of meaningful insured
losses to regional reinsurance markets would be expected to strain technical performance
margins over the near-term.
For MENA reinsurers, the economic fallout of COVID-19 and the challenging oil price
environment is expected to lead to reduced premium volumes. AM Best expects a regional
contraction of premium in the near-term in the primary market, partly reflecting delays
in implementation of mandatory product coverages, as well as reduced demand for non-
compulsory insurance products. This primary market premium reduction will have a knock on
effect in the reinsurance segment. A reduction in public spending on infrastructure projects,
given reduced oil revenues, is another area which may drive lower insurable risk opportunities
for MENA reinsurers. These risks are typically heavily reinsured by the region’s insurers, and
have provided profitable opportunities for MENA reinsurers. Although regional reinsurers
generally cede a large portion of these participations to international reinsurance partners,
they benefit from the associated commissions.
A reduction in reinsurance opportunities as a result of the COVID-19 pandemic and weak oil
price environment has the potential to exacerbate already significant competition across the
region and may slow the positive reinsurance pricing momentum.
Exhibit 3
MENA Reinsurers – AM Best-Rated Companies
Ratings as of Aug. 05, 2020.
Best's
Best's Long- Financial
Term Issuer Strength Best's ICR & Rating
Credit Rating Rating FSR Best's ICR & Effective
AMB # Company Name (ICR) (FSR) Action FSR Outlook Date
89190 Arab Reinsurance Co. SAL Lebanon bbb- u B+ u Under Review Negative 17-Apr-20
90777 Compagnie Centrale de Réassurance Algeria bbb- B+ Affirmed Stable 12-Sep-19
85585 Kuwait Reinsurance Co.K.S.C.P. Kuwait a- A- Affirmed Stable 14-May-20
85454 Milli Reasurans Turk Anonim Sirketi Turkey bb+ B Downgraded Stable 18-Jun-20
84052 Société Centrale de Réassurance Morocco bbb B++ Affirmed Stable 27-Nov-19
83349 Société Tunisienne de Réassurance Tunisia bbb- B+ Affirmed Stable 15-Jul-20
Source: Best's Financial Suite - Global , AM Best data and research
478
Retakaful – Long-Term Growth Potential

Retakaful (Islamic reinsurance) operators have yet to achieve sustained traction in the
MENA region, despite ample opportunities. Over the past two decades, there has been
significant growth and interest in the MENA retakaful market. Many retakaful formations
have been structured as greenfield investments, and others formed by large global
reinsurers looking for additional distribution platforms. However, initial strong momentum
has stalled due to inconsistent and underperforming technical results. In recent years,
market contraction has occurred with “dedicated” retakaful operators such as Takaful Re
and Emirates Retakaful (both from the UAE) exiting the market due to poor performance,
driven in part by their inability to gain sufficient scale. The remaining retakaful operators
in the region are now primarily branches or subsidiaries of conventional reinsurers, as
opposed to standalone retakaful outfits.
In AM Best’s opinion, several factors are constraining the success of retakaful in the
region. These include the underachievement and small size of the region’s direct takaful
markets, and most notably competitive pressure from the conventional reinsurance market.
Additionally, Shari’a boards of takaful operators are not taking a strict approach to retakaful
enforcement, allowing contributions to seep into the conventional market, arguing the
necessity of policyholder protection. Without tighter regulation and Shari’a control of ceded
contributions, the retakaful market will continue to be overlooked in favour of conventional
reinsurers, inhibiting sizeable growth potential.
Nevertheless, AM Best expects interest in retakaful to persist, particularly if the primary

takaful market continues to improve its performance while successfully expanding its
footprint, capitalising on a growing target market. AM Best notes renewed interest from
conventional reinsurers to establish Shari’a compliant operations in the region, notably
in North Africa, in response to development in the primary market. While the shape of
retakaful capacity offerings remains to be seen, positive dynamics in the primary takaful
market suggests the long-term potential of the region’s retakaful segment is good.
COVID-19-driven investment volatility has been significant for the region during 2020 to date. Asset
allocations vary among the region’s reinsurers, with those holding elevated exposure to equities
seeing the largest fair value impacts. Even for those with lower allocations to equities, the potential
for volatility, and impairments – both to fixed income and real estate holdings – remains high.
Rating Considerations
The majority of AM Best-rated reinsurers domiciled in the MENA region have seen rating
affirmations over the past 12 months, indicative of stable rating fundamentals despite difficult
market conditions.
The range of credit ratings encompasses Financial Strength Ratings of “B” through to “A-”. The
wide-ranging scale partly reflects divergent assessments of country risk across the region.
Despite the range in credit quality, MENA reinsurers tend to demonstrate strongest levels
of risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio, reflective of
significant capital buffers relative to their operational exposures.
While operating performance is generally considered as “adequate” for MENA reinsurers,

