insidepandc.com 1

2020: A “prove-it” year for Bermuda independents? Bermuda price-to-book valuations

There are two words that overhang the Bermuda cohort in 2020: “Argo” and “Aspen”.

Both are companies that rebuffed approaches during the peak of the Bermuda M&A market cycle, and both with unhappy consequences.

For Aspen, having declined (hostile) overtures from Endurance, the company ended up landing in private equity hands at Apollo for just 1.1x BV in a deal closing early last year, with CEO Chris O’Kane promptly departing.

At Argo, the protective cocoon afforded by a long-tenured and overly deferentialboard was eventually fractured by an activist assault from Voce.

What both of these case studies share in common is evidence that management’s desire for independence and a compliant board are no longer sufficient conditions on their own to secure a preferred outcome if returns are inadequate.

Market mechanisms have clearly evolved to enforce better accountability.

With a host of peers finding an exit at peak multiples like XL (1.51x BV), Validus (1.58x), and Endurance (1.36x), and subsequent returns dented by significant cat activity, the pressure on those who have elected to “go it alone” is likely to increase. Top of this list, simply based on its recent returns and current peer-low valuation at circa book value is Axis (setting aside the special case of Sirius).

Now, as we have written before, Bermuda is a market that is perpetually reincarnated off the back of market timing. Market participants have leveraged unique market opportunities – such as the withdrawal of casualty capacity in the 1980s and the cat capacity in the 1990s and 2000s – to launch new businesses (typically in waves).

With the market now transitioning into a hardening cycle and providing opportunity not seen for years, the challenge for those remaining will be to demonstrate the ability to adapt that has historically been the market’s defining characteristic. Essentially, some companies have reached a “prove it” moment in their existence that will dictate their viability as independent companies moving forward.

To this point, we’ve recently argued, public equity markets are a bad home for specialty (re)insurance. The combination of pressure to grow regardless of market conditions creates the wrong incentives, and the significant amounts of

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Past Bermuda

Property Casualty Intelligence Briefing 9 March 2020

Inside P&C Research

Gavin Davis

Director of Research

E: gavin.davis@insidepandc.com

T: (212) 224 3328

James Thaler, CFA

Senior Analyst

E: james.thaler@insidepandc.com

T: (212) 224 3336

Dan Lukpanov, CFA

Research Analyst

E: dan.lukpanov@insidepandc.com

T: (212) 224 3326

Gianluca Casapietra

Research Analyst

E: gianluca.casapietra@insidepandc.com

T: (212) 224 3495

Composite YTD px chg. P/B

Large comm. (12.9)% 0.9x

Regional (9.7)% 1.5x

Specialty (3.3)% 1.7x

Personal 3.0% 2.1x

Bermuda (7.3)% 1.3x

Florida (16.7)% 1.1x

Brokers 0.6% -

IPC Select (7.7)% 1.2x

S&P 500 Fin. (17.3)% -

S&P 500 (8.0)% -

Top performer on the day UVE +2.6%

Bottom performer on the day AIG -6.9%

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volatility are a challenge for equity investors when not part of a more diversified portfolio.

This is best evidenced in the success of companies like Chubb and Berkshire Hathaway, who can scale up and scale down those business without sweating the volumes or the ensuing expense ratio pressures. And this perhaps explains the direction of travel in M&A, with Partner Re, Allied World, XL, Validus, and Endurance, all tucking into conglomerate multinational insurers with big balance sheets and diversified risk businesses.

The job of the remaining independents in 2020 is to prove this theory wrong.

Exhibit: IPC Bermuda Composite Earnings Summary Source: Company Reports, Inside P&C

($mn) IPC Bermuda Composite

Q4:18 Q4:19 YoY var. 12M:18 12M:19 YoY var.

GWP 5,241 6,076 15.9% 23,870 27,071 13.4%

NWP 4,081 4,659 14.2% 17,790 19,940 12.1%

NWP/GWP 77.9% 76.7% (1.2)pts 74.5% 73.7% (0.9)pts

Loss ratio 92.3% 72.9% (19.4)pts 71.8% 66.1% (5.7)pts

Acquisiton ratio 20.3% 21.1% 0.8pts 20.3% 21.3% 1.0pts

Op. expense ratio 8.3% 8.7% 0.4pts 9.1% 9.2% 0.1pts

Combined ratio 121.0% 102.7% (18.3)pts 101.2% 96.6% (4.6)pts

Cats 30.5% 11.5% (19.0)pts 14.8% 7.2% (7.6)pts

PYD (5.8%) (1.0%) 4.7pts (5.3%) (1.7%) 3.6pts

Ex. cat. AY CR 96.3% 92.3% (4.0)pts 91.7% 91.2% (0.5)pts

U/W gain, P/T (964.7) (131.1) -86.4% (201) 667 NM

NII, P/T 422.3 530.6 25.6% 1,720 2,075 20.7%

ROE (annualized) (2.7%) 5.8% 8.5pts 5.9% 8.5% 2.7pts

Includes: ACGL, AXS, RE, and RNR

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2020: A “prove-it” year for Bermuda independents?

