Reinsurer capacity remains stable despite 2017 cat losses

The reinsurance industry emerged relatively unscathed from the heavy catastrophe losses of 2017 with its shareholders’ equity increasing and its combined ratio nowhere near as bad as in 2005 and 2011 – two most recent years severely hit by cat losses.

Those were some of the findings of the Reinsurance Market Report from Willis Re, which features the Willis Reinsurance Index, which tracks the performance of 34 reinsurance companies.

Shareholders’ equity in these companies was up 7.8 percent to $371 billion at year-end 2017. The increase occurred despite catastrophe losses, which led to a weighted combined ratio for the tracked reinsurers of 104.8 percent, up 10.4 percentage points from the previous year.

Alternative capital also increased to $88 billion (year-end 2016: $75 billion), despite the draw-down of some catastrophe bonds and collateralized reinsurance and retrocession layers in the wake of the 2017 Atlantic hurricanes.

However, the main reason for the rise in equity was unrealized investment gains of $34.7 billion. And when National Indemnity is excluded from the group, the total shareholders’ equity was roughly stable, at $343.7 billion.

The Index delivered return on equity of 3.4 percent, down from 8.0 percent in 2016, after aggregate net income fell to $12.0 billion (2016: $26.6 billion). Profitability was also heavily reliant on significant realised investment gains of $9.7 billion, up 38.6 percent, driven largely by a $2.7 billion investment gain realized by Fairfax following the sale of two subsidiaries and equity gains.

Underwriting losses were again partly offset by high prior-year reserve releases. Notably, capital of $15.6 billion was returned by reinsurers through dividends ($11.2 billion) and share buybacks ($4.4 billion) far exceeding the aggregate net income of $12.0 billion.

In a new combined ratio analysis, Willis Re compared 2017 with the severe catastrophe-affected years of 2005 and 2011. The analysis of a subset of reinsurers shows that the reported combined ratio for 2017 was 107.4 percent compared with 108.2 percent in 2011 and 112.8 percent in 2005.

The impact of natural catastrophe losses in 2017 was 18.1 percent lower than 2011 (24.8 percent) and 2005 (25.8 percent). Notably, excluding natural catastrophe losses and prior year reserve releases, the Ex-Cat Accident Year combined ratio deteriorated further to 94.6 percent in 2017, from 90.2 percent in 2011 and 89.2 percent in 2005.

James Kent, Global CEO, Willis Re, said: “2017 was one of the worst years on record for insured natural catastrophe losses. However, today the global reinsurance market is able to deploy more capital than at the same time last year. When a few exceptional transactions are considered, total reinsurance capacity is roughly stable, despite the hurricanes, earthquakes, wildfires, and other events which brought misery to millions of people in 2017. That’s a significant achievement for the reinsurance market, and a testament to its strength.”

He continued: “Comparing the 2017 natural catastrophe experience with 2005 and 2011 shows that a number of large global property catastrophe reinsurance accounts were not impacted by the events of 2017. The primary market retained more of the losses from the year’s numerous catastrophe events under higher retentions. The Ex-Cat Accident Year comparison of only a 5pt increase from 2005 may be viewed as surprising given the years of rate reductions in the past decade. The 2017 result was supported by the aforementioned reserve releases and investment gains which remains a concern and is why many reinsurers continue to try to push pricing on under-performing lines.

“The pressure on traditional reinsurers from alternative capital suppliers is stronger than ever, as many participants in this market cleared their first true major test. This increase in alternative capital, as well as the global reinsurance market having more capital to deploy, is continuing to dampen price increases in the mid-year renewals.”

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