Reinsurance Market Outlook report - Thought Leadership - Aon Benfield

Contents Executive Summary: Supply Increase Pauses and Demand Set to Accelerate

1

Reinsurer Supply Strong Despite Adverse Market Movements

2

Reinsurance Demand to Increase Slightly in 2016

5

Second Quarter 2015 Catastrophe Bond Review

8

M&A Activity Update—Increasing Focus

10

Rating Agency Criteria Continues to Evolve; Impact = Increase in Demand

11

Regulatory Developments on the Horizon; Impact = Slight Increase in Demand

13

Global Catastrophe Losses Remain on Below Average Pace in 2015

16

Economic and Financial Market Update

19

Bank Leverage Continues a Slow Decline

23

Contact Information

24

1

Reinsurance Market Outlook

Executive Summary: Supply Increase Pauses and Demand Set to Accelerate In the past year, ceding companies have successfully incorporated ever more accretive reinsurance capital into their own growth strategies, benefitting from record traditional reinsurance and USD68 billion of alternative capital. In Q2 2015, currency fluctuations contributed to a 2 percent decline in total USD-denominated reinsurance capital, and the pace of alternative capital flowing into the market slowed to 7 percent from its previous 25 percent run rate. Asset managers continue to exercise discipline in their interest in the insurance space, but substantial capital is available to enter to meet new sources of reinsurance demand. Reinsurance capital stood at USD565 billion at the end of Q2 2015, as stable operating earnings aided by continued light catastrophe activity were offset by currency fluctuations. Total alternative capital was up 7 percent in the first half of 2015 and remains impactful to the overall market for risk transfer, as more traditional reinsurers incorporate into their capital structures and enhance offerings to their primary insurer customers. Barring a significant shift in supply and demand dynamics, we now estimate alternative capital will reach USD120 billion to USD150 billion by 2018. Hedge funds seeking stable underwriting risks to complement sophisticated asset strategies also continue to show broad interest in insurance risk, as potential new companies consider forming. Significant US demand increases to date in 2015, particularly from Florida and other coastal risks, will also be bolstered by demand from rating agency criteria changes. Specifically, A.M. Best will be unveiling changes to their Best’s Capital Adequacy Model (“BCAR”) that will result in many companies buying additional top layer catastrophe protection, as well as potential quota share and other risk transfer products. Beginning in 2016, catastrophe-exposed carriers rated A- or higher will be held to 1 in 200 year all perils occurrence compared to current standards of a 1 in 100 wind or 1 in 250 earthquake. A+ rated carriers will be held to a 1 in 500 and A++ carriers will be held to a 1 in 1000 standard. Importantly, all rated companies will have their capital adequacy metrics published at the 98, 99, 99.5, 99.8 and 99.9 percent confidence intervals for the public to evaluate. The criteria will not be fully effective in the US until sometime in 2016 though prudent carriers will begin adapting to the new standards with the January 1 placements. A.M. Best will update global criteria to a similar standard following the US roll out. Other sources of reinsurance demand continue to materialize, including transfer of US mortgage risk and the expansion of variable annuities as a risk transfer product. Regulatory changes and the privatization of the Florida market are expected to increase reinsurance demand but it is believed that ample reinsurance capacity exists to meet these needs.

Note: This reinsurance market outlook report should be read in conjunction with our firm’s views on rate on line, capacity and retention changes for each cedent’s market. Our professionals are prepared to discuss variations from our market sector outlook that apply to individual programs due to established trading relationships, capacity needs, loss experience, exposure management, data quality, model fitness, expiring margins and other factors that may cause variations from our reinsurance market outlook

Aon Benfield

1

Reinsurer Supply Strong Despite Adverse Market Movements Aon Benfield estimates that global reinsurer capital totaled USD565 billion at June 30, 2015, a reduction of 2 percent since the end of 2014. The decline reflected two major influences in the period. Firstly, the strengthening of the US dollar resulted in a reduction of capital on conversion from other currencies. The Euro for example depreciated by 9 percent. The second factor affecting capital in the period was the impact of rising interest rates on bond valuations. Exhibit 1: Change in global reinsurer capital

-17%

$410B

2007

18%

$340B

$400B

2008

2009

11%

-3%

18%

-2%

6%

7%

$470B

$455B

$505B

$540B

$575B

$565B

2010

2011

2012

2013

2014

Q2 2015

Source: Individual company reports, Aon Benfield Analytics

Alternative capital maintains market share Total alternative capital increased again to USD68.4 billion at the end of Q2 2015. While sidecar, ILW, and collateralized reinsurance grew to historical highs of USD8.4 billion, USD4.0 billion, and USD32.5 billion respectively, catastrophe bond capital decreased for the first time since 2010 falling slightly to USD23.5 billion driven by the substantial maturities of USD5.5 billion in the first half of 2015. With the slight reduction in overall capital in USD terms, alternative market capital continued to grow in market share to slightly above 12.1 percent of total reinsurer capital.

USD billions

Exhibit 2: Bond and collateralized market development Col Re and others

80 70 60 50 40 30 20 10 0

ILW

Sidecars

Bonds

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Q2 2015 Source: Aon Securities Inc.

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Reinsurance Market Outlook

Net written premium to GDP in uncharted territory Prior to 2010, dips in the ratio of net premium to GDP below 3 percent signaled a market turn. Since 2010, this ratio has remained below 3 percent for five consecutive years. While a number of factors have likely contributed to this, the fact that alternative capital has nearly tripled since 2010 is definitely one of them. Exhibit 3: Net written premium to GDP 4.25% 4.00% 3.75% 3.50% 3.25% 3.00% 2.75%

2014: 2.8%

2.50% 1968

1973

1978

1983

1988

1993

1998

2003

2008

2013

Source: Aon Benfield Analytics

Aon Benfield

3

The reinsurance sector* reported an annualized return on equity of 10.7 percent for the first half of 2015, down from 12.2 percent in the same period last year. The total capital returned to investors in the first half of 2015, including the impact of common dividends, preferred dividends, and share repurchases, represented 4.1 percent of shareholders’ funds at the end of 2014. Price to book stood at 1.06 at September 1, 2015, unchanged relative to the end of 2014. Exhibit 4: The reinsurance sector* return on equity, total capital return, and valuation Return on equity (%) 20% 15% 10% 5% 0% 2008

2009

2010

2011

2012

2013

2014

1H 1H 2015** 2015*

Total capital return (as % of opening shareholders' equity) 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2008

2009

2010

2011

2012

2013

2014

1H 2015

2014

2015 YTD

Valuation - price to book (%) 1.2 1.1 1.0 0.9 0.8 0.7 0.6 2008

2009

2010

2011

2012

2013

* Based on the listed Aon Benfield Aggregate (ABA), a group of 26 publicly-listed reinsurers serving as a representative sample of the broader traditional reinsurance market. ** 1H has been annualized Source: Individual company records, Aon Benfield Analytics