Exhibit: Bermuda Composite GWP Growth Since 4Q14 Source: Company Reports, Inside P&C

What Lies Ahead? With the full-year 2019 results in for the publicly traded Bermuda companies, a picture is beginning to emerge of the state of the market, and the road ahead as 2020 begins to take shape.

Following a year when the direction of markets shifted substantially – primary rates and premium volumes surged sequentially each quarter – and underwriting improved (helped along by a better cat loss year), conditions have developed that have been described by many as “an underwriter’s market”.

We would add the coda that it is generally an underwriter’s market, unless you significantly underpriced business, under-reserved, and deployed excessively large lines during the last soft market. In which case, it’s at once both an “underwriter’s market” and a “remediator’s” market.

As we’ve written previously, those who have been adept at managing the cycle – Arch in particular – are currently better positioned to grow profitability and take share, while those have been less disciplined (both in growing and reserving during the softest part of the market) are forced to give up share at precisely the wrong time. This seemed to be the case at Axis in 2019, as it failed to grow its top line for the first three quarters.

Exhibit: Casualty Reinsurance GWP Since 2014 Source: Company Reports, Inside P&C

Note: RNR GWP growth includes acquisition of Platinum (PTP) in 2014 and Tokio Marine Re (TMR) in 2019

Yet though conditions have changed and the market has turned – or, as some would describe it, is “transitioning” – the same significant structural challenges that have been the prevailing industry themes the last several years stubbornly remain.

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Volume ($mn) (left) Growth (right)

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Returns overall continue to remain poor and the necessity of achieving scale and capital efficiency is as pressing as ever, perhaps more so as reserve cushions are depleted and balance sheet weakness set to become more evident.

Questions rightfully recur as to the long-term viability of the Bermuda cohort as independent operators.

Adding to this picture, the topic of M&A in the Bermuda market re-emerged recently with the takeover of privately-held PartnerRe by French mutual Covea. M&A speculation has also percolated with management and board changes at Argo and another year of stagnation and underperformance at Axis – although to date there are no signs that either company is actively on maneuvers.

Sirius also made plenty of news last week as majority shareholder CMIG blocked a share issuance intended to dilute its stake, and AM Best downgraded the carrier after its independence came under question.

At a minimum, Covea’s acquisition of Partner pushes back against the notion that skepticism around balance-sheet strength in an environment beset by social inflation makes the topic of M&A a non-starter.

Coupled with the (successful) activist pressure at Argo, and Axis being five years into a “remain independent” strategy with little to show for it, the heat is on for these management teams to show better results in a substantially improving market.

As we wrote recently, so long as the off-ramp of M&A remains open, many companies are likely to face questions about the NPV of their global growth ambitions versus the immediate value creation and high IRR to shareholders of selling. It’s worth remembering that even highly regarded RenRe has had an activist pushing for a sale.

To us, perhaps the most important implication for the Bermuda composite of the Covea-Partner transaction is the continuing trend towards the conglomerization of reinsurance – tucking reinsurance into large balance sheet multi-national conglomerates.

Exhibit: Reinsurance NEP as % of Total Revenue Source: Company Reports, Inside P&C

Our view is this trend makes sense given the relief it provides from the need to grow at all costs, whatever the market, as well as the ability to better diversify the inherent earnings volatility that comes from this business. Scale on line sizes and lower pressure on the expense base should help too.

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TVC +7.9% IN Q4 = LOWER CATS LEADS TO IMPROVED RESULTS

Exhibit: TVC and Total Returns Source: SNL, Company Reports, Inside P&C

Winning in the (re)insurance industry is generally defined as compounded total value creation over time (tangible book value growth plus capital return to shareholders as dividends). In addition, winning also entails “avoiding the zeroes” that result in significant dilutions to book value (such as over-priced acquisitions, outsized losses or significant trends of under-pricing business through a prolonged soft market).

