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Cat losses weigh on reinsurance results: Moody’s

Posted On: Apr. 3, 2018 12:07 PM CST

Cat losses weigh on reinsurance results: Moody’s

Reinsurers posted significantly lower earnings in 2017, U.S.-based ratings agency Moody's Corp. said Tuesday, as catastrophe losses pushed profits down to their lowest level in 12 years.

In a report titled Reinsurance – Global: Catastrophe Losses Weigh on Reinsurers' Results, Pricing is Stable to Positive, Moody’s said last year’s earnings came up short in comparison with 2016 due to a series of Atlantic hurricanes in the third quarter and, to a lesser degree, wildfire losses in the fourth quarter.

The report said that according to Munich Re, catastrophe losses for the year reached a record high of $135 billion, driving reinsurers’ 2017 profitability down to the lowest level since 2005, when the industry felt the impact of hurricanes Katrina, Rita and Wilma.

Moody’s said its rated reinsurers reported a median return on equity of 1% for 2017, down from 7.8% in 2016, and 12% in 2013, when the soft pricing cycle began.

“Price increases at the January 1 renewals were lower than the market expected,” the report said. “Nevertheless, profitability should improve modestly based on rate increases, efficiency initiatives and slowly rising interest rates. Some reinsurers started 2018 with moderately lower capital levels, and as a result are increasingly dependent on retrocession and alternative capital to maintain gross capacity.”

The report said the trend of large insurance groups buying specialty insurers and reinsurers continues with the recent acquisitions of Validus Holdings Ltd. and XL Group Ltd. Moody’s said the challenging operating environment remains conducive to additional M&A activity, particularly among smaller firms.

Moody’s also said that global reinsurers with large U.S.-based operations that cede significant business to non-U.S. affiliates could be hit with higher taxes under the new tax law's base erosion and anti-abuse tax. However, the report said, firms do have options that can help mitigate the impact.

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

Over the past three years, the report said, reinsurers have ceded an increasing amount of risk to alternative capital providers, primarily in the form of collateralized reinsurance, to lower their own blended cost of capital and enable competition with alternative capital for profitable property-catastrophe risk.

In addition, a number of reinsurers upsized their alternative capital vehicles, including insurance-linked securities funds and sidecars, during the first quarter of 2018, accelerating a shift in revenue mix toward fee income from managing third-party capital.

“We expect this trend to continue as reinsurers become more sophisticated in matching risk with the appropriate form of capital,” the report said, “and as they seek to grow their top line while keeping net exposures in check.”