Reinsurance earnings reach lowest level since 2005

Reinsurers’ 2017 profitability declined to the lowest level since 2005, when the industry was affected by hurricanes Katrina, Rita and Wilma, Moody’s said in an April 2 report.

In 2017, insured losses from natural catastrophes hit a record high of $135 billion, according to Munich Re estimates.

Net income for a cohort of re/insurers fell sharply to $4.9 billion from $14.3 billion in 2016. Moody’s rated reinsurers reported a median return on equity (ROE) of just 1 percent for 2017, down sharply from 7.8 percent in 2016, and 12 percent in 2013, when the soft pricing cycle began.

Swiss Re’s net profit declined to $331 million in 2017 from $3.56 billion in 2016. Munich Re’s net income shrank to $424 million from $2.86 billion over the period.

Several reinsurers posted losses for 2017. Aspen Insurance, for example, reported a net loss of $268 million after a net profit of $203 million in 2016. Similarly, XL Group reported a net loss of $560 million after a net profit of $441 million in the previous year. Renaissance Re made a net loss of $225 million compared to a net profit of $481 million.

Reinsurers’ weak profitability in 2017 was also reflected in the negative 6.2 percent ROE on an index of insurance-linked securities (ILS) funds, which have a heavy weighting toward property-catastrophe risk, Moody’s said. However, soft pricing that persisted in 2017 also weighed on profit, exacerbating the impact of substantial catastrophe claims.

Catastrophes have impacted the capital of some reinsurers. The mid-tier reinsurers that are more focused on property-catastrophe and specialty business held less excess capital at the end of 2017, relying on more retrocession to maintain underwriting capacity. This category of reinsurer includes the six with the highest proportional decrease in shareholder’s equity from 2016 to 2017. This is in part due to losses sustained during 2017, but also reflects their deliberate strategy of using more retrocession, primarily backed by alternative reinsurance capital, as part of their capital base.

Aspen faced the biggest decrease in shareholders’ equity in 2017 among the group with a 20 percent drop, followed by AXIS Capital with minus 15 percent and XL Group with minus 12 percent.

Over the past three years, reinsurers have ceded an increasing amount of risk to alternative capital providers, primarily in the form of collateralised reinsurance, to lower their own blended cost of capital and enable competition with alternative capital for profitable property-catastrophe risk, Moody’s noted. In addition, a number of reinsurers upsized their alternative capital vehicles, including ILS funds and sidecars, during the first quarter of 2018, accelerating a shift in revenue mix toward fee income from managing third-party capital.

Moody’s expects this trend to continue as reinsurers become more sophisticated in matching risk with the appropriate form of capital, and as they seek to grow their top-line while keeping net exposures in check. Increased use of alternative capital should boost reinsurers’ profitability by lowering their overall cost of capital. However, reliance on such non-permanent forms of capital increases the risk that these reinsurers may not be able to fulfil capacity requirements in the event of an unexpected decline in the supply of retrocession, or of affordable alternative capital.

Reinsurance prices increased moderately at the January 1 reinsurance renewals, although less than initially expected, providing some support to profitability. Prices for US property exposures increased by approximately 4 percent on average, with changes of between 0 percent and 7.5 percent for catastrophe-exposed US property cover.

Prices for loss-affected business rose more strongly, rising by between 5 percent and 10 percent for US property-catastrophe risk, and by 20 percent to 40 percent for Caribbean property-catastrophe cover. This indicates that the average price increase at July 1 renewals, when the bulk of non-proportional US and Caribbean covers are rolled over, could be higher than in January. However, we believe the abundance of both traditional and alternative reinsurance capital will dampen price increases relative to previous post-event price hardening cycles. While Moody’s expects reinsurer profitability to increase, it will likely remain significantly below levels reported in 2012/2013.

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