All four companies in our composite have posted strong total value creation over the past year, with Arch (23%) and Everest (19%) leading the way, and RenRe (17%) and Axis (15%) not far behind. For the quarter, RenRe posted modest TVC (3%), while the figure at Axis was negative (-1%), in both instances the result of heavy hits from cats and slowing reserve releases.

TVC for the composite was up 7.9% for the quarter and 20.7% on the year, aided by strong equity markets and lower interest rates boosting investment valuations. Companies also benefitted from lower cats and reserve releases (through a slowdown in favorable development from the year prior). The figures were much improved from the TVC loss, or “value destruction” of 5.7% in the fourth quarter of 2018, and the total TVC of 1.4% in 2018, when cat losses and falling equity markets impacted companies negatively.

Exhibit: Bermuda Composite Avg. Op. ROE Since 2012 Source: Company Reports, Inside P&C

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PREMIUMS ↑ 16% FOR Q4 (+13.4% FY19), WITH GROWTH COMING LARGELY FROM RATE, INCREASED SUBMISSION FLOW, M&A

As the pace of rate improvement accelerates, it is interesting to take stock of who is growing, by how much, and why. Without question, the major theme from the past year has been the shift in direction in (re)insurance markets overall.

Surprise of the Year: Rate Increases Sequentially Each Quarter

Though many have been reluctant to describe current conditions as a hard market, where capacity is in short supply and deals can’t get placed, no matter the price, the quarter-on-quarter sequential acceleration in rates has taken many by surprise and represents a substantial departure from market conditions the last few years.

While to some degree the quickening rate improvement is the product of back-to-back historic cat loss years, a pickup in loss trends, and prolonged period of declining rates, the changing market dynamics is every bit as much the result of substantial re-underwriting at major market players. So far, the Bermuda composite has been a major beneficiary of underwriting problems plaguing significant competitors.

Indeed, at a recent sell-side industry conference, AIG President Peter Zaffino spoke about how the rate environment has been what has surprised his team most about how the large carrier’s turnaround has compared with expectations:

Exhibit: Global Composite Insurance Pricing index change Source: Marsh, Inside P&C

Bermuda Capitalizes on Market Dislocation

As large global carriers retrench, several companies within the Bermuda composite have seized the opportunity. For the fourth quarter, Everest, Arch and RenRe continued to post stand-out growth figures – RenRe aided by the acquisition of Tokio Millennium Re (TMR) – while Argo’s numbers were more sluggish (premium grew by only 1.5%, weighed down by a decline of 10% in international).

AIG

“If you asked the large brokers, they haven't been through a market like this in a long

time. It took a little bit of time for them to really calibrate to the market we were in.

Under no set of circumstances do we think that when we started the year, every quarter

would have sequential improvement in rate, and it would be broad-based in terms of

product, and it'd be broad-based across geographies…I think that's probably one

surprise this year is how much the price accelerated as we got in the back half of the

year.”

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Axis returned to growth for the quarter, following three quarters of top-line declines. Where competitors have seen the pricing of new business as fit to increase premium volumes, Axis has described pricing inadequacy as continuing to be pervasive. While Axis spent the bulk of 2019 remediating, management expressed optimism on the Q4 earnings call that the re-underwriting process is coming to an end.

Exhibit: GWP and Growth – Q4

Source: Company Reports, Inside P&C

Casualty-led Growth

More granularly, the dominant theme has been the surging premium volumes in casualty lines, specifically in casualty insurance at Everest and Arch, and casualty reinsurance at RenRe. RenRe has benefited to some degree from the TMR acquisition – a portfolio that management indicated has now been completely re-underwritten –where the growth has largely been organic at Everest and Arch.

The increased focus on casualty business – as well as on primary insurance – represents the ongoing evolution of the Bermuda composite to diversify itself away from its historic dependence on property cat at a time when property cat margins have thinned and structural changes have led to an arguably permanent state of excess capacity. Increasingly, reinsurers are “moving to the front of the bus”.

Even so, there will likely remain questions overhanging those that grew heavily through the 2014-2018 years, specifically Everest in casualty insurance and RenRe in reinsurance. Though the pedigree and track record of these firms gives them something of a benefit of the doubt for many, we think a dose of healthy skepticism is warranted given the context of the cycle. Looking forward, declining interest rate trends may also add a new dynamic to this market.

We take a closer look at companies’ premium trends below.