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Reinsurance Market Outlook

Reinsurance Demand to Increase Slightly in 2016 A number of factors are expected to impact the demand for reinsurance throughout 2016. From rating agency and regulatory changes to insurers seeking to expand into new lines of business, our expectation is for increased demand in the next 12 months. Exhibit 5: Key topics impacting reinsurance demand Topic

New rating agency capital models

Impact

Increase

Florida catastrophe capacity privatization

Slight increase

Low catastrophe loss activity

Decrease

Mergers & acquisitions (M&A) activity

Slight decrease

Regulatory developments

Slight increase

Line of business expansion

Slight increase

Commentary A.M. Best is releasing a request for comment on a new BCAR model that will evaluate capital adequacy at various confidence intervals. While the industry is well-capitalized, some companies will be pressured at higher confidence intervals leading to increase in demand for reinsurance, likely at high-end catastrophe layers. In addition, Fitch released a factor based model for EMEA and APAC with Latin America on the horizon, which may influence some demand. Throughout the past three years, a larger portion of depopulation from Florida Citizens has occurred during the second half of the year. Assuming this trend continues reinsurance demand will likely increase to support these policies in the private market for 2016. Citizens has also consistently increased its own reinsurance capacity from the private market in recent years despite depopulation. In addition, the FHCF also secured private market reinsurance for the first time in history in 2015, all pointing to more demand in 2016. Insured catastrophe losses have fallen each year since 2011 with 2015 on track to be the lowest catastrophe loss year since 2006. To date, USD16 billion in losses have occurred representing only 26 percent of the ten year historical average. A synergistic opportunity for many mergers is consolidating reinsurance programs and potentially retaining more risk on a larger balance sheet. However, reinsurance such as adverse development covers can enhance capital adequacy of targets and provide due diligence cover for acquirers. Also, with large mergers in the reinsurance sector, it is yet to be seen whether some supply will be constrained as underwriting appetite changes in the new entities. The trend toward increasing capital requirements continues as regulators update capital models and incorporate stress tests within the regulatory framework. There will be some increased demand as companies evaluate reinsurance to manage capital requirements and risk tolerances. Strong insurer capital positions and a reinsurance market focused on securing new premium has led to line of business expansions for insurers. US mortgage risk and variable annuity (re)insurance are just two significant potential expansions for the market.

Source: Aon Benfield Analytics Aon Benfield

5

Key market drivers in more detail Topics introduced in Exhibit 5 are discussed at greater length in the remaining sections of the report, but we explore below additional details on a few of the key drivers that increased demand.

Privatization of risk in peak catastrophe-exposed regions Overall reinsurance demand in peak regions increased materially for the second consecutive year. This was particularly notable in Florida and other US coastal areas, given the attractive risk transfer margins offered in both the alternative and traditional markets. As a result, a number of insurers reduced participation in government risk transfer programs—such as the Florida Hurricane Catastrophe Fund (FHCF)—and utilized reinsurance capacity to depopulate policies from Citizens Property Insurance Corporation (Florida Citizens)—a government entity that provides insurance protection to Florida policyholders who are entitled to, but are unable to find property insurance coverage in the private market. Interestingly, these same public entities have also turned to private reinsurance capacity. Florida Citizens, a consistent purchaser of reinsurance since 2011 increased its capacity by USD800 million for the 2015 hurricane season to USD4.05 billion and is the largest beneficiary of catastrophe bonds through its Everglades Re Ltd. and Everglades Re II Ltd. notes programs based on outstanding notional volume, as of June 30, 2015. It is also notable that the FHCF elected to secure its first private market purchase of reinsurance coverage, including collateralized reinsurance, for the 2015 hurricane season since the inception of the FHCF in 1994.

Line of business expansion—US mortgage risk In mid-2013, Freddie Mac and Fannie Mae, known collectively as government sponsored enterprises (GSEs) and now under US Government conservatorship, began sharing credit default risk on their recently acquired mortgages accessing both the capital markets and the insurance industry with innovative risk sharing structures. To date, the GSEs have issued more than USD20 billion of credit linked notes. This risk sharing that has been mandated by their regulator, the Federal Housing Finance Agency, also dictated that the GSEs find multiple ways to share risk so as to not be reliant on a single type of risk sharing execution. Starting in November of 2013, new insurance programs, known as ACIS® (Freddie’s deals) and CIRT™ (Fannie’s deals), have come to the market with 12 deals and USD2.2 billion of limit placed to date. These figures will grow and these transactions could generate an annual opportunity to place upwards of USD6 billion of annual limit with the potential to generate as much as USD2 billion of annual premium.

Line of business expansion—variable annuities In the absence of M&A related activity, or bank driven clients’ solutions, the North American variable annuities (VA) reinsurance market activity levels remain muted. On the supply side, the number of active reinsurers continues to be low, in contrast to the demand side, where the number of interested parties remains high. However, traditional long term VA reinsurance solutions continue to have high prices, due in part to low interest rates, and counter party credit concerns. In Japan, the VA reinsurance market is more active, as a result of simpler product designs and the recent M&A activity in the life sector. Players on both sides of the VA reinsurance market continue to look for effective risk transfer solutions that cover key market and biometric risks, and there is talk of new entrants and new risk transfer solutions in the market in 2016.

6

Reinsurance Market Outlook

Insurer capital remains stable at Q2 2015 Insurer capital ended Q2 2015 at a similar level to year end as net income was offset by capital management, rising interest rates, and the effect of exchange rate movements. Exhibit 6: Change in insurer capital

-29%

7%

1%

12%

0%

6%

4%

34%

$3.4T

$3.8T

$4.0T

$4.2T

$3.2T

$3.6T

$4.2T

$3.5T

2009

2010

2011

2012

2013

2014

Q2 2015

$2.4T

2007

2008

Source: Aon Benfield Analytics

According to the Council of Insurance Agents and Brokers, US primary rates have seen a decline in rates throughout 2015 renewals in commercial property, general liability, umbrella, and workers compensation. While commercial property rates started to decline in Q1 2014 and have seen reductions nearing 5 percent for renewals to date in 2015, general liability, umbrella, and workers compensation held small increases until late 2014 or early 2015 and have seen smaller decreases ranging from 1.2 to 2.7 percent during the first six months of the year. Commercial auto rates while still increasing, have slowed in pace in 2015 achieving an average increase of 1.0 percent throughout Q1 and Q2 renewals. Exhibit 7: CIAB rate change