challenges persist in achieving sustainable underwriting profitability. COVID-19-driven
pressures on current and prospective investment returns also present hurdles.
79 5
Regional reinsurers have demonstrated resilience over recent years to a range of market
challenges. Despite green shoots as regards market conditions, AM Best expects the operating
environment for MENA reinsurers to remain testing. Those reinsurers with robust capital
buffers and good market positions are considered best placed to weather the storm.

Oldwick, NJ Best’s Issuer Credit Rating (ICR): an independent opinion of an entity’s
CHAIRMAN, PRESIDENT & CEO Arthur Snyder III ability to meet its ongoing financial obligations and can be issued on either a
SENIOR VICE PRESIDENTS Alessandra L. Czarnecki, Thomas J. Plummer long- or short-term basis.
Best’s Issue Credit Rating (IR): an independent opinion of credit quality
A.M. Best Rating Services, Inc. assigned to issues that gauges the ability to meet the terms of the obligation
Oldwick, NJ and can be issued on a long- or short-term basis (obligations with original
PRESIDENT & CEO Matthew C. Mosher maturities generally less than one year).
EXECUTIVE VICE PRESIDENT & COO James Gillard
SENIOR MANAGING DIRECTORS Edward H. Easop, Stefan W. Holzberger, Andrea Keenan Rating Disclosure: Use and Limitations
A Best’s Credit Rating (BCR) is a forward-looking independent and objective
AMERICAS opinion regarding an insurer’s, issuer’s or financial obligation’s relative
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nor should it be construed as a consulting or advisory service, as such; it is not
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Version 010320
SINCE 1899
80
September 2, 2020
Tough Operating Conditions Present
Challenges for Sub-Saharan
Reinsurance Markets
For many years, sub-Saharan Africa (SSA) reinsurance markets, though small by global
Rapid standards, have provided global reinsurers with an opportunity for diversification and
profitable revenue growth. However, competition and rising acquisition costs have led to a
industrialisation gradual deterioration in the performance of market participants, reducing the attractiveness of
and increasing the region to potential new entrants.
investment in Nigeria, South Africa and Kenya are the three largest economies in the region, as measured by
infrastructure gross domestic product (GDP), and as such generate the majority of its reinsurance revenue.
have The operating environments across SSA remain difficult for both domestic and international
contributed to companies, more recently exacerbated by the COVID-19 pandemic (albeit with varying
severity). Many of the region’s markets face double-digit inflation and local currency
the expansion depreciation; and for some countries, government instability and corruption have
of SSA contributed to social unrest and political uncertainty. Despite these challenges, there
remains significant growth potential for the (re)insurance sectors due to the region’s
reinsurance substantial natural resources, a young and growing population, and the gradual development
of regulatory regimes.
markets over
the past 10 Exhibit 1
Sub-Saharan Africa – Written Premiums and Retention Ratios for AM
years Best-Rated Reinsurers, 2010-2019
1,800 95
1,600
Analytical Contacts: 90
Ben Diaz-Clegg, London 1,400
Tel: +44 20 7397 0293 1,200
(USD million)
[email protected] 85
1,000
(%)
Ghislain Le Cam, CFA, FRM, 800

London 80
+44 20 7397 0268 600
[email protected] 400 75
200
Editorial Managers: 0 70
Richard Banks, London 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Tel: +44 20 7397 0322
[email protected] Gross Written Premium Net Written Premium Retention Ratio
Richard Hayes, London Sources: Best's Financial Suite - Global, AM Best data and research
Tel: +44 20 7397 0326
[email protected]
2020-150.12
SINCE 1899
81
Market Segment Report Sub-Saharan Africa Reinsurance
Growth Has Slowed, Profit Margins Have Narrowed