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Exhibit: Casualty Insurance GWP Since 2014 Source: Company Reports, Inside P&C

Company-by-Company Results

On the quarter, Arch continued to opportunistically grow written premiums in its Professional Lines book – a line where rates have risen dramatically – by +34% to $145mn YoY, while also growing in Property insurance (+118% to $95mn) and E&S casualty (+48% to $61mn). On the reinsurance side, property cat and non-cat were both up about +33%, while casualty reinsurance (-17%) and specialty re (-5%) premiums fell to $85mn and $103mn, respectively. Mortgage was up 3.5% to $371mn in GPW. Total insurance premiums written grew by 25%, while the reinsurance segment grew by 5.6%.

Axis grew premiums for the first time all year, generating headline growth of 19% in reinsurance, 4% in insurance and 7.6% growth in premiums overall. After a pullback in Q3, Axis grew Professional Lines – its largest LOB – by 9% to $356mn, Liability and Casualty by 25% to $180mn and Marine premiums by 31% to $73mn. Property premiums fell by 1% to $242mn. Casualty reinsurance premiums grew by 75% to $88mn and 80% growth in Professional Lines reinsurance by 80% to $34mn.

At Everest, growth continued to center on the insurance business, and more specifically, the Specialty Casualty segment, which was up +43% to $239mn. Within the overall +30% insurance segment growth, Everest reduced the allocation in its portfolio to Workers’ Comp by -5% while growing the workers’ comp book by only 1.6% (all other lines were up +25% in GWP). Reinsurance written premiums fell by 1% to $1.68bn, led by a 9% decline in the US and a 29% reduction in property cat premiums to $259mn. Casualty pro rata premiums grew by 21% to $194mn.

RenRe’s premium growth for the quarter was predominantly driven by the acquisition of TMR. Quarterly premium grew 65% to $905mn YoY, led by growth in Casualty and Specialty (up 90% to $660mn), followed by Property growth of 23% to $245mn.

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Exhibit: GWP Growth in 2019 Source: Company Reports, Inside P&C

Market Conditions

Axis. Reported achieving +11% rate increases across the renewalportfolio, vs. +8% achieved in Q3, 7% and +5% in Q2 and Q1, respectively.US rates were up +14%, including XS Casualty at +24% and E&S propertybusiness at 16%. US Primary Casualty was up 11%. NA Professional Linesrate increases were +7% vs. +4% in Q3 and Commercial ManagementSolutions unit (mostly XS D&O) saw average increases of +17% (vs. 14%in Q3). International rates were up +12% (vs. 6.5% in Q3).

Argo. Saw accelerating rate increases in the US (avg. rates up in the mid-to-high-single digits); Professional and Property increases “approach[ed]20%”. Submissions were up nearly 20% in Argo’s core growth businesses,with that growth rate holding steady through January. Rate increases inInternational continued to accelerate and averaged in the mid-teens for thequarter.

RenRe. RenRe reiterated the common theme from the 1 January renewals,that the U-shaped pricing curve remains intact, noting that primaryinsurance and retro rates were “up materially”, but reinsurance rates onloss-free business were “only up slightly”. Loss-affected business, such astreaties exposed to California wildfires, experienced material rate increasesat renewal, and complex commercial risks were more stressed.

Exhibit: Annual GWP and Growth Source: Company Reports, Inside P&C

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RE/INSURANCE MARKET CONDITIONS / EARNINGS CALL ROUND UP

Exhibit: Guy Carpenter Global Property RoL Index Source: Guy Carpenter, Inside P&C

Executives used Q4/FY19 earnings calls to opine on major industry topics such as social inflation, mid-year renewal outlooks, growth in third-party capital utilization and increased retro opportunities, to name a few.

We highlight the key themes that emerged below.

Reinsurance Rate Commentary

On the reinsurance side, benefits from the hardening—or “transitioning” primary market have been uneven. Everest management provided a unique point of view on the direction of reinsurance rates, commenting that the pricing phenomenon in the (re)insurance markets more closely resembled a “W”-shaped curve rather than the typical “U”-shaped pricing curve that has dominated industry discussions throughout conference season and for the last several months.

Essentially, Everest described proportional treaties benefiting from an improving primary insurance rate environment, while other segments of the reinsurance sector – mostly notably loss-free regional US cat treaties with minimal peak zone exposure – continue to disappoint.

French reinsurer Scor drew the attention of analysts by cutting back the company’s reinsurance top line at 1 January, while the London-based Beazley provided a pessimistic outlook on the direction of the property reinsurance market.