3.0

Commercial Auto Umbrella

Commercial Property Workers' Comp

General Liability

Index

2.5 2.0 1.5 1.0 0.5

Source: Council for Insurance Agents and Brokers

Aon Benfield

7

Second Quarter 2015 Catastrophe Bond Review The 12-month period ending June 30, 2015 was again notable for the insurance linked-securities (ILS) market. The period was characterized by enhanced coverage, an active mergers and acquisitions environment, and reactive traditional markets. Annual catastrophe bond issuance totaled USD7.0 billion (Exhibit 8) and was the third highest of any year in market history. However, issuance was ultimately down 26 percent over the prior record 12-month period, in part due to the reaction of both traditional and collateralized reinsurance players to the heightened competition from the catastrophe bond market. The reduction in new catastrophe bond issuance compared to 2014 was offset by a sizeable increase in collateralized reinsurance participation. Momentum from 2014, however, carried the total volume of catastrophe bonds on-risk to a new all-time period high of USD23.5 billion (Exhibit 9), representing a USD1 billion year-on-year increase. Maturities for the year ending June 30, 2015 totaled USD5.9 billion, and Aon Securities remains bullish that market growth will continue to outpace redemptions. Exhibit 8: Catastrophe bond issuance by year, 2006 to 2015 (years ending June 30) Life / Health Issuance

Property Issuance

10,000

9,400 8,145

USD millions

8,000 5,914

6,000

4,736 4,000

6,431

6,665

2012

2013

6,981

4,382

3,279 1,705

2,000 0 2006 Source: Aon Securities Inc.

8

Reinsurance Market Outlook

2007

2008

2009

2010

2011

2014

2015

Exhibit 9: Outstanding and cumulative catastrophe bond volume, 2006 to 2015 (years ending June 30)

70,000

Life / Health Outstanding

Property Outstanding

Cumulative Property Issuance

Total Cumulative Bonds

USD millions

60,000 50,000 40,000 30,000

22,422 23,467

20,000

16,155 12,911

10,000

13,174 13,167 11,504

15,123

17,788

6,558

0 2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: Aon Securities Inc.

Key market drivers Enhanced coverage Sponsors continued to expand coverage on catastrophe bond transactions. This took the form of more aggregate and variable reset transactions, longer terms, larger transaction sizes, and new covered areas and perils.

Supply and demand The prevailing low yield environment motivated investors to continue seeking returns in the ILS market, due to its low correlation with the dynamics of the global economy. In the 12 months ending June 30, 2015, there were moderate capital inflows in aggregate across the ILS sector from both existing and new investors. Growth in assets under management (AUM) from some of the larger ILS managers, such as Stone Ridge Asset Management, LLC and Elementum Advisors, LLC, was softened by reductions in AUM from other investors, such as Nephila Capital Ltd., Aeolus Capital Management Ltd., and Fermat Capital Management, LLC. Overall, alternative capital was up modestly in Q2 2015 at USD68.4 billion deployed across all alternative market products. The pause in rate decreases for some alternative markets allowed traditional reinsurers to recapture some business. In the soft market environment, characterized by record levels of industry capital, insurers’, and traditional reinsurers’ operating results have been under pressure. This has motivated some reinsurers to consider further decreases in rates, while others have maintained discipline in terms of price and/or coverage expansion.

Aon Benfield

9

M&A Activity Update—Increasing Focus M&A activity in the global insurance and reinsurance market increased dramatically in 2015. According to Capital IQ, the global insurance sector M&A deal volume through the first seven months of 2015 totaled USD73.3 billion with 461 deals, compared to USD16.8 billion and 387 deals for the same period of 2014, a deal value increase of 336 percent. The recent increase in M&A activity has been driven by the acquirers’ desire to (i) expand geographically like Tokio Marine Holdings or HCC Insurance Holdings, (ii) expand into new products or distribution channels, such as RenaissanceRe Holdings or Platinum Underwriters Holdings, and (iii) to achieve scale and stronger client relationships, similar to XL Group and Catlin Group. Additionally, the challenging organic environment caused by low interest rates, excess capital, fierce competition from new alternative capital, among others, is driving acquirers to become more efficient and effective in utilizing existing capital. Finally, hedge funds continue to assess opportunities to expand into the insurance sector. These asset managers’ unique investment expertise can mitigate the risks associated with the current low interest rate environment. Aon Securities believes that this acquisition motivation will continue into the near future. A summary of the current market trends affecting M&A activity follows: 

Reinsurer and insurer stock price performance and valuation multiples continue to be positive. As summarized in the Aon Securities Weekly Public Market Recap, most global reinsurers’ and insurers’ stock prices and valuation multiples have continued to appreciate. One reason for this positive performance is the continued strength in earnings from a benign catastrophe environment and stable loss reserve releases. Another potential driver of the recent appreciation is investors’ increased M&A expectations.



Continued pressure on underlying organic results will drive additional M&A. Whether the pressure on earnings and returns is from new alternative capital market capacity or from traditional challenges (e.g. low interest rates, reduced favorable reserve development, excess capital, etc.), the need for improved capital utilization and operational efficiencies will increasingly stimulate buyers’ interest.



Investors are accepting TBV dilution for transactions with compelling strategic rationale. Despite meaningful tangible book value dilution, investors have been very supportive of M&A transactions with meaningful strategic value. Examples include Ace’s relative stock price appreciation of 7.1 percent (through August 4) despite an estimated 22.5 percent TBV dilution from its acquisition of Chubb and XL Group’s stock price appreciation of 4.3 percent despite an estimated 10 percent TBV dilution from its acquisition of Catlin Group.



Increasing foreign (especially Asian) interest in the (re)insurance market stemming from these companies’ desire to achieve diversification and augmented assets under management. Increased competition and low global interest rates have led foreign buyers to search for geographic and investment diversification, as well as yield. This desire has driven them to focus on (re)insurance companies in mature markets, such as Tokio Marine’s acquisition of HCC, CMI’s acquisition of Sirius, Fosun’s acquisition of Ironshore, and Exor’s acquisition of Partner Re.

Over the near term, Aon Securities expects M&A activity to continue at historically high levels as companies seek to satisfy their strategic, diversifying, and asset gathering objectives through acquisition.

10

Reinsurance Market Outlook

Rating Agency Criteria Continues to Evolve; Impact = Increase in Demand Rating agencies continually fine-tune criteria to address industry trends and anticipate emerging issues, while improving their analytical approach and increasing rating transparency. Below, we summarize key criteria developments in 2015 and changes on the horizon. Our Evolving Criteria report discusses these developments in more detail and is available at aonbenfield.com.