Rapid industrialisation and increasing investment in infrastructure in SSA, together with
gradual increases in insurance penetration, have contributed to the expansion of the region’s
reinsurance markets over the past 10 years. AM Best expects that trend to continue.
SSA reinsurers rated by AM Best have experienced good growth. Gross written premium
(GWP) has grown at a 10-year compound annual growth rate (CAGR) of 6.3% (calculated in US
dollars). GWP growth has been driven predominantly by the non-life insurance segment, as
life business is at a nascent stage of development in many of the region’s countries.
The steady growth in GWP (see Exhibit 1) was achieved over this period despite the
significant depreciation of local currencies against the US dollar. The Nigerian naira and South
African rand have depreciated by 61% and 56%, respectively, since 2010. Following the 2014-
2016 oil price crash, the region demonstrated a modest economic recovery which bolstered
the reinsurance market (seen as a four-year (2016-2019) GWP CAGR of 8.9%).
Over the short-to-medium term, growth of the SSA reinsurance market is expected to
flatten, affected by a fall in economic activity and a drop in the value of local currencies as
a consequence of the COVID-19 pandemic - the International Monetary Fund projects that
SSA will experience a real GDP contraction of 1.8% in 2020, a 4.7 percentage-point reduction
against 2019.
Traditionally, SSA reinsurers have focused largely on local African risks. As a result, the
region’s carriers were not exposed to the major catastrophe losses experienced by the global
reinsurance market over the past three years. In 2019, the weighted average loss ratio for AM
Best-rated reinsurers in the region was 58.8% (see Exhibit 2), compared with 69.4% for the
50 largest global reinsurers. However, performance is affected by increasing acquisition costs
imposed by the domestic broker markets, and limited efficiency driven by a lack of economies
of scale. Consequently, the weighted average expense ratio reported in 2019 for the region
Exhibit 2
Sub-Saharan Africa – Combined Ratios, 2014-2019
(%)
106
104
102
100
98
96
94
92
90
2014 2015 2016 2017 2018 2019
Sub-Saharan Africa (AM Best-Rated Reinsurers) AM Best Global Reinsurance Top 50
Sources: Best's Financial Suite - Global, AM Best data and research
282
compared unfavourably with the broader reinsurance market at 40.2%, versus 30.4% for the 50
largest global reinsurers.
In line with the global reinsurance top 50 composite, AM Best has observed a deterioration
in underwriting performance for the reinsurers it rates in the SSA region, though for very
different reasons. The weighted average combined ratio of SSA reinsurers has risen steadily
since year-end 2014, when it was as low as 91.2%, to 99.0% in 2019. Over the period, the
underwriting results of a number of mid-sized African reinsurers were negatively impacted
by a combination of a higher frequency of mid-sized losses, with limited retrocession
protection, as well as the poor performance of non-core overseas business, most notably in
the Indian subcontinent. The aggressive expansion into the Indian agricultural segment by a
number of SSA reinsurers in particular, has played a noteworthy role in the deterioration of
the average loss ratio.
Furthermore, negative exchange rate movements, particularly between 2016 and 2018,
generated claims inflation - especially on lines of business that rely on the importation of
goods/spare parts - and an increase in foreign currency denominated technical provisions for
non-US dollar reporting companies. This has contributed to the gradual deterioration of the
loss ratio for several African reinsurers that report in local currency.
Despite the decline in underwriting results, the segment continues to return solid levels of
profitability, demonstrated by a five-year (2015-2019) weighted average return on equity (ROE) of
10.7%, compared with 6.8% reported for the global reinsurance top 50 composite (see Exhibit 3).
The region’s weighted average ROE is largely driven by the performance of African Reinsurance
Corporation (Africa Re) and ZEP-RE (PTA Reinsurance Co.) (ZEP Re), both of which report in US
dollars, which, to some extent, limits the impact of high inflation in their core markets on their
reported net income. The ROE for SSA reinsurers must be considered in conjunction with their
high levels of risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR) (see
Exhibit 4), which indicates solid
capital buffers that temper this Exhibit 3
metric. Sub-Saharan Africa – Return on Equity, 2014-2019
(%)
AM Best expects the fallout of
the COVID-19 pandemic and
subsequent economic downturn 18
to impact the reinsurers that it 16
rates in the SSA region. Elevated 14
levels of inflation, local currency 12
depreciation and a deterioration 10
in the collectability of premiums 8
are among some of the challenges 6
that SSA reinsurers are expected 4
to face. 2
0
Regional Capacity is Limited -2