Arch

"While property and casualty rates are increasing in several lines of business, we believe

the market remains in a transitioning phase between soft and harder conditions. Given the

uncertainty of current claim trends, we believe our industry needs further rate increases to

provide a more clear risk/reward proposition ...Strengthening market conditions are evident

to us from both the rise in our submission activity and our ability to achieve significant rate

increases. Dislocation is ongoing as some industry participants derisk by tightening

underwriting standards and by actively managing down their exposures. We believe that

these conditions are likely to continue in the foreseeable future due to the continuing

uncertainty regarding losses from the recent soft policy years."

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Exhibit: Reinsurance Renewal Pricing – 1 January 2020 Source: Willis Re, Inside P&C

Though a disproportionate number of major property cat deals are placed at the 1 January renewal, some market commentators have observed that the renewal is unique, consisting mostly of placements for large carriers with significant retentions and whose programs have not been loss impacted.

Given that, there has been some optimism that reinsurance rate increases will accelerate as the year progresses, as programs come up for renewal that are loss impacted and that for several years have been woefully underpriced.

Increasing Demand

There may also be increased appetite on the demand side, as on earnings calls reinsurance brokers alluded to significant growth in their facultative businesses.

As we’ve written recently, our view is that facultative transactions are indicative of a market trying to problem solve for exposures, often “off cycle” of their treaty renewals. To us, this speaks of positive demand-side factors in play in 2020 that may have been under-stated at 1 January due to the mix of renewing business.

(Re)insurance Market Shifts Attention to Mid-Year Renewals

With the 1 January renewal in the rearview mirror, management teams faced questions from analysts regarding their expectations for the upcoming mid-year renewals.

Florida in the Crosshairs

While as usual executives argued for needed price improvements, another common theme to emerge was the urgent level of concern over the state of the Florida market.

RenRe sounded the alarm on structural weaknesses in Florida – expressing skepticismof AOB reform – but also highlighting the push-pull dynamic of Florida specialists’ capital deficiencies and dependence on reinsurance, a problem compounded by reinsurance rate inadequacy and the limited scope of Florida insurers to pay higher reinsurance costs.

TerritoryPro rata

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Asia 0% -5% to -2.5% N/A N/A

Australia N/A 0% to +2.5% +2.5% to +5% Varies

Austria -1% to 0% 0% to +10% N/A 0% to +2%

Canada -3% to +1.5% 0% to +2.5% +10% to +40%

Caribbean 0% 0%

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China -3%

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+5% to +10%+5% to +20%N/A5% to +15%

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Germany N/A

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Middle East 0% 5% to -7.5%

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Nordic Countries N/A 0% N/A

Taiwan N/A 5% to +5%

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United Kingdom N/A 0% +5% to +10% N/A

United States 2.5% to 0% 0% to +10% +10% to +50%

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-5% to +5%-5% to +5%-2.5% to 0%0% to +5%

+10% to +20%

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Several weeks back it emerged Demotech was preparing to downgrade as many as 18 Florida insurers in the rating agency’s coverage universe, while in the interim AM Best has already begun to take action, downgrading Florida Family below A-.

At the same, the pace of consolidation has picked up in the Florida market in the past two months, with the acquisitions and disposals of both companies and books of business, in part of an effort to shore up operating models.

Yet as we wrote recently, consolidation does nothing to improve fundamental problems in the market, but rather significant capital injection is what is sorely needed.

Exhibit: A/T 1st Event FL Retention (% of Q319 SE)

Source: Company Presentation, Inside P&C

Loss creep remains an issue in Florida, as evidence by reserve hikes and rising ultimates of prior-year losses. In Q4, Universal raised its Irma loss by $150mn, while FedNat increased its figure by $39mn.

Ren

Re

"Several Florida domestics are now close to exhausting their 2017 private market

reinsurance. This is yet another indicator of the deep structural problems afflicting Florida.

In addition, Florida is increasingly exposed to the effects of climate change, such as rising

sea levels, increased rainfall and flooding, and intensifying hurricanes. I can say that these

two factors are materially impacting our view of Florida and will result in the need for

substantial rate increases...Florida will always be an important market for RenRe. That

said, we reduced our exposure to Florida domestic companies last year and are prepared

to do so again if rate increases do not meet our return hurdles."

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Exhibit: Hurricane Irma Loss Development Source: Company Reports, Inside P&C

Reinsurers: Japan Rate Rises More Likely

By contrast, reinsurers were more upbeat on the Japanese market, characterizing Japanese reinsurance buying as more relationship-oriented and the market as one where pricing has historically been much more reactive to loss activity.

RenRe’s management told analysts that rate increases in the Japanese market had been effectively nullified by losses from Typhoon Hagibis, and pointed to similar effects of climate change that has resulted in increasing severity of loss events in Florida.