A.M. Best to issue request for comment on new Stochastic BCAR Model A.M. Best has been developing a new stochastic factor-based BCAR model and is set to release draft criteria in mid-late September for the US property casualty statutory model. A.M. Best will also release criteria for the US life and health, Title, Universal, and two Canadian BCAR models in the months following. The current expected implementation is Q3 2016, but this could be delayed depending on feedback during the comment period. While the overall structure of the model is not intended to change materially, risk factors will be determined using stochastic simulations from probability curves at various confidence intervals (98%, 99%, 99.5%, 99.8% and 99.9%). A.M. Best plans to publish the BCAR scores individual rated entities across all five confidence intervals. Exhibit 10 provides a mapping of confidence intervals by financial strength rating (FSR) and related catastrophe return periods. Exhibit 10: Mapping by rating level Confidence interval FSR Catastrophe PML

98.0% B- / B 50yr

99.0% B+ / B++ 100yr

99.5% A- / A 200yr

99.8% A+ 500yr

99.9% A++ 1,000yr

Source: A.M. Best

At each successive confidence interval, risk factors for bond default, stock volatility, reinsurer default, pricing risk, and reserving risk are increasingly conservative. In addition, the catastrophe charge will vary based on higher return periods, and will be applied on an All Perils, occurrence VaR basis rather than by peril. Companies likely to be most at risk from a change to the model are those with lower current BCAR scores relative to their rating level as there is less room to absorb the impact of more conservative factors, especially at higher confidence intervals. In addition, higher rated companies (A- or above) whose current catastrophe reinsurance program exhausts near the 100-year return period will likely see a material drop in capital adequacy at higher confidence intervals, which will influence A.M. Best’s view of their balance sheet strength. The change in catastrophe charge may encourage insurers to buy more catastrophe cover to mitigate the impact on net required capital. The current charge is based on the greater of 100-year wind or 250-year earthquake. The new requirement will be on an all perils basis, varying by confidence interval as shown in Exhibit 10. As an example, an A rated carrier driven by hurricane exposure faces a catastrophe charge based on the 100-year hurricane PML in the current model versus the 200-year all perils PML in the new output. Companies most at risk are higher rated companies (A- or above) whose current catastrophe reinsurance program exhausts near the 100 year return period.

Aon Benfield

11

Fitch Releases Prism Model in Asia Pacific Following the release of “Prism Factor-Based Model (Prism FBM)” for EMEA insurers in September 2014, Fitch launched the model for Asian Pacific companies in May 2015. The model will be used as the primary tool to assess an insurer’s capital strength and will enable the agency to use a single framework to compare companies in different regions using distinct accounting methods. While part of Asia Pacific, companies in Indonesia and Sri Lanka will not be subject to the model until later in 2015 due to specific risk characteristics. There is currently no timeframe for implementation in Latin America.

Standard & Poor’s updates model for mortgage insurers In March 2015, Standard & Poor’s (S&P) issued criteria on an updated model to analyse capital adequacy for mortgage insurers. The capital model is applied within S&P’s broader insurance criteria framework. Specific considerations are now given to the Insurance Industry and Country Risk Assessment (IICRA), competitive position, capital and earnings, and liquidity. S&P assesses capital and earnings based on a specific mortgage insurance (MI) capital adequacy model. The model output remains the same as the general model where adjusted capital is compared to required capital, and is determined to be either redundant or deficient at various target rating levels. The following are key considerations S&P uses to determine MI capital adequacy. 

S&P uses a ten year profit and loss statement projection period as the basis for the MI model



Capital charges reflect individual loan characteristics such as: vintage, loan-to-value, credit score, employment, product type, loan type, property type, and occupancy



Also, capital charges consider the following regional attributes: market structure characteristics, regulatory environment, borrower recourse, and funding sources

Moody’s provides guidance on sovereign risk and affiliated support Moody’s offered more clarity concerning rating action due to sovereign credit quality and parental/affiliate support. Specifically, an insurer’s relation to sovereign risk is analyzed based on geographic diversification, government debt, and lines of business. Companies that Moody’s views favorably in these categories could have an IFS rating of up to two notches above the sovereign. Factors regarding parental support include level of commitment, brand name distribution, operating company size compared to the group, geographic vicinity, type of ownership, and integration with group level operations. Moody’s generally elevates a company’s IFS rating one or two notches, with the potential of three or more notches if there is strong explicit support.

Demotech issues catastrophe bond requirements In December 2014, Demotech released an update regarding credit for catastrophe bonds. Demotech noted that catastrophe bonds have become more prevalent in reinsurance programs and outlined information they require for their review. If a Demotech rated company utilizes a catastrophe bond in its reinsurance program, Demotech requires the following:     

A management narrative on factors considered in issuing a catastrophe bond A fully executed copy of the Reinsurance Agreement A fully executed copy of the Reinsurance Trust Agreement A management narrative on the replacement of the catastrophe bond Structure chart of the reinsurance program displaying and describing the catastrophe bond.

We view the above as Demotech clarifying information needs and do not expect it to impact credit or require additional terms for new catastrophe bonds.

12

Reinsurance Market Outlook

Regulatory Developments on the Horizon; Impact = Slight Increase in Demand North America—Own Risk Solvency Assessment requirements First required filings of Own Risk Solvency Assessment (ORSA) summary reports are due before the end of this year for non-exempt companies domiciled in states that already have legislation passed. As of the publication release date, 35 states adopted the model act and 3 states have actions pending. The US National Association of Insurance Commissioners (NAIC) plans to vote on the adoption of ORSA into the NAIC’s Accreditation Standards—Part A. Adoption of ORSA as one of the required model laws in the NAIC’s accreditation standards will ultimately result in most, if not all, states to pass ORSA legislations. The NAIC’s next task will be focusing on finalizing review and evaluation procedures for regulators that are receiving the reports. States Adopted ORSA Model AK, AR, CA, CT, DE, GA, IA, IL, IN, KS, KY, LA, ME, MN, MO, MT, ND, NE, NH, NJ, NY, NV, OH, OK, OR, PA, RI, TN, TX, UT, VA, VT, WA, WI, WY States with Actions Pending AL, MA, MI

US risk based capital —catastrophe risk charge Discussions of key components for calculating the risk based capital (RBC) catastrophe risk charge have been ongoing but are nearing finalization. The NAIC still does not have a definitive timeline for including the catastrophe charge into the actual RBC calculation. It was made clear that the catastrophe component will again be filed on an informational basis only for the 2015 reporting year. Currently, the 2016 reporting year is the tentative target for implementation of the catastrophe charge. The following key decisions made in the past year may have significant impact on a company’s RBC results when the catastrophe charge is implemented: 

Contingent credit risk charge was reduced to 4.8 percent from 10 percent



Allow companies to report both occurrence exceedance probability and aggregate exceedance probability modeled results as opposed to aggregate exceedance probability only

Europe, the Middle East, and Africa—Solvency II January 1, 2016 will bring into force the long awaited Solvency II regulations for insurers and reinsurers in the EU while Solvency Assessment and Management comes into effect in South Africa. In the Middle East, as the insurance industry continues its rapid growth, new regulations continue to be introduced with existing ones strengthened to improve market stability, transparency, and policyholder security. While some regulators are adapting Solvency II regulations to fit their markets, others interestingly are looking to the International Association of Insurance Supervisors and its insurance core principles.