2014 2015 2016 2017 2018 2019
The larger reinsurers in SSA
(excluding South Africa) tend Sub-Saharan Africa (AM Best-Rated Reinsurers)
South Africa Reinsurance Market
to be either national or supra-
AM Best Global Reinsurance Top 50
national entities, which often
benefit from compulsory cessions
Sources: Best's Financial Suite - Global, AM Best data and
and a mandate to develop local research, and KPMG Insurance Survey (includes life business)
83 3
Exhibit 4
Sub-Saharan Africa – Best's Capital Adequacy Ratio (BCAR) Scores –
AM Best-Rated Reinsurers
(As at Aug. 5, 2020)
2019 Capital &
Surplus including Best's Capital Adequacy Ratio
Minority Interests (VaR %)* Assessment
AMB# Company Name (USD 000s) 95.0 99.0 99.5 99.6 Effective Date
83411 African Reinsurance Corporation 975,198 76.2 68.0 63.2 61.4 11-Dec-19
94974 Kenya Reinsurance Corporation Ltd. 318,549** 61.1 53.8 44.5 37.9 21-Apr-20
78388 ZEP-RE (PTA Reinsurance Co.) 262,320 68.7 63.4 60.9 60.2 11-Dec-19
93852 CICA Re 103,729 73.4 63.5 59.5 58.2 30-Jan-20
71675 WAICA Reinsurance Corporation PLC 89,370 82.0*** 73.2*** 69.1*** 67.5*** 1-Jul-20
93641 Continental Reinsurance Plc 83,847 74.0 62.1 56.2 53.8 12-Dec-19
71476 Ghana Reinsurance Co. Ltd. 64,213 73.7 66.1 62.9 62.0 19-Dec-19
77803 East Africa Reinsurance Co. Ltd. 50,611 56.3 50.2 47.6 46.8 13-Dec-19
Notes:
BCAR scores calculated at the consolidated group level.
* BCAR scores based on year-end 2018 data. ** Pre-Audit. *** BCAR scores based on year-end 2019 data.
Sources: Best's Financial Suite - Global, AM Best data and research
primary markets. Competition comes from a relatively small group of sophisticated large global
reinsurers, and a number of smaller regional privately owned companies.
Despite the solid growth in capital demonstrated by the industry in recent years, the level
of capacity offered by African reinsurers is still relatively low in the context of the global
reinsurance market. The capital base of SSA reinsurers is typically too small to meet fully
the needs of the local primary markets, where construction and energy risks often require
significant capacity. Established and internationally experienced companies are able to
contribute the know-how needed to manage complex risks and offer greater capacity than
local market participants. With a few notable exceptions, local and regional reinsurers act as
followers, subscribing to the terms and conditions arranged by the lead reinsurer.
Most local primary markets are characterised by low insurance penetration rates. Typically
for each market, a moderately high number of small companies write concentrated insurance
portfolios. Moreover, the ability of companies to access or attract a workforce with the talent
and experience required to successfully innovate and grow profitably remains a challenge for
the industry across the region. In some cases the quest for market share has led to companies
aggressively pricing business at the cost of profitability.
The gradual strengthening of regulatory capital requirements for (re)insurers, particularly in

Nigeria and Kenya, is expected to encourage some industry consolidation, which could create
(re)insurers with greater capacities. However, this will not directly address the skills gap or the
limited level of insurance penetration on the continent.
High Barriers to Entry

Barriers to entry remain high in many African reinsurance markets and include protectionist
local regulations, as well as the presence of state-owned reinsurance companies or specialised
pools (in which a state might have interests) in a handful of countries. The expansive
geography of the continent but relatively small (re)insurance market size, coupled with
484
significant cultural and policy position differences, has limited the level of interest from global
participants.
In recent times, authorities have become more aggressive in the protection of their national
markets. Some countries limit the access of foreign companies to reinsurance in an effort to
retain premiums domestically. This protectionist tendency often deprives these markets of
the ability to diversify risks and gain access to international expertise and resources. This
protectionism can also force primary market participants to cede risks to reinsurers of a
generally weaker credit quality. Nevertheless, supra-national reinsurers such as Africa Re,
CICA Re and ZEP Re play an important role in supporting the underlying insurance markets,
maintaining a mandate that goes beyond a pure commercial existence.
Credit Quality Varies Among Participants