Industry Topic Du Jour: Social Inflation

The topic of “social inflation” has also increasingly gathered steam in industry circles. While rising jury awards and increased litigation undoubtedly are increasingly weighing on company underwriting performance, there are some who regard the phenomenon instead as a “euphemism” for underpricing and under-reserving during the last soft market.

Not surprisingly, this view is echoed by perhaps some of those best positioned in the industry, at least from a reserves and underwriting perspective. Arch management has outlined a similar view in recent earnings calls:

Ren

Re

The Japanese market has responded as good partners, when there's losses to recognize,

[and] there is a need for additional rate.

Ren

Re

"Loss creep from Typhoon Jebi also continues to be an issue. Our team of scientists,

meteorologists and engineers believe that climate change will further increase the natural

catastrophe risk Japan faces. Sea level rise will intensify. Storm surge, rainfalls will

increase and average typhoon intensity will be stronger, and there will be more typhoons of

Category 4 intensity or greater. Typhoons Hagibis and Faxai are likely portents of impacts

that climate change will have on Japan."

insidepandc.com 14

With excess reserves continuing to dry up, one of the key questions will involve whether we will continue to see extensive growth by those companies attempting to “outrun the pain” and at what point reserve releases will turn into reserve charges.

The level of reserves released in Q419 fell precipitously, continuing a strong downward trend in recent years, and particularly notable given that Q4 is typically when the largest level of releases are observed.

Exhibit: Favorable Reserve Development (as a % of net earned premium) Source: Company Reports, Inside P&C

Interestingly, RenRe spoke about the difficulties in deploying capital in a market where there are “poor returns” and loss creep, yet in the same breath added the seemingly contradictory statement that the reinsurer is deploying more capital, one example of the company struggling to walk the line between talking the market higher on pricing while acting like its “game time” on capital deployment.

Arch

“While there are some lines of business where the rise in loss costs can be tied to

social inflation, in our view, a large component of the stress on the P&C industry's

performance is due to prolonged soft market conditions and optimistic loss picks over

the last 3 to 4 policy years. But reported capital levels are still high, combined ratios are

still below 100. Therefore, the duration of the transition or hardening market is

unpredictable.”

11.7%

7.9% 7.7%

3.9%

2.4%

4.9%

6.1%

4.4%

13.7%

4.1%

5.7%

2.5%

0.8%1.7%

3.4%

1.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

RenRe Axis Arch Everest

2016 2017 2018 2019

RE

There's been a lot of talk about social inflation and increased loss trends in casualty.

We believe this is a reversion to the long-term mean as opposed to something new.

And this reversion to the mean in trend and loss development is something that we have

been underwriting for, pricing for and embedding in our trend factors for several years,

prior to this being in the headlines now.

Ren

Re

In Casualty lines, the market is recognizing rate is required as losses are being

impacted by social inflation from exponentially increasing jury verdicts and adverse

development on recent prior accident years. For the industry, third-party capital is

constrained in 2019 due to poor returns, mounting loss creep and concerns over climate

change. Against this backdrop, we deployed more capital, both in respect to our own

capital as well as the capital we manage on behalf of our partners.

insidepandc.com 15

Reinsurers Benefit from Increased Retro Writings

Another persistent theme in the fourth quarter was the increased deployment of retro capacity among reinsurers at the 1 January renewal.

Several firms noted seeing “increased opportunities”, with Everest providing the most detailed commentary – retro writings were up +25% as the company “dusted off” its pillared “purple” product that the company marketed beyond its core customers – while Arch saw its net PML increase following an increase in the deployment of retro capacity at 1.1.

Third-Party Capital

The use of third-party capital also received attention, spotlighted by RenRe raising $925mn between the fourth quarter and 1 January for its third-party vehicles Vermeer, Upsilon, and Da Vinci.

Everest’s utilization of third-party capital slipped in the quarter, while Fidelis raised $300mn with the backing of the Abu Dhabi Investment Authority. Axis generated a 66% increase in fees from managing third-party capital and ceded $1bn in premium to Harrington Re and other strategic capital partners, a 30% increase from the year before. Despite the rise in fees collected, the level of alternative capital used by Axis fell during the year.

