Global reinsurers in the spotlight after nat cat losses

While SCOR’s big European competitors may have been hit harder by the events they are perceived as strong enough to cope with significant losses from hurricanes and earthquakes. But for some Bermuda and Lloyd’s players the hit has been so strong that they may need fresh capital.

Hurricanes in North America and the Caribbean and earthquakes in Mexico are estimated to have caused around $100 billion in insured losses in the third quarter of 2017, resulting not only in an earnings event but also a capital event for some property/casualty reinsurers.

SCOR’s exposure is relatively low

The impact the natural catastrophes had on SCOR are comparatively low. The firm has  estimated that hurricanes Harvey, Irma and Maria, as well as the Mexico earthquakes, will cost the company €430 million net of retrocession and tax.
The estimate is based on the expectation that the total private insured market loss for the combined North American nat cat events could reach $95 billion.

As a consequence of the natural catastrophes, SCOR  posted a net loss of €267 million for the third quarter of 2017.

At the same time, SCOR noted that the group's solvency position remains strong and in the upper half of the optimal solvency range. Furthermore, the dividend policy remains unchanged and the share buyback programme is maintained.

SCOR has historically always limited its Florida exposure by choice, according to a Sept. 26 presentation by CEO Denis Kessler. SCOR’s Florida Specialist exposure was further almost halved at the latest spring/summer renewal, the presentation states.

The nat cat events had a low impact on SCOR despite the fact that the Americas region now represents SCOR’s biggest regional exposure. Gross written premium in the Americas grew to €6.32 billion in 2016 from €1.20 billion in 2007. This compares to the Europe, Middle East and Africa (EMEA) business which was worth €5.36 billion in 2016, an increase from €2.94 billion in 2007.

SCOR is a notable outperformer due to its lower exposure to catastrophe losses and its clear intention to take advantage of upcoming renewals for growth, Jefferies analysts said in a Sept. 7 note.

Swiss Re and Munich Re incur larger losses

SCOR’s competitor Swiss Re has stated its exposure to the Americas region at 45 percent measured by net premiums earned. This compares to a 33 percent exposure to the Europe, Middle East and Africa (EMEA), according to a Sept. 21 presentation by chief underwriting officer Edi Schmid.

But Swiss Re faces a higher bill from the third quarter nat cat events in North America with  estimated claims from hurricanes Harvey, Irma, Maria, and the Mexico earthquakes at $3.6 billion. As a result of the natural catastrohes, Swiss Re reported a net loss of $468 million for the first nine months of 2017 after a net income of $3.0 billion in the same period of 2016,

German competitor Munich Re issued a profit  warning in September because of the nat cat events, noting that losses from hurricane Harvey and Irma could mean that the firm would miss its profit guidance of €2.0–2.4 billion for 2017.

Munich Re incurred a net loss of €1.4 billion in the third quarter of 2017 due to the impact of natural catastrophes in North America. Hurricanes Harvey, Irma and Maria together accounted for losses totalling €2.7 billion in the third quarter.

Hannover Re avoided a Q3 loss

Hannover Re managed to post a  profit in the third quarter despite large losses exceeding its budget for the period. This was made possible by the divestment of the firm’s listed equity portfolio which boosted the investment income.

As a result, Hannover Re recorded a group net income of €13.9 million in the third quarter of 2017 compared to €303.4 million in the same period a year ago. The firm estimated large losses for the period at €765 million from hurricanes Irma, Harvey and Maria and two earthquakes in Mexico, exceeding the budgeted large losses by €270 million.

Munich Re and Swiss Re incurred the largest nominal losses with more than $3.5 billion each, Jefferies analysts noted. However, their losses proportionate to book value are materially lower than their Bermudian and Lloyd's of London peers, the analysts added.

The ‘Big 4’ European reinsurers have outperformed its peers in term of loss resilience. They are in strong position to take advantage of the rate rise in 2018 and still have strong balance sheets in spite of recent losses, according to Jefferies.

Losses in Bermuda proportionately higher

The situation for Bermudian and Lloyd's of London reinsurers may be less clear, as suggested by analysts at investment bank Jefferies.

The 2017 hurricanes Harvey, Irma and Maria (HIM) led to recorded  estimated losses of $31.2 billion net of reinsurance costs for Bermudian re/insurers, according to the Bermuda Monetary Authority (BMA).