The credit quality of the reinsurance offerings on the African continent is wide-ranging and
significantly impacted by each company’s ability to operate in environments which generally
present high political, economic, and financial system risks.
Historically, the rating fundamentals of AM Best-rated SSA reinsurers have been stable. However,
in recent times, deteriorating operating conditions have weakened the credit quality of certain
companies. For all rated entities, risk-adjusted capitalisation, as measured by BCAR, remains at
the Strongest level (above 25% at the 99.6% confidence level), largely as a consequence of their
often under-utilised capital bases due to a low exposure to underwriting risk. Nevertheless,
the balance sheet strength assessments of almost all entities are assessed as Very Strong (see
Exhibit 5), with high levels of asset risk associated with investing in domestic markets and
elevated credit risk derived from high levels of aged receivables considered offsetting factors.
With the exception of three players, operating performance of AM Best-rated SSA reinsurers
is assessed as Adequate, and is reflective of their typically volatile, yet solid, inflation-adjusted
profitability.
The competitive position of SSA reinsurers varies greatly from company to company. Several
rated reinsurers receive either a Neutral or a Favorable business profile assessment, which
Exhibit 5
Sub-Saharan Africa – Best's Credit Ratings – Assessment Descriptors
(As at Aug. 5, 2020)
Balance Sheet Operating Business Enterprise Risk

Strength Performance Profile Management Assessment
AMB# Company Name Assessment Assessment Assessment Assessment Effective Date
83411 African Reinsurance Corporation Strongest Strong (+1) Favorable (+1) Appropriate (0) 11-Dec-19
93852 CICA Re Very Strong Adequate (0) Neutral (0) Weak (-2) 30-Jan-20
93641 Continental Reinsurance Plc Very Strong Adequate (0) Neutral (0) Marginal (-1) 12-Dec-19
77803 East Africa Reinsurance Co. Ltd. Very Strong Adequate (0) Limited (-1) Marginal (-1) 13-Dec-19
71476 Ghana Reinsurance Co. Ltd. Very Strong Adequate (0) Limited (-1) Weak (-2) 19-Dec-19
94974 Kenya Reinsurance Corporation Ltd. Very Strong Adequate (0) Neutral (0) Weak (-2) 21-Apr-20
71675 WAICA Reinsurance Corporation PLC Very Strong Strong (+1) Limited (-1) Marginal (-1) 1-Jul-20
78388 ZEP-RE (PTA Reinsurance Co.) Very Strong Strong (+1) Neutral (0) Marginal (-1) 11-Dec-19
Sources: Best's Financial Suite - Global , AM Best data and research
85 5
reflects their privileged market access in the form of mandatory cessions, as well as their
moderate geographical diversification.
Overall, the risk management capabilities of SSA reinsurers are not commensurate with
their elevated risk profile. AM Best’s enterprise risk management (ERM) assessment of
individual reinsurers in the region is typically Marginal or Weak and takes into account the
risk management requirements of companies operating in environments with high economic,
political, and financial system risks. Moreover, the region’s relatively basic catastrophe
modelling capabilities, compounded by limited access to accurate data of underlying insured
risks from cedants (for treaty business in particular), makes it extremely difficult for SSA
reinsurers to manage their accumulations.
Exhibit 6
Sub-Saharan African Reinsurers – AM Best-Rated Companies
As at Aug. 05, 2020.
Best's
Best's Long- Financial
Term Issuer Strength Best's ICR Best's ICR Rating
Credit Rating Rating & FSR & FSR Effective
AMB # Company Name (ICR) (FSR) Action Outlook Date
83411 African Reinsurance Corporation Nigeria a A Affirmed Stable 11-Dec-19
93852 CICA Re Togo bb+ B Affirmed Stable 30-Jan-20
78723 Continental Reinsurance Plc Nigeria bbb- B+ Affirmed Stable 12-Dec-19
77803 East Africa Reinsurance Co. Ltd. Kenya bb+ B Affirmed Stable 13-Dec-19
90035 Ghana Reinsurance Co. Ltd. Ghana bb B Affirmed Stable 19-Dec-19
85416 Kenya Reinsurance Corporation Ltd. Kenya bb+ B Affirmed Negative* 21-Apr-20
94468 WAICA Reinsurance Corporation PLC Sierra Leone bbb- B+ Assigned Stable 1-Jul-20
78388 ZEP-RE (PTA Reinsurance Co.) Kenya bbb B++ Affirmed Stable 11-Dec-19
Notes: *FSR = Stable.
Sources: Best's Financial Suite - Global , AM Best data and research
686
South Africa
South Africa, one of Africa’s most industrialised economies, has been on one of the longest
downward trends in decades, with business confidence and employment rates at their low-
est level in years. In particular, the country’s economic activity has been weighed down by
power-supply constraints, with power blackouts a regular occurrence. More recently, the
COVID-19 health crisis has created additional headwinds for the South African economy and
its reinsurance market, owing to a strict government-mandated lockdown and weak outlook
for global consumer demand.
South Africa is by far the largest single insurance market in SSA, with estimated GWP of USD
47 billion in 2019 (Kenya USD 2.2 billion and Nigeria USD 1.6 billion), according to Swiss
Re Institute’s sigma report, “World Insurance: Riding out the 2020 Pandemic Storm”. The
country has a relatively mature insurance market with established life and non-life segments.
In recent years, the profitability of the South African reinsurance sector has seen a sharp
downturn. The weighted average combined ratio for the market was 104.4% in 2018,
up from 96.4% in 2013 (see Exhibit 7). Performance of the market’s reinsurers was
significantly impacted by soft pricing conditions in the corporate segments, as well as a
spate of natural catastrophes in 2017 and 2018, including storms, flooding and a tornado in
Vaal Marina. Meanwhile, severe flooding in Durban will impact 2019 results.
Over the short-to-medium term, the industry is facing further challenges. The fallout of the
COVID-19 pandemic on the (re)insurance industry has already begun, with businesses in
the hospitality and tourism sectors going to court in a bid to resolve the denial of business
interruption (BI) claims.
Insurance Claims Africa (ICA), a loss adjusting firm that is representing numerous
policyholders in potential lawsuits against the insurance sector, has estimated that ensuing
claims as a result of COVID-19-related BI losses could amount to as much as USD 232 million
for local primary insurers. In July 2020, a court decision ruled in favour of an insured in one
particular case. Should there be further decisions in favour of claimants, AM Best expects
reinsurers with policies written back-to-back will take a share of the costs borne by the
primary market.
Exhibit 7
Sub-Saharan Africa – Combined Ratios for South African
Reinsurance Sector, 2013-2018
(%)
115 113.2
110 108.3
104.4
105
101.2
99.5
100
96.4
95
90
85
2013 2014 2015 2016 2017 2018
Source: KPMG Insurance Survey (includes life business)
87 7
Analytical Contacts/Contributors
Mike Adams, Oldwick
Asha Attoh-Okine, Oldwick
Mathilde Jakobsen, Amsterdam
Ghislain Le Cam, London
Doniella Pliss, Singapore
Mike Porcelli, Oldwick
Jessica Botelho-Young, London Christie Lee, Hong Kong Alex Rafferty, London
Bruno Caron, Oldwick Michelle Li, Oldwick Eli Sanchez, Mexico City
Steve Chirico, Oldwick Scott Mangan, Oldwick Wai Tang, Oldwick
Market Segment Report

