Global Reinsurance — Where Have All the Losses …

1 BEST'S BRIEFING Our Insight, Your Advantage. Global Reinsurance November 15, 2017. Global Reinsurance Where Have All the Losses Gone? As the catastrophe events from the third quarter were taking place, like most industry Global observers, A M. Best anxiously wondered Where the Losses would end up. As anyone in insurance knows, it is difficult to be precise when estimating Losses . Hurricanes Harvey, Reinsurance Irma, and Maria will be remembered as some of the costliest events in history and adjusting composite Losses will be a complicated and long process. The earthquake that struck central Mexico on September 19th also inflicted physical and financial damage as well as significant human expected tragedy. This, however is Where the (re)insurance industry stands ready. To quote Thomas to deliver Caldecot Chubb: If there were no Losses , there would be no premiums.

2 The industry helps people and businesses with the rebuilding process. combined ratio of Reinsurers have historically played a significant role in the recovery from catastrophe events. Over the past five years, the capital markets have assumed a greater role in this process in approximately the form of alternative capital . Based on A. M. Best's surveillance of the Global reinsurers, it appears that alternative capital has played a meaningful role in mitigating the net loss impact 110% and a from this series of extreme events, mostly in the form of collateralized Reinsurance . return on equity Starting with data provided to us by the Global reinsurers in our composite, which includes between 0% Bermuda market companies, and layering on some broad assumptions, A. M. Best constructed a and -5% for full range of outcomes to evaluate, among other components, what underwriting results, net income, and return on equity year 2017 would look like for Exhibit 1.

3 The year. The analysis Net Catastrophe Losses as a Percentage of has been and will 2016 Equity continue to be refined 16%. as more information 15%. becomes available. 14%. At this point, we feel relatively comfortable 12%. in terms of evaluating what these loss 10%. events mean for 8%. the Reinsurance 8%. analytical Contacts: composite. Robert DeRose, Oldwick +1 (908) 439-2200 Ext. 5453 6%. While we don't want to share company- 4%. Greg Reisner, Oldwick specific information +1 (908) 439-2200 Ext. 5224. given the nature of 2%. the data that's been 0%. Mathew Brady, Oldwick collected, what can 0%. +1 (908) 439-2200 Ext. 5405. be shared about High Average Low our composite is By Company SR-2017-B-974 the following: for Source: Best data and research Copyright 2017 Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. No part of this report or document may be distributed in any electronic form or by any means, or stored in a database or retrieval system, without the prior written permission of Best.

4 For additional details, refer to our Terms of Use available at Best website: Briefing Global Reinsurance Hurricanes Harvey, Irma, and Maria, along with the central Mexico earthquake, the sector, on average, has reserved these loss events with the assumption that these Losses accumulate to roughly $90 billion. This is well below some of the headline modeled loss figures that have been circulated. So this leads to a question, who's got it right? Using history as a lesson, it is not uncommon for Losses relating to catastrophe events to develop adversely over time, and the complexity of the loss is usually a determining factor in this regard. Given the complexity of the hurricane events, it would not be surprising to see Losses develop well into next year. Using the $90 billion reported as our starting point, our completed surveys indicate cumulative net catastrophe Losses for the Reinsurance companies are between $20-25 billion.

5 We estimate that primary companies retained about half of the $90 billion, which leaves approximately $20-25 billion of Losses going to alternative capital, most in the form of collateralized retro. The impact of cumulative net catastrophe Losses as a percentage of year-end 2016 equity for the Global Reinsurance composite ranged from 15% on the high side to less than 1% at the low end. The median was approximately 8%. For many companies, the cumulative Losses as a percentage of equity on a gross versus net basis differed by roughly 5-8 percentage points but there were some companies Where the disparity was much larger the largest gap being 23 percentage points. To gauge the earnings impact, we considered net income loss coverage , calculated as total net catastrophe Losses divided by 2016 net income. This indicates how long it may take for companies to earn back these Losses based on their own recent earnings.