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Equivalency status is of major importance to the large internationally active insurance groups that have operations in the EU. There are three areas in Solvency II where equivalence status comes in to play: 

Solvency calculation—able to use local regulatory solvency capital requirements



Group supervision—exempt from some EU group supervision rules



Reinsurance—reinsurer receives same treatment as EU reinsurer with no collateral posting requirements

On June 5, the European Commission announced these equivalence decisions subject to a six-month review by the European Parliament: Country Switzerland US Australia Bermuda Brazil Canada Mexico

Solvency calculation Full Provisional Provisional Provisional Provisional Provisional Provisional

Group supervision Full Not equivalent Not equivalent Not equivalent Not equivalent Not equivalent Not equivalent

Reinsurance Full Not equivalent Not equivalent Not equivalent Not equivalent Not equivalent Not equivalent

“Full” = Equivalence for an indefinite period of time “Provisional” = Equivalence last for 10 years and is re-evaluated again prior to its expiration

China—C-ROSS In February 2015, the China Insurance Regulatory Commission (CIRC) issued the final version of C-ROSS rules, and the transition period started right after. During the transition period, insurers will report solvency under both the expiring scheme and C-ROSS, while supervision decisions are still based on the expiring scheme. The three-pillar C-ROSS aims to better align solvency capital requirement with the risks insurers face. At the same time, risk management is emphasized and the market discipline mechanism is implemented. The first quarter of 2015 is the first period China insurers reported their solvency under C-ROSS. According to CIRC’s announcement, the average solvency ratio was at 264 percent for the whole industry (and 282 percent for property casualty insurers). CIRC commented that the solvency level for the industry was adequate, the risk indicators properly reflected the real risks the industry faced, and C-ROSS guided the insurers to improve their business model, marketing strategy, and risk management.

Hong Kong and Singapore—Risk based capital In September 2014, the Insurance Authority of Hong Kong published its first consultation paper on the development of a new RBC framework. The proposed RBC framework adopts a three-pillar structure. 

Pillar 1 consists of the quantitative requirements, including assessment of capital adequacy and valuation



Pillar 2 sets out the qualitative requirements including corporate governance, enterprise risk management, and ORSA



Pillar 3 focuses on disclosures and enhancing transparency of relevant information to the public

14

Reinsurance Market Outlook

The Monetary Authority of Singapore (MAS) has embarked on a review of the framework (“RBC 2 Review”) in light of evolving market practices and global regulatory developments. The first industry consultation was conducted in June 2012 in which the MAS proposed a number of changes and an RBC 2 roadmap for implementation. In March 2014, the MAS issued a consultation paper on the RBC framework, updating the previous proposal. This second paper included the detailed technical specifications required for insurers to conduct Quantitative Impact Study 1. This will gather information and help evaluate the full impact of the RBC 2 proposals. MAS is finalizing the risk calibration and features of the RBC 2 framework, with implementation expected January 1, 2017.

Japan—economic value-based Solvency framework In June 2015, the Japan Financial Service Agency (JFSA) disclosed the results of its second field tests with the aim of introducing an economic value-based solvency regime. The JFSA summarized the direction of future examinations. 

A variety of issues and challenges were recognized in the field tests, as in the previous tests. Based on the results, the JFSA needs to conduct further examination toward establishing a specific framework.



There are ongoing movements in the economic value-based solvency regime and accounting system, such as the International Association of Insurance Supervisors’ Insurance Capital Standards field tests, Solvency II in Europe, and examination of IFRS 4 “Insurance Contracts.”



Introducing the economic value-based solvency regime requires some revisions to the business management and risk management methods used by insurance companies.

The JFSA will make steady efforts to establish a new framework through dialogue with relevant parties in various situations, so as to ensure a smooth introduction.

Latin America In June 2015, Brazil was granted Solvency II equivalency from the European Insurance and Occupation Pension Authority for a ten year period. This allows the country to maintain its own solvency capital model with a similar Solvency II scale. In addition, Brazil introduced Regulation CNSP 322, which is intended to reduce the percentage of the mandatory offer of reinsurance to the local market over a five year period. In April 2015, the Mexican regulators officially adopted the new Insurance and Surety Institutions Law (LISF). Under the new law, regulatory authority will be shifted from the Ministry of Finance and Public Credit to the National Insurance and Surety Commission, replacing the statutory examiner with an audit committee. The LISF regulation paved the way for the Unified Insurance and Surety Regulations (CUSF), which was adopted in April 2015 as well. The main objective of this law is to incorporate the Solvency II framework throughout the country. Both the LISF and CUSF set forth regulation similar to Pillar 2 of Solvency II and ORSA requirements with increased Board responsibilities and implementation of risk management and internal control committees. The Chilean Securities and Insurance Supervisory Authority is expected to discuss requirements for earthquake catastrophe reserves. The current regulation stipulates that insurers must establish a reserve based on CRESTA zone exposure, applying a PML of 10 percent for material damage and of 15 percent for engineering risks and BI covers, less reinsurance and plus a 10 percent safety margin. Although these requirements may be sufficient, Chilean regulators plan to review the adequacy of the current standards.

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Global Catastrophe Losses Remain on Below Average Pace in 2015 As of September 1, global catastrophe insured loss activity remained well below the historical ten year average (2005-2014). The USD16 billion in insured losses represent just 26 percent of the USD61 billion annually averaged since 2005. If current trends persist, 2015 could end up as the quietest year for insurers since 2006. To date, the severe thunderstorm peril (USD8.5 billion) remains the costliest globally, with most of those losses occurring in the US following an active spring and summer season of thunderstorms. The majority of the thunderstorm insured losses resulted from hail and damaging straight-line winds. So far in 2015, the costliest insured events include: February 16-22 stretch of cold and heavy snow in the US; May 23-28 severe weather in the US; late March and early April arrival of windstorms Mike and Niklas in Europe; and, April 7-10 severe weather in the US. Each of these events caused at least USD1.0 billion in insured losses to public and private insurance entities. Of note, there has yet to be a multi-billiondollar insured loss event in 2015. Exhibit 11: Insured losses by peril 140

USD billion (2015)

120 100 80

Tropical Cyclone Severe Weather Earthquake Flooding Winter Weather Wildfire EU Windstorm Drought Other

60 40 20 0

Source: Aon Benfield Analytics

As seen above, with the exception of winter weather, all of the major perils are on pace to be below their ten year averages in 2015. In addition, disaster losses resulting from tropical cyclones are expected to be below normal for the third consecutive year.

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Reinsurance Market Outlook

USD billion

Exhibit 12: 2015 YTD Insured losses compared to recent annual averages by region 2014

45 40 35 30 25 20 15 10 5 0

United States

2015 YTD

APAC

2005-2014 Avg.

