Despite a challenging 2017 and indifferent 2018 results, balance sheets of traditional reinsurers remain strong, and overall interest from insurance-linked securities (ILS) investors remains mostly undimmed. We have seen modest changes in some ILS managers’ risk appetite and a handful of funds with materially less capital.
Virtually all reinsurers have posted improved combined loss ratios for 2018, though for many reinsurers, the improvement was marginal. While results were adversely impacted by abnormal loss activity in 2018, compounded by 2017 catastrophe loss creep and diminishing prior-year casualty reserve releases, reinsurers are encouraged by improvements in primary rating levels across many classes and territories. These primary rate increases are filtering into reinsurance pricing, most obviously via proportional treaties.
The following graphs illustrate the property catastrophe (CAT) pricing trends in two large markets, showing flat pricing for US CAT at April 1, while the loss-impacted Japanese CAT renewals increased.
In reaction, insurers are using more conservative line-size management to drive improvement in primary rates, particularly on large-commercial accounts. In addition to these efforts, some carriers are setting minimum rate increases for some lines of business and withdrawing from a number of specialty lines.
For treaty business, many reinsurers expressed hope that the April 1st 2019 renewals would see a stronger pricing increase momentum than at January 1st. In reality, buyers experienced rate increases from reinsurers, which were in some cases substantial but rational, on loss-affected business. These rate increases were balanced by flat renewals on non-loss affected classes and programs.
We have not seen emerging signs of generalized hardening rate levels across the market, and pricing remains rational. Primary rates continue to move faster than treaty rates.
Capacity has not been a constraint in the market, even for buyers who have sought to purchase additional limits; instead, the only restrictions in available capacity have been driven by price. The Japanese market is one of the largest buyers of catastrophe capacity outside of the US and, as in previous years, the bulk of capacity sought by buyers has been supplied by major traditional reinsurers.
The involvement of the ILS markets remained small, but unchanged, with some increase in appetite from funds in a few selected areas. The long- term philosophy of many buyers undoubtedly influenced the overall flat pricing on non-catastrophe-loss-free classes, where parties looked to produce a balanced portfolio-based approach.
The ability of the market to respond in a rational manner and meet the request from buyers for increased capacity remains directly linked to the ongoing high level of capitalization with pockets of start-up capital adding to the supply.
The continued capital overhang in the market with supply outweighing demand is undoubtedly the key driver for the ongoing balance sheet management through share buy backs of a number of the largest quoted reinsurers. The message remains clear that in the absence of more attractive opportunities to earn reasonable returns, shareholders prefer capital to be returned rather than making substantial across-the-board improvements in pricing.
Total capital dedicated to the global reinsurance industry measured $462 billion at year-end 2018, down 5% from the end of 2017. This includes the total shareholders’ equity of 32 major reinsurance companies. Those companies’ equity was down 10% to $335.7 billion from last year, reversing growth of 8% in 2017. This was due in part to the exit of two companies through M&A.
Reinsurers paid out the majority of the $20.5 billion of net income as dividends and buybacks, which together reduced capital by $17.6 billion. Unrealized investment depreciation of $21.4 billion, mainly due to falling equity markets and rising bond yields, also was a major factor in the decline. Alternative capital (outside of reinsurance companies) grew by 6%.
In summary, the reinsurance market remains stable with some excess capacity and a strategy of providing cover at a rational price that is being selectively adjusted higher on selected business.
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James Kent is Global Deputy CEO and North America President of Willis Re.