Impact of third-quarter losses on reinsurance market – Moody’s and Best

The reinsurance market is transitioning to higher rates, as third-quarter profits were hit hard by the three major hurricanes in the US as well as Mexico earthquakes, according to Moody’s Investors Service. Despite these substantial losses, Moody’s expects many reinsurers will be profitable for the full year, limiting the impact of Q3 losses on capital levels. Following Hurricanes Harvey, Irma, and Maria and the two Mexican earthquakes, Moody’s’ reinsurance cohort reported a total net loss of $4.5bn in Q3 2017, down from net income of $5.8bn a year ago. About three quarters of the reinsurance cohort reported quarterly net losses, including Munich Re and Swiss Re. However, Moody’s said reinsurers are expected to absorb losses from the California wildfires in the fourth quarter, and for full year 2017 many reinsurers will be profitable, although some will report a loss, moderately eroding capital. “We expect the average US property catastrophe reinsurance rates to increase by 5% to 10% in the upcoming renewals, with higher rate increases for loss-affected accounts. However, pricing increases are likely to be capped by the availability and willingness of alternative capital providers to deploy capacity. Demand for additional reinsurance protection is likely to rise as some insurers re-evaluate their reinsurance purchases and elect to buy more cover to protect earnings,” said Moody’s. It explained that, in aggregate, reinsurers remain well capitalised after the heavy catastrophe losses sustained in 2017, and in order to take advantage of the expected pricing increases, some firms have raised, or are planning to raise, additional funds to deploy in 2018 through sponsored third-party capital vehicles. And it added that a number of reinsurers have suspended share buybacks to shore up balance sheets and/or retain excess capital to write more business as property catastrophe rates rise. According to AM Best, while catastrophe events in the third quarter of 2017 may slightly improve overall reinsurance market conditions in the near term, the rating agency is holding its 2018 outlook for the global reinsurance sector at negative, citing the considerable uncertainty surrounding the level and sustainability of any market improvement. It said the negative impact of catastrophe losses on underwriting earnings in 2017 has further eroded the segment’s historical earnings. Best said it is concerned that property catastrophe pricing is somewhat at the mercy of the alternative capital market and is not as heavily influenced by the traditional reinsurance market as has historically been the case. “This is an important distinction as regards current market dynamics. Any near-term improvement in the market may be relatively shortlived given the current level of excess capacity in the overall market today. This is compounded by the continued inflow of alternative capacity that was seen in the fourth quarter of 2017, which has helped offset the collateralised capacity that is currently trapped until losses from 2017 work their way through the settlement process,” said Best. The agency explained that it does see some potential positive factors that could favourably impact the reinsurance market in the near term, which may be sufficient cause it to revise its market outlook from negative to stable, including an improving global economy, rising cession rates and further merger and acquisition activity. “A potential increase in demand from government risk pools such as the National Flood Insurance Plan in the US, as well as opportunities in cyber, mortgage and other emerging risks, should allow for greater utilisation of available market capacity,” said Robert DeRose, senior director, AM Best. Best concluded that much remains uncertain at this point and the existing risks to the market remain in play – as do one-off risks such as the potential fallout from Brexit and what that may mean to the global economy. “It is our expectation that, at a minimum, underwriting and overall performance will improve slightly and stabilise over the near term, resulting in an average ROE of between 7% and 10% over the cycle,” said Best.

Impact of third-quarter losses on reinsurance market – Moody’s and Best

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