EMEA

Americas

Source: Aon Benfield Analytics

All regions of the globe have sustained below average insured losses in 2015, as seen in Exhibit 12 above. While the third quarter of the year is typically when the highest volume of insured catastrophe losses occurs, that has yet to be the case. With an increasingly likely benign Atlantic Hurricane Season given one of the strongest El Niño phases in decades, it is expected that there will be fewer landfall opportunities in the US. Unless an unexpected significant catastrophe occurs prior to the end of the year, given current trends, it appears likely that all regions will end the year below the ten year average.

Forecasters: Strong El Niño expected to reduce Atlantic activity The three main hurricane season prognosticators (National Oceanic and Atmospheric Administration (NOAA), Colorado State University (CSU) and Tropical Storm Risk (TSR)) have all forecast below normal hurricane activity for the rest of the Atlantic Hurricane Season. Each agency cites the arrival and intensification of one of the strongest El Niño phases in the Central and Eastern Pacific Ocean in decades. Such an event has led to cooler sea surface temperatures in the main development region of the Atlantic Ocean and above-average wind shear in the upper levels of the atmosphere. The figure below shows the latest TSR, CSU, and NOAA forecasts. The table shows a comparison of each group’s climatological average to their forecast for 2015. Exhibit 13: Atlantic Hurricane season forecast

TSR (August 2015) 1950-2014 average 2015 Difference CSU (August 2015) 1981-2010 median 2015 Difference NOAA (August 2015) 1981-2010 average 2015 Difference

Named storms

Hurricanes

Major hurricanes

11 11 0

6 4 -2.0

3 1 -2.0

12.0 8 -4.0

6.5 2 -4.5

2.0 1 -1.0

12 6-10 -4.0

6 1-4 -3.5

3 0-1 -2.0

Sources: Tropical Storm Risk (TSR), Colorado State University (CSU), NOAA

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El Niño’s arrival: How might this impact the US insurance industry To date in 2015, there has been much discussion surrounding the intensification of El Niño and its potential implications in the US and around the world. In its July ENSO (El Niño-Southern Oscillation) discussion, the National Oceanic and Atmospheric Administration stated that there is a 90 percent chance that El Niño conditions will continue through the Northern Hemisphere Winter of 2015/16, and an 80 percent chance that it will linger through the early months of 2016. There remains nearly unanimous consensus from the latest forecast computer model projections that a strong El Niño event will persist. In fact, the intensity of the current El Niño could rival that of 1997/98 and be one of the strongest on record since 1950. Given the arrival of El Niño, and entering the peak of the Atlantic Hurricane Season, the question is raised as to what—if any—impacts this may have on the US insurance industry throughout the rest of 2015. Typically, during an El Niño phase suppressed tropical cyclone activity is expected in the Atlantic Basin resulting in a lower number of hurricanes. The decreased level of activity in the Atlantic Basin is due to increased vertical wind shear and reduced sea surface temperatures in the main development region. Despite the lower development of hurricanes in an El Niño period, it does not help forecast the number of those hurricanes that will be US landfalling and it only takes one major landfalling to change the course of total insured catastrophe losses. Hurricane Andrew in 1992 during an El Niño period is the prime example of such an instance. This, coupled with the much higher percentage of insurance penetration in the US, results in a continued level of interest in the Atlantic Hurricane Season. Notable El Niño (or transitioning to/from an El Niño) US landfalling hurricanes since 1990 include: Exhibit 14: El Niño landfalling hurricanes since 1990 Affected US states

Insured loss (actual)

Insured loss (2015 USD)

HU Andrew (1992)

FL, LA

15.7 billion

26.3 billion

HU Charley (2004)

FL, NC, SC

7.5 billion

9.4 billion

HU Frances (2004)

FL, GA, NC, NY, SC AL, DE, FL, GA, LA, MD, MS, NC, NJ, NY, OH, PA, TN, VA, WV DE, FL, GA, MD, NC, NJ, NY, PA, SC, VA

4.8 billion

5.9 billion

8.7 billion

10.8 billion

3.8 billion

4.7 billion

Name (year)

HU Ivan (2004) HU Jeanne (2004) Source: Aon Benfield Analytics

For the most up-to-date global catastrophe loss data for 2015, and other historical loss information, please visit Aon Benfield’s Catastrophe Insight website: www.aonbenfield.com/catastropheinsight

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Reinsurance Market Outlook

Economic and Financial Market Update The global economy Economic growth in the first half of 2015 once again fell below expectations. A slowdown in the first quarter was largely attributable to an unexpected contraction in the United States, with attendant spillovers to Canada and Mexico, where another severe winter and port closures hit production and demand, and there was a strong downsizing of capital expenditure in the oil sector. In its July 2015 update, the International Monetary Fund (IMF) noted that positive and negative surprises outside North America were broadly offsetting. A number of factors contributed to a continuing slowdown in emerging markets, including lower commodity prices, tighter external bottlenecks, rebalancing in China, and economic distress associated with geopolitical factors. More recently, further uncertainty has been generated by the position of Greece in the Eurozone and with respect to its international creditors. Concerns about the slowdown in the Chinese economy have been reflected in a collapse in the Chinese stock market and the government has responded by devaluing the renminbi, cutting interest rates, and injecting liquidity, in an attempt to boost growth. The resultant worry about the implications for the global economy has sent shockwaves through the world’s financial markets. Economic forecasters have cut their growth projections for 2015 compared with earlier estimates, but economic activity is still expected to revive during 2016. In the advanced economies, the setback in the United States is anticipated to be only temporary while underlying factors remain intact, such as wage growth and labor market conditions, a strengthening housing market, and easy financial conditions. Growth is projected for the Eurozone, although recent developments in Greece have cast a shadow and are likely to be a constraint. Economic activity in Japan proved stronger than expected during the first quarter of 2015 but sluggish consumption and weaker growth in real wages are a restraining factor. In emerging markets, growth is projected to pick up in 2016, thanks to anticipated improvements in economic conditions in economies such as Russia, the Commonwealth of Independent States, and some countries in the Middle East and North Africa. The IMF still believes the balance of risk to its near term outlook is “slightly tilted to the downside”. Particular concerns are possible disruptive asset price movements and an increase in financial market volatility, and the recent strengthening of the US dollar poses increased balance sheet and funding risk for dollar debtors, especially in emerging markets.