6 We use 2016 earnings as a proxy for what future earnings may be, contingent on any future improvement in the underwriting environment, yet to be determined. The average for the Global Reinsurance composite is This means it will take approximately 5 quarters to earn back what has been paid out. Granted, improved rates can speed up this timeline, but some companies may take closer to 2 or 3 years to earn back these Losses again, looking at it strictly through this Exhibit 2. lens. Arguments can be made to normalize Net Income Loss Coverage, Calculated as or adjust earnings for Total Net Catastrophe Loss / 2016 Net Income certain companies, but this is an unadjusted view of the data and an observation of the range. Net Income Loss Coverage Looking at the Reinsurance sector's earnings from an aggregate perspective for the full year 2017, Best's Global Reinsurance composite is anticipated to deliver a combined ratio of approximately High Average Low 110% and a return By Company on equity measure Source: Best data and research 2.

7 Briefing Global Reinsurance somewhere between 0% and -5% not stellar but also not too bad considering the magnitude of the Losses . This compares to a 5-year average combined ratio of approximately 91% and a 5-year average return on equity of approximately 11%. The last time the Global Reinsurance composite reported a combined ratio above 100% was in 2011 due to a series of Global catastrophes, including the Japanese and New Zealand earthquakes and flooding in Thailand. However, in some respects this is a dreaded scenario, Where Losses are significant to drag earnings but not significant to meaningfully change market dynamics and pricing for a sustained period of time. What's different with these particular hurricane events, however, is the material participation by alternative capital and the unique features of that capacity. The response from this capacity will have a definite effect on the dynamics of the market both near and long term.

8 While Best maintains a negative outlook on the Reinsurance sector, that outlook has primarily been driven by the earnings profile of the sector and the competitive market pressures. Our view has always been that risk-adjusted capital for the sector has been strong. That view still holds. Thus far, the data has not been surprising and there have been no rating changes to our rated Reinsurance companies as a result of these loss events. While some companies may lose a nominal amount of capital in 2017, this isn't a significant depletion of capital that will be problematic or disruptive to the market. Again, our concern is that the earnings profile and trend continues to be strained and the year 2017 will weigh on the 5-year average return on equity. Published by Best Best's Financial Strength Rating (FSR): an independent opinion of an insurer's financial strength and ability to meet its ongoing insurance policy and briefing contract obligations.

9 An FSR is not assigned to specific insurance policies or contracts. Best Company, Inc. Best's Issuer Credit Rating (ICR): an independent opinion of an entity's Oldwick, NJ. Chairman & President Arthur Snyder III ability to meet its ongoing financial obligations and can be issued on either a Executive Vice President Karen B. Heine long- or short-term basis. Senior Vice Presidents Alessandra L. Czarnecki, Thomas J. Plummer Best's Issue Credit Rating (IR): an independent opinion of credit quality assigned to issues that gauges the ability to meet the terms of the obligation Best Rating Services, Inc. and can be issued on a long- or short-term basis (obligations with original Oldwick, NJ. maturities generally less than one year). Chairman & President Larry G. Mayewski EXECUTIVE VICE PRESIDENT Matthew C. Mosher Rating Disclosure: Use and Limitations Senior Managing DirectorS Douglas A.

10 Collett, Edward H. Easop, A Best's Credit Rating (BCR) is a forward-looking independent and objective Stefan W. Holzberger, Andrea Keenan, James F. Snee opinion regarding an insurer's, issuer's or financial obligation's relative creditworthiness. The opinion represents a comprehensive analysis consisting World Headquarters of a quantitative and qualitative evaluation of balance sheet strength, operating 1 Ambest Road, Oldwick, NJ 08858. Phone: +1 908 439 2200 performance and business profile or, Where appropriate, the specific nature and details of a security. Because a BCR is a forward-looking opinion as of the date it WASHINGTON is released, it cannot be considered as a fact or guarantee of future credit quality 830 National Press Building, 529 14th Street , Washington, DC 20045 and therefore cannot be described as accurate or inaccurate. A BCR is a relative Phone: +1 202 347 3090 measure of risk that implies credit quality and is assigned using a scale with a Mexico City defined population of categories and notches.