Exhibit: Total Dedicated Reinsurance Sector Capital Source: Guy Carpenter

Reinsurers walk the line on messaging

With all the talk of an underpriced, structurally flawed Florida market (among others), some reinsurers – especially those utilizing significant amounts of third-party capital –face a delicate balance in messaging, between talking up the dire need for fundamental market reforms and talking up to investors the superlative market opportunity before them. Following its $925mn capital raise, RenRe told investors:

Ren

Re

This highlights our ability to procure the most efficient capital for multiple sources and

provides us considerable underwriting capital and financial flexibility heading into what we

expect to be the best market opportunities we've seen in years.

insidepandc.com 16

CATS FALL FROM HISTORICALLY HIGH LEVELS IN Q4; REMAIN ELEVATED

Exhibit. Q419 Catastrophe Losses Source: Company reports, Inside P&C

While cat activity was notably lower year over year, sizeable losses from Typhoon Hagibis weighed on companies’ results, where the median industry loss estimate currently stands at about $9bn.

Exhibit: Typhoon Industry Loss Estimates Source: Company reports, Inside P&C

Arch proved to be the outlier among the Bermudians, posting a much lower $30mn total cat loss figure for the quarter, owing mostly to the reduction of the weight of property cat in the company’s book over time and its significant purchases of cat reinsurance. At Arch, the cat loss total was much better than the year before when Hurricane Michael and California wildfires took a heavy ($118mn) toll.

While 2017 and 2018 were both heavy cat loss years, the bulk of 2017 losses occurred in Q3, while a disproportionate amount of cat loss in 2018 occurred in Q4.

RenRe’s Hagibis loss was higher than its prior-year market share would indicate, the result of the typhoon hitting a soft spot in the reinsurer’s retro protections, where the company has focused on buying more retro for its peak southeast US wind exposures.

Hagibis gross

losses, P/T

Total net

losses, P/T

Net impact on

combined ratio% of equity

RenRe $175.0 $193.0 25.0% 3.2%

Axis $93.0 $140.0 12.1% 2.5%

Everest $190.0 $225.0 11.5% 2.5%

Arch ND $30.3 2.2% 0.3%

insidepandc.com 17

Exhibit: Bermuda Composite Q4 Cat Loss Totals Since 2017 Source: Company Reports, Inside P&C

Note: Arch cat losses in 2017 totalled $765k

PML Changes

While PMLs rose modestly at Arch to 6% of S/E, Axis continued to move in the opposite direction, curtailing underwriting volatility as the carrier continues to devote energy to re-underwriting and de-risking its portfolio. In 2019, Axis stood from the crowd in that while other carriers grew considerably, Axis shrunk its top line in all but the fourth quarter, reducing gross written premiums in total for the year.

Axis did increase its exposure to the Japanese market at 1 April 2019, which proved to be unfortunate timing, giving the second consecutive historic loss-making typhoon season. That being said, Axis noted its commitment to the market for the long term and was pleased to have capitalized on the opportunity to expand relationships in the market, despite the losses.

Exhibit: Axis Capital PML Changes Since 2017 Source: Company Reports, Inside P&C

1

105133

36

118

35

269

875

30

193140

215

0

100

200

300

400

500

600

700

800

900

Arch RenRe Axis Everest

in $

mn

2017 2018 2019

insidepandc.com 18

FAVORABLE DEVELOPMENT PLUMMETS ↓ 80% IN Q4, ↓ -64% FY19

Exhibit: Bermuda Composite Reserve Development since 4Q16 Source: Company Reports, Inside P&C

Prior-year loss reserve releases in Q4 totalled $53mn, a steep drop-off from the $262mn released in Q418 and the $141mn released in Q3. The favorable impact on the C. ratio was 1pt, down -4.7pts from the 5.8pt benefit last year.

All companies contributed to the releases during the quarter, with Everest and Arch posting similar numbers and trends (both releasing about $20mn, down from roughly $75mn in Q418), compared with a drop-off to ~12mn from $74mn at Ren and a fall from $40mn to $13mn at Axis.

The full-year releases for the composite amount to $331mn, off from $908mn in 2018, or roughly a ~64% reduction. From an impact on the C. ratio perspective, Arch received by far the biggest quarterly benefit (about 4pts), while Arch’s peers’ margins improved by 1pt or less from reserve releases.

EX-CAT AY CR IMPROVES IN Q4, DESPITE RISE IN EXPENSE RATIO

Exhibit: Bermuda Composite 2019 Underlying CR vs. GWP Growth Source: Company Reports, Inside P&C

The composite’s ex-cat AY combined ratio improved by 4pts on the quarter, principally the result of a substantially better underlying loss ratio in RenRe’s casualty and specialty segment – cutting the current-year loss ratio to 68.1% from 92.4% the year before.