Ben Diaz-Clegg, London
Myles Gould, Singapore
Sridhar Manyem, Oldwick
Emmanuel Modu, Oldwick
Catherine Thomas, London
Emily Thompson, London
Dan Hofmeister, Oldwick Tran Nhat Trung, Singapore Carlos F. Wong-Fupuy, Oldwick

Published by NJ
Oldwick, AM Best Best’s Issuer
Financial Credit RatingRating
Strength (ICR): (FSR):
an independent opinion opinion
an independent of an entity’s
of an
CHAIRMAN, PRESIDENT & CEO Arthur Snyder III ability to meet
insurer’s its ongoing
financial strengthfinancial obligations
and ability to meetand can be issued
its ongoing on either
insurance a
policy
MARKET SEGMENT REPORT
SENIOR VICE PRESIDENTS Alessandra L. Czarnecki, Thomas J. Plummer
long- or short-term
and contract basis. An FSR is not assigned to specific insurance
obligations.
A.M. Best’s Issue Credit Rating (IR): an independent opinion of credit quality
A.M. BestBest Company,
Rating Services, Inc.Inc.
assigned to issues that Rating
gauges (ICR):
the ability to meet the terms of the obligation
Best’s Issuer Credit an independent opinion of an entity’s
Oldwick, NJ and
abilitycan be issued
to meet on a long-
its ongoing or short-term
financial obligations basis (obligations
and can be issuedwith original
on either a
CHAIRMAN
PRESIDENT & PRESIDENT
& CEO Matthew Arthur C. Snyder
MosherIII maturities generally basis.
long- or short-term less than one year).
SENIOR VICEEXECUTIVE
PRESIDENTSVICEAlessandra
PRESIDENTL.&Czarnecki,
COO James Thomas
Gillard J. Plummer
SENIOR MANAGING
GROUPDIRECTORS Edward H.
VICE PRESIDENTS Easop, Laughlin,
Shannon Stefan W.Lee Holzberger,
McDonaldAndrea Keenan Rating Disclosure:
Best’s Issue CreditUse and (IR):
Rating Limitations
an independent opinion of credit quality
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assigned to issues Rating
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gauges is the
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WORLDOldwick, NJ
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EXECUTIVE DIRECTORA.M. & CHAIRMAN
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1 Ambest Road, Oldwick, NJ 08858 performance,
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NEW YORK
Phone:
54W. 40th Street, +1 908
8th Floor, Suite 439 2200
815, New York, NY 10018 appropriate, the specific nature and details of a security.
notches. Entities or obligations assigned the same BCR symbol developed using Because a BCR is a
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Global Reinsurers Maintain Equilibrium