Bermuda re/insurers will be picking up 30 percent of the Harvey, Irma and Maria losses from this record-setting hurricane season, according to a Nov. 21 press release. The loss information includes both direct insurance and reinsurance.

Bermuda-based RenaissanceRe Holdings and Validus Holdings registered the highest combined ratios in the first nine months of 2017 as the companies hold the greatest proportion of property catastrophe business of global reinsurers,  according to Fitch Ratings. RenaissanceRe’s combined ratio was 156 percent between January and September 2017.

RenaissanceRe  reported a net loss of $504.8 million for the third quarter of 2017 as the company had to absorb significant natural catastrophe losses from hurricanes and earthquakes.

The results compare to a net income available to RenaissanceRe common shareholders of $146.8 million in the third quarter of 2016.

The third quarter 2017 results include a net negative impact from hurricanes Harvey, Irma and Maria, the Mexico City earthquake and certain losses associated with aggregate loss contracts of $615.1 million.

Validus Holdings’ combined ratio was 141 percent in the first nine months of 2017, according to Fitch. Validus  reported a net loss attributable to shareholders of $250.4 million for the third quarter of 2017 compared to a net income of $89.8 million for the same period in 2016.

The results included losses of $926.2 million in the third quarter compared to $1.0 million during the same period a year ago. The combined ratio for the third quarter was 200.5 percent compared to 82.4 percent in the same period a year ago.

Lloyd's has to absorb $4.8bn hit

The Lloyd’s market has estimated a total commitment of $4.8 billion for hurricanes Harvey, Irma and Maria (HIM) and it had already  paid $1.7 billion in claims by November-end.

Fitch already had Lloyd's of London on negative outlook and believes that the third quarter catastrophe losses have placed further pressure on the negative outlook.

The amount of losses combined from the nat cat events will exceed this year’s earnings for the industry and become a capital event, Jon Hancock, Lloyd’s performance management director  said at the Baden-Baden reinsurance meeting.

“Some syndicates will need to put more capital in. That’s absolutely normal and expected,” Hancock added.
He stressed, however, that the hurricanes will not turn into a solvency event for Lloyd’s.

Overall, non-life reinsurers’ underwriting results weakened significantly in the first nine months of 2017 to a 116 percent reinsurance combined ratio from 91 percent in the same period of 2016, according to Fitch Ratings.

Each global reinsurer that Fitch tracks reported a nine month 2017 reinsurance combined ratio over 100 percent with the exception of PartnerRe with 99 percent.

Bermuda-based PartnerRe  reported a net loss of $84 million in the third quarter of 2017 compared with net income of $240 million for the same period of 2016. This was almost entirely driven by hurricane-related losses of $472 million, pre-tax, net of retrocession and reinstatement premiums, which added 44.7 points on the combined ratio which reached 109.8 percent.

Capital hit for some

While the nat cat events may have had only limited impact on PartnerRe, they dented the capitalization of some reinsurers. 
Double-digit shareholders’ equity declines led to negative rating outlooks at Bermuda-based AXIS Capital Holdings (13 percent) and XL Group (11 percent), Fitch noted. Bermudian Sirius International Insurance Group recorded the largest decline at 15 percent, driven by a change in capital structure and catastrophe losses, according to Fitch.

Even so, overall shareholders’ equity declined by only 1 percent for Fitch’s group of reinsurers in the first nine months of 2017 (excluding Berkshire Hathaway). Fairfax Financial Holdings had the highest growth at 47 percent, due to its acquisition of Allied World Assurance Holdings.

Nevertheless, the nat cat events of the third quarter of 2017 will drive the industry into an underwriting loss in the full year. Fitch forecasts a 110 percent reinsurance combined ratio, the worst underwriting result since 113 percent registered in 2011.

But following the losses, market conditions in reinsurance are poised to improve. Fitch forecasts a 2018 reinsurance combined ratio of 96 percent, reflecting an average level of market catastrophe losses of eight points, down from 22 points in 2017. The underlying combined ratio should improve slightly in 2018 as reinsurance market pricing appears to have reached a bottom in 2017 and is expected to turn positive in 2018.

However, earnings are expected to barely cover the cost of capital in 2018. Fitch forecasts a 7.1 percent return on equity (ROE) in 2018 for global reinsurers, just above the estimated 6–7 percent cost of capital, as both underwriting and investment results remain stressed.