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Exhibit 15: GDP projections Percent (percentage point change vs April 2015 f/c) World Advanced economies Euro area France Germany United Kingdom United States Japan Emerging market and developing economies Emerging and Developing Europe China Latin America and the Caribbean

2013 3.4 1.4 -0.4 0.7 0.2 1.7 2.2 1.6 5.0 2.9 7.7 2.9

2014 3.4 1.8 0.8 0.2 1.6 2.9 2.4 -0.1 4.6 2.8 7.4 1.3

2015p 3.3 (-0.2) 2.1 (-0.3) 1.5 (0.0) 1.2 (0.0) 1.6 (0.0) 2.4 (-0.3) 2.5 (-0.6) 0.8 (-0.2) 4.2 (-0.1) 2.9 (0.0) 6.8 (0.0) 0.5 (-0.4)

2016p 3.8 (0.0) 2.4 (0.0) 1.7 (+0.1) 1.5 (0.0) 1.7 (0.0) 2.2 (-0.1) 3.0 (-0.1) 1.2 (0.0) 4.7 (0.0) 2.9 (-0.3) 6.3 (0.0) 1.7 (-0.3)

Source: IMF World Economic Outlook

Seasonally adjusted GDP growth in the euro area slowed during the second quarter of 2015, rising by 0.3 percent compared with 0.4 percent in the first quarter. The picture was somewhat brighter than this time a year ago, when there were quarter-on-quarter contractions in GDP in a number of core regions. Second quarter GDP in Germany was 0.4 percent higher than in the first quarter and 0.2 percent higher in Italy, while Spain continued to show recovery with quarter-on-quarter growth of 1.0 percent. In contrast, there was zero growth in France in the second quarter compared with a 0.7 percent rise in the first quarter. Oil prices staged a partial recovery during the first half of the year, with evidence of a sharper than expected contraction of non-traditional capacity in the United States, but have since fallen away, exacerbated by the resurgence of concerns about weakening prospects for the global economy, with Brent Crude dipping to below USD43 dollars per barrel at late August—the lowest level since March 2009. Oil importing countries have benefited from the price reduction over the last twelve months, but there is evidence of consumers in developed markets taking advantage of higher real incomes to increase savings or repay debt rather than raising spending and consumption. Oil exporting economies naturally face more difficult prospects with pressures for depreciation and rising inflation, which have reduced central banks’ fiscal flexibility. Exhibit 16: Brent crude price USD/barrel 120 100 80 60 40 Jan 14

Apr 14

Source: Bloomberg

20

Reinsurance Market Outlook

Jul 14

Oct 14

Jan 15

Apr 15

Jul 15

The EU debt crisis Greece was again the focus of recent attention as the government entered an increasingly acrimonious negotiation with its creditors ahead of a major debt repayment in June. Nevertheless, the Greek parliament finally (August 14, 2015) approved a package of tough spending cuts and tax rises to unlock a new EUR86 billion (USD95 billion) bailout package. In response, yields on the government debt of the other so-called peripheral economies drifted higher through the second quarter, but have since fallen back. With the exception of Greece, bond yields have remained well below 7 percent, which was a trigger for earlier intervention by the European Central Bank. The yield on German ten-year government bonds was negative through the first four months of the year, falling to a low of -0.15 percent in April. Exhibit 17: Eurozone ten-year government bond yields

40

Greece

Portugal

Italy

Spain

Ireland

Germany

35

Percent

30 25 20 15 10 5 0

Source: Bloomberg (data as of August 14, 2015). * Ireland is 5-year

Financial markets Governments around the world continue to target low interest rates and expansive monetary policy as key measures to stimulate economic recovery. With low inflation in most developed markets, interest rates are expected to remain low into 2016, as the renewed worries about a China-led global economic slowdown have cast doubts on the previously widely held belief that the US Federal Reserve would raise interest rates at its September 2015 meeting. The key US Federal Funds Rate has been kept at a record low of 0.25 percent since December 2008 and the UK Bank Rate has been at 0.5 percent since March 2009. In response to concerns over disinflation and to promote sustainable growth, the European Central Bank (ECB) has kept its benchmark Main Financing Rate at 0.05 percent since September 4, 2014, with a rate of -0.2 percent on its overnight deposit facility.

Aon Benfield

21

Percent

Exhibit 18: Five-year government bond yields 7 6 5 4 3 2 1 0 -1 Jan 06

UK

Jan 07

Jan 08

Eurozone

Jan 09

Jan 10

USA

Jan 11

Jan 12

Japan

Jan 13

Jan 14

Jan 15

Source: Aon Benfield Analytics, Bloomberg

During the first part of 2015, the yield on five-year Eurozone government debt continued its declining trend, turning negative from mid-January to the end of April, coinciding with the start of the ECB’s program of quantitative easing. After a brief rise, yields have fallen again, bouncing around close to zero, to just 0.08 percent at the end of August. The yield on UK government bonds has oscillated within a range of 0.88 percent and 1.65 percent, falling back from the peak in late June to 1.35 percent at late August. US Treasuries fell back through the first quarter, to rise steeply though the second quarter, easing again to 1.48 percent at the end of August. The yield on Japanese bonds has traded in a range of 0.01 percent to 0.13 percent, ending August at 0.07 percent. Exhibit 19: Equity markets index (January 2006 = 100) S&P 500

MSCI World

FTSE 100

Eurotop 100

Nikkei

160 140 120 100 80 60 40 Jan 06

Jan 07

Jan 08

Jan 09

Jan 10

Jan 11

Jan 12

Jan 13

Jan 14

Jan 15

Source: Aon Benfield Analytics, Bloomberg

The performance of equity markets during 2015 to date has been mixed, with significant volatility returning during August in response to the evolving concerns about China and its spill-over into the global economy. The MSCI World index traded in a narrow range, before falling in recent weeks, ending the year-to-date period down 4.6 percent at the end of August. The US S&P 500 index and the UK FTSE 100 similarly kept within a tight range before falling, and both ended the period down, by 4.8 percent and 6.7 percent, respectively. By contrast, the Eurotop 100 index rose for most of the period, before turning down, but still ended the period up 2.0 percent, while Japan’s Nikkei index closed the period up 7.4 percent, despite a recent setback.

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Reinsurance Market Outlook

Bank Leverage Continues a Slow Decline Analysis of the 20 largest banks globally shows that total asset leverage, measured by total assets to shareholders’ equity continues to decline, albeit at a slower rate. Since year end 2014, ratios have declined to 18.1 from 18.7. Implementation of the leverage ratio requirement began in January 2013 and any final adjustments to the definition and calibration of the leverage ratio will be made by 2017, with a view to migrating to a Pillar 1 treatment on January 1, 2018 based on appropriate review and calibration. As of April 2015, Basel II has been adopted by 27 of the 28 Basel Committee member jurisdictions, and regulations in Russia were expected to be adopted in the first half of 2015. Basel 2.5 has been adopted by 25, and Basel III is in various stages of adoption, with nine member jurisdictions having fulfilled all three requirements: the risk based capital, the liquidity, and the leverage ratio requirements while all other jurisdictions have varying degrees of progress in rulemaking. Exhibit 20: Top 20 largest banks total leverage Name Industrial & Commercial Bank of China Ltd China Construction Bank Corp Agricultural Bank of China Ltd Bank of China Ltd HSBC Holdings PLC JPMorgan Chase & Co BNP Paribas SA Mitsubishi UFJ Financial Group Inc Bank of America Corp Deutsche Bank AG Barclays PLC Citigroup Inc Wells Fargo & Co Credit Agricole SA Mizuho Financial Group Inc Sumitomo Mitsui Financial Group Inc Royal Bank of Scotland Group PLC Societe Generale SA Banco Santander SA Lloyds Banking Group PLC Average