The performance improvement was the result of the year-ago quarter being impacted by California wildfire claims. The expense ratio in the segment also dropped by 8.6pts, which RenRe partly attributed to enhanced operating leverage resulting from the TMR acquisition.

insidepandc.com 19

Exhibit: Bermuda Composite Combined Ratio Contributions Source: Company Reports, Inside P&C

Core underwriting margins at Axis improved 1.8% to 96.3% from 98.1%. The improved result at Axis was due to a much better underlying loss ratio in the insurance segment, falling in the quarter to 55% from 62.4%. Axis said the margin expansion was the result of a decrease in loss experience associated with the repositioning of the property and aviation portfolios, improved loss experience in marine, and credit and political risk lines, the continued impact of rate and trend, partially offset by changes in business mix.

The underlying combined ratio modestly deteriorated at Arch (rising .6pt to 81.4%). At Everest, the core underwriting result was slightly better, dropping .1pt to 90.3% from 90.4% the year before.

Exhibit: Bermuda Composite 4Q2019 Combined Ratio Contributions Source: Company Reports, Inside P&C

insidepandc.com 20

Q4 NET INVESTMENT INCOME ↑ 26% YOY; ↑ 21% FY19

Exhibit: Bermuda Composite NII Since 4Q14 Source: Company Reports, Inside P&C

Net investment income was up 26% to $531mn in Q4 and was up ~21% to $2.1bn for FY19. The gain was driven by RenRe, whose investment performance was up 111%, or by about $60mn, largely due to higher returns on the company’s equity, private equity, and catastrophe bond portfolios, partially offset by lower returns on the portfolio of fixed maturity investments. Also driving the investment result were higher average invested assets, primarily resulting from the acquisition of TMR, combined with capital raised during 2019 for DaVinci, Upsilon, Vermeer and Medici, and the subsequent investment of those funds as part of the Ren’s consolidated investment portfolio.

Returns were more subdued at Everest, Axis and Arch, where NII was up only about 4% apiece. Arch disclosed that the annualized pre-tax investment income yield was 2.36% for the quarter, compared to 2.49% the year before, primarily due to the effects of a lower interest rate environment.

VALUATION REVIEW: STOCKS TRADE UP ON GROWTH, LOW CATS

Exhibit: 1-year and YTD stock performance for Bermuda composite Source: SNL, Inside P&C

Following a strongly positive reaction to Q4 earnings in which Bermuda stocks surged, the composite has been swept up among the market-wide fears of the coronavirus posing a systemic economic risk. After rising most of the month in February, the Bermuda stocks fell 9.7% on the month, though the best-performing peer group in the year, having posted 16.3% yearly gain.

-9%-6%-3%0%3%6%9%12%15%18%21%24%27%30%33%36%39%42%45%48%51%

28-F

eb

14-M

ar

28-M

ar

11-A

pr

25-A

pr

9-M

ay

23-M

ay

6-J

un

20-J

un

4-J

ul

18-J

ul

1-A

ug

15-A

ug

29-A

ug

12-S

ep

26-S

ep

10-O

ct

24-O

ct

7-N

ov

21-N

ov

5-D

ec

19-D

ec

2-J

an

16-J

an

30-J

an

13-F

eb

27-F

eb

Inside P&C SelectArchEverestReRenReAxis

Earnings

Earn

ings

Earn

ings

Earnings

insidepandc.com 21

Exhibit: P&C performance by peer groups (at 2/28/2020) Source: SNL, Inside P&C

Exhibit: PB over ROE versus P&C industry Source: SNL, Inside P&C

Exhibit: Bermuda Composite Price/BVPS – 2010 vs. 2020 Source: Company Reports, Inside P&C

This research report was written by Insider Publishing’s Research team which includes Gavin Davis, James Thaler, Gianluca Casapietra, and Dan Lukpanov.

The content of this report is the copyright of Insider Publishing Ltd. All rights reserved. Registered in England

3923422. Insider Publishing actively monitors the usage of our reports, emails and websites and reserves the

right to terminate accounts if abuse occurs. No part of this report may be used, reproduced or stored in an

MTD YTD 1 year 3 years

Inside P&C Select -9.9% -9.2% 2.0% 3.2%

Large commercials -9.7% -11.9% -0.8% -15.1%

Regionals -12.6% -12.4% -1.6% 21.1%

Specialty -7.1% -4.3% 12.1% 22.8%

Personal -10.1% -3.5% 1.1% 41.5%

Bermuda -9.7% -8.4% 16.3% 16.4%

Florida -11.2% -21.6% -38.4% -23.5%

insidepandc.com 22

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