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BEST’S MARKET SEGMENT REPORT

Welcome to AM Best’s annual commentary on the global reinsurance industry.

2013 2014 2015 2016 2017 2018 2019 2020E

Third-Party Capital Traditional Capital

Note: Joint estimate by AM Best and Guy Carpenter.

Direct Institutional Investors

There has been much talk about negative developments

Assets Under Change in

Nephila Capital 10,000 ▼ Bermuda Purchased by Markel 2018

RenaissanceRe Holdings Ltd.* 9,730 ▲ Bermuda

Credit Suisse Insurance Linked Strategies Ltd. 7,200 ▼ Zurich

LGT ILS Partners Ltd. 6,800 ▼ Pfaeffikon, Switzerland

Fermat Capital Management, LLC 6,800 ▲ Westport, Connecticut

Stone Ridge Asset Management 6,630 ▲ New York

Leadenhall Capital Partners LLP 5,500 ● London Purchased by Amlin 2014

AlphaCat Managers 4,200 ● Bermuda Purchased by AIG in 2018

Aeolus Capital Management Ltd 4,000 ● Bermuda Purchased by Elliott in 2016

Twelve Capital AG 4,000 ● Zurich

Schroder Investment Management 3,000 ▲ London

Markel CATCo Investment Management 2,700 ▼ Bermuda Purchased by Markel 2015

Hudson Structured Capital Management Ltd 2,000 ▲ Bermuda

Top 15 Fund Managers 82,660

What to Expect for the Rest of 2020?

5-Year Average, 5.7

Source: AM Best data and research

Favorable Loss Reserve Development (%)

60 68.2 66.7 65.6 10

Expense Ratio Loss Ratio Favorable Loss Reserve Development

Stress Testing and Government Intervention

World’s 50 Largest Reinsurers Ranking – Methodology

the largest reinsurers house disproportionately Exhibit 2

Downwards Current Prior Change

Top 15 Non-Life and Top 10 Life Global Reinsurers

• Carlos Wong-Fupuy, Senior Director of Global Reinsurance Ratings, AM Best

AM Best Outlook and Ratings

Hardening Market Attracts Capital

Sustainability of Rate Increases

According to Isherwood, “it is a different environment in many different ways. Each

Life Reinsurance Diversification Despite COVID-19

Low Interest Rates Add Momentum to Underwriting Discipline

Significant Uncertainty in Reserve Estimates

Public-Private Partnership Solutions for Pandemic Risk

Planning for a Second Wave of COVID-19

traditional reinsurer. Large amounts of

A number of property/casualty and life Harrington,

Emergence of Several Total Return Reinsurer Models

Theoretical Advantages and Disadvantages

From an asset manager’s perspective, a common assumption of a low correlation of

From an investor’s perspective, the low correlation of reinsurance to other investment

Viability of the Total Return Model

Source: AM Best data and research

Total Return Composite Results and Financial Analysis

Asset Composition and Liquidity

Global US & Bermuda Total Return Reinsurers

200 256 251 251 244 238

Net Reserves as % of Shareholders' Equity NPW as a % of Shareholders' Equity

Source: AM Best data and research

Total Underwriting Performance

41.2 34.4 36.3 37.0

Expense Ratio Loss Ratio Loss Reserve Development