MILLI REASURANS ANNUAL REPORT 2018

Milli Re Annual Report 2018 Financial Status / 57 Philippines in September, is considered to be the strongest storm in Japan’s history since Typhoon Yancy in 1993. Losses from Typhoon Jebi alone amounted to USD 12.5 billion, with USD 9 billion expected to be recovered from the insurance and reinsurance markets. Aside from severe weather conditions, two earthquakes centred in Osaka and Hokkaido hit the country in 2018, causing USD 9 billion economic and USD 2 billion insured loss. Moreover, the severest event of 2018 Pacific hurricane season was Category 5 Super Typhoon Mangkhut, which affected The Philippines, some parts of China and Hong Kong, taking about a hundred lives. Total economic loss from Mangkhut is estimated to be USD 6 billion, with insured losses approaching USD 2 billion. In contrast to other parts of the globe, Europe started off the year with heavy weather conditions. Extratropical Cyclone Friederike which affected Netherlands, Germany, Belgium and United Kingdom in January stands out as the costliest natural disaster recorded in the first half of 2018. The total cost of Friederike to the economy is estimated to be USD 2.7 billion, while USD 2.1 billion of this is anticipated to be absorbed by the insurance industry. Looking at the market losses, Cyclone Friederike is the second-costliest cyclone ever impacting Europe, behind Cyclone Kyrill which occurred in 2007. Total reinsurance capital, including both traditional and alternative capital in the form of cat bonds, sidecars and ILWs; is estimated to be USD 595 billion. Traditional capital diminished by 4% to USD 496 billion from USD 516 billion, while alternative capital increased by 11% to USD 99 billion at the end of 3 rd quarter 2018, from year end 2017 figure of USD 89 billion. Even though the growth rate of alternative capital slowed down due to heavy loss activity in 2018 and the deterioration of losses from the previous year, industry players are confident that the alternative capital will pick up the pace once the trapped collateral is released. On the other hand, overall demand for traditional reinsurance products continued to grow modestly in 2018, as buyers were keen to purchase more cover in the aftermath of increasing non-peak zone losses and the requirements under the new regulatory regimes, coupled with attractive market conditions. Due to the rise of new business models, change in regulatory framework, shifts in technology and greater emphasis on cost optimization following the diminishing profit margins, transformation was inevitable for some market players. Merger and acquisition activity being the main driver of structural changes, first half year of 2018 was marked with mega deals, total transaction volume reaching USD 37 billion, which is 18% up from 2017 first half year total. Biggest deal of the year was French giant Axa buying Bermuda based insurance company XL Catlin for USD 14.1 billion with the strategy of shifting its focus more into P&C business. Announced in January, AIG completed its acquisition of Validus for USD 5.3 billion in July. There were other transactions in the second half of the year, with Marsh & McLennan agreeing to buy JLT for 5.5 billion in September, Renaissance Re announcing its acquisition of Tokio Millenium Re for USD 1.5 billion in October. Last activity of the year was China Re completing the USD 940 million deals with Chaucer on December 31. In the eve of Brexit, many players domiciled in the UK searched for alternatives in order to mitigate the potential risks. Following this trend, aiming to protect its policyholders in case the UK leaves the EU without a transitional agreement, Lloyd’s of London opted for establishing a subsidiary in Brussels for its European operations. On the other hand, the Corporation revised its syndicate evaluation methods and started implementing stricter mechanisms for market oversight to preserve the brand, competitive edge and security of Lloyd’s. In line with the strategy of shifting focus on risk and performance management, underperforming classes were required to be addressed with remedial plans or otherwise withdrawn. Moreover, business plans that had not reflected reduced expenses were rejected in order to improve profitability. In 2019 renewals, reinsurers opted for a tailor-made approach and assessed their cedants depending on factors such as credibility, loss track record, data quality and exposures. As a result of this approach, some buyers have been able to secure risk-adjusted rate reductions while some others renewed flat or with higher costs. Some buyers with the hope of achieving better terms preferred to approach markets quite late, however early comers have been luckier as 2018 losses piled up towards the year end. USD 595 billion Total reinsurance capital is estimated to be USD 595 billion as per the end of third quarter of 2018.