6/30/09

9/30/09 12/31/09

12/31/10

12/31/11

12/31/12

12/31/13

12/31/14

3/31/15

6/30/15

17.2

18.6

18.1

17.8

16.8

16.2

15.2

14.1

13.5

13.6

17.6

18.0

17.5

17.0

15.2

14.6

14.4

14.0

13.5

13.4

24.6 16.3

25.1 17.4

25.5 16.8

19.2 17.8

18.7 16.6

18.0 16.1

17.6 15.3

16.7 15.3

16.1 13.4

15.0 14.2

23.4

20.5

19.4

17.2

17.1

15.9

15.2

14.1

14.0

14.3

15.0 47.6

13.8 46.8

13.2 39.3

12.9 32.2

13.1 28.6

12.2 23.5

12.6 21.4

12.0 23.6

12.1 25.1

12.0 25.5

32.2

28.7

28.0

23.6

23.4

22.3

20.0

19.8

19.6

18.7

14.0 62.5 48.0 26.2 18.7 40.4

11.5 50.5 41.0 23.7 15.4 36.7

11.3 48.0 34.5 13.4 13.6 39.6

11.0 50.8 30.6 12.2 10.6 36.5

10.5 44.0 28.5 10.9 10.3 37.5

9.9 38.5 29.5 10.4 9.7 44.5

9.7 41.8 28.4 9.7 9.8 43.3

9.6 32.3 22.9 9.3 10.0 32.1

9.4 23.4 24.6 9.2 10.2 32.9

9.4 25.2 25.1 9.0 10.4 31.2

128.7

95.3

58.6

40.8

38.9

36.2

30.6

27.5

27.0

23.9

55.4

33.4

32.2

26.5

26.8

26.0

21.3

21.6

20.8

20.3

40.0

32.7

32.8

21.6

20.8

18.9

16.7

16.8

18.4

19.4

32.2

27.9

26.0

25.2

25.9

26.1

27.5

28.2

28.2

29.9

18.8

18.1

16.4

17.4

17.2

17.9

16.6

16.0

15.7

14.9

34.7 35.7

31.8 30.4

27.3 26.6

21.1 23.1

21.2 22.1

20.6 21.3

21.1 20.4

18.4 18.7

17.6 18.2

17.1 18.1

Source: IMF World Economic Outlook

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Contact Information Bryon Ehrhart Chairman of Aon Benfield Analytics Chairman of Aon Securities +1 312 381 5350 [email protected] Stephen Mildenhall Global Chief Executive Officer of Analytics Aon Center for Innovation and Analytics, Singapore +65 6231 6481 [email protected] John Moore Head of Analytics, International Aon Benfield +44 (0)20 7522 3973 [email protected] Greg Heerde Head of Analytics & Inpoint, Americas Aon Benfield +1 312 381 5364 [email protected] Tracy Hatlestad Managing Director Aon Center for Innovation and Analytics, Singapore +65 6512 0244 [email protected]

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Reinsurance Market Outlook

About Aon Benfield Aon Benfield, a division of Aon plc (NYSE: AON), is the world’s leading reinsurance intermediary and fullservice capital advisor. We empower our clients to better understand, manage and transfer risk through innovative solutions and personalized access to all forms of global reinsurance capital across treaty, facultative and capital markets. As a trusted advocate, we deliver local reach to the world’s markets, an unparalleled investment in innovative analytics, including catastrophe management, actuarial and rating agency advisory. Through our professionals’ expertise and experience, we advise clients in making optimal capital choices that will empower results and improve operational effectiveness for their business. With more than 80 offices in 50 countries, our worldwide client base has access to the broadest portfolio of integrated capital solutions and services. To learn how Aon Benfield helps empower results, please visit aonbenfield.com.

© Aon Benfield 2015. | All rights reserved. This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Benfield’s preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. Aon Benfield disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Benfield reserves all rights to the content of this document. © Aon Securities Inc. 2015 | All Rights Reserved Aon Securities Inc. is providing this document and all of its contents (collectively, the “Document”) for general informational and discussion purposes only, and this Document does not create any obligations on the part of Aon Securities Inc., Aon Securities Limited or their affiliated companies (collectively, “Aon”). This Document is intended only for the designated recipient to whom it was originally delivered and any other recipient to whose delivery Aon consents (each, a “Recipient”). This Document is not intended and should not be construed as advice, opinions or statements with respect to any specific facts, situations or circumstances, and Recipients should not take any actions or refrain from taking any actions, make any decisions (including any business or investment decisions), or place any reliance on this Document (including without limitation on any forward-looking statements). This Document is not intended, nor shall it be construed as (1) an offer to sell or a solicitation of an offer to buy any security or any other financial product or asset, (2) an offer, solicitation, confirmation or any other basis to engage or effect in any transaction or contract (in respect of a security, financial product or otherwise), or (3) a statement of fact, advice or opinion by Aon or its directors, officers, employees, and representatives (collectively, the “Representatives”). Any projections or forward-looking statements contained or referred to in this Document are subject to various assumptions, conditions, risks and uncertainties (which may be known or unknown and which are inherently unpredictable) and any change to such items may have a material impact on the information set forth in this Document. Actual results may differ substantially from those indicated or assumed in this Document. No representation, warranty or guarantee is made that any transaction can be effected at the values provided or assumed in this Document (or any values similar thereto) or that any transaction would result in the structures or outcomes provided or assumed in this Document (or any structures or outcomes similar thereto). Aon makes no representation or warranty, whether express or implied, that the products or services described in this Document are suitable or appropriate for any sponsor, issuer, investor, counterparty or participant, or in any location or jurisdiction. The information in this document is based on or compiled from sources that are believed to be reliable, but Aon has made no attempts to verify or investigate any such information or sources. Aon undertakes no obligation to review, update or revise this Document based on changes, new developments or otherwise, nor any obligation to correct any errors or inaccuracies in this Document. This Document is made available on an “as is” basis, and Aon makes no representation or warranty of any kind (whether express or implied), including without limitation in respect of the accuracy, completeness, timeliness, or sufficiency of the Document. Aon does not provide and this Document does not constitute any form of legal, accounting, taxation, regulatory, or actuarial advice. Recipients should consult their own professional advisors to undertake an independent review of any legal, accounting, taxation, regulatory, or actuarial implications of anything described in or related to this Document. Aon and its Representatives may have independent business relationships with, and may have been or in the future will be compensated for services provided to, companies mentioned in this Document.

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Reinsurance Market Outlook