There’s something to be said for being a large, globally diverse, reinsurance firm in the current environment of competition, capital, softening prices and increasing amounts of alternative reinsurance capital from institutional investors and the capital markets.
As we approach the end of the first quarter financial results season and the largest reinsurers in the world report their progress during Q1, it becomes apparent that being bigger is certainly preferable and has enabled the larger reinsurers to avoid the worst of the competitive and soft market so far.
Some of the smaller, less globally or line of business diverse, reinsurers have reported reductions in premiums as they have pulled back from once staple lines of business in the U.S. property catastrophe market. Others have reported lower quarterly income due to lower pricing, as they continue to seek to deploy capital into areas of the market where the softening has been most apparent. Still more are reported to have relaxed terms further, perhaps to a point where this could come back to bite them should a worst case scenario catastrophe event occur.
For the likes of Swiss Re, Munich Re, Hannover Re and SCOR, four of the world’s largest reinsurance groups all with globally diverse platforms and operating across multiple lines of business, the impact of the softening rate environment and high levels of competition are, so far, not as apparent.
Of course the reinsurance industry has experienced a below average level of catastrophe loss experience in recent quarters, which has helped these reinsurers to maintain relatively low combined ratios on their property catastrophe business, while at the same time looking to their diverse, global platforms to secure growth opportunities.
This has definitely helped their results to look better than expected in many cases and it’s clear that a single large catastrophe event in a peak zone where these reinsurers are exposed could change the outlook for them entirely, but for now they appear to be coping admirably.
Swiss Re reported its results this morning, leading with a 78.8% combined ratio across its P&C business due to low catastrophe losses. The firms P&C fundamentals do look to be weakening, said RBC Capital Markets analysts in an update, but the fact that P&C remains so profitable for Swiss Re suggests that we are not yet seeing the end of recent pricing pressures.
Swiss Re reported net income of $1.2 billion and while this is down on a year ago by approximately 11% it remains on target for its five-year plan.
Hannover Re saw a slightly above expectation profit, led by its non-life reinsurance operations which it said had navigated the difficult market admirably.
“The quarterly profit of EUR 233 million was driven by a very pleasing underwriting result in non-life reinsurance and good investment income. This shows that we have adjusted well to the challenging business environment,” commented Chief Executive Officer Ulrich Wallin.
Hannover Re is focusing on maintaining the profitability of its non-life reinsurance business. “We take the view that this is the only way to ensure a profitable non-life reinsurance portfolio in the prevailing soft market,” Mr. Wallin said. At the same time the firm is looking to its life reinsurance arm to generate new opportunities as well.
SCOR meanwhile lifted its profits by 21.6% for the first quarter, a very healthy result built on the back of growing premiums and a much improved asset side performance. At the same time the firm continues to optimise its portfolio and look for growth in life and longevity risks.
CEO Dennis Kessler said; “The results recorded by SCOR over the first quarter in terms of growth, profitability and solvency once again demonstrate the pertinence and strength of its strategic decisions. In the first quarter, the Group records significant progress in a number of areas, including solid growth in SCOR Global Life, strong January and April P&C renewals and the reinforcement of our platforms in the US and the London market. SCOR is firmly on track to achieve the profitability and solvency targets defined in “Optimal Dynamics”.”
Finally, of the big four reinsurers Munich Re, the world’s largest reinsurance firm, said last week that it expects to remain on track for its full year target despite an expectation of lower first quarter profit results due to the reduction in reinsurance market pricing. Munich Re has been focusing on its large single-risk business, providing tailored capital relief solutions and its primary business to boost profits while it navigates the tricky reinsurance market conditions.
The way these large reinsurers have reported reasonable results, although all show some impact from the softening rate environment, demonstrates the benefits of a global platform across multiple lines of business. It’s no surprise that analysts expect M&A to pick up among smaller reinsurers and perhaps shows why Endurance clearly thinks bigger is better in re/insurance and made its hostile offer for Aspen.
What’s interesting to note is that there appears to be two ways to navigate this market. One is to have a large global and line of business diverse platform. The other is to lower your cost-of-capital to enable you to compete on better terms. The latter is one of the key reasons that reinsurers are increasingly embracing alternative capital from investors, both to lower their risk transfer costs and to lower their cost of underwriting.
It will be interesting to see whether these reinsurers can continue to report reasonable results if the softening market and pricing pressure continues. At some point the impact of continued softening and also any relaxation of terms will show. However it might take a few more quarters for the market environment to really bite for the biggest reinsurers in the world. That, or a major catastrophe loss event.
Should a catastrophe a few quarters down the road show up any reduction in underwriting discipline, the shareholders of these global reinsurers may have reason for concern. The other scenario which could be keeping the CEO’s of these reinsurers awake at night is the prospect of a major catastrophe event occurring but alternative capital providers such as pension funds choosing to double down and pour a flood of capital into reinsurance, maintaining the low pricing. That could be the point at which alternative capital finds itself truly dominating certain areas of the property catastrophe reinsurance market.
While these reinsurers are so far avoiding disappointing their shareholders so far, if market conditions continue as they are and alternative reinsurance capital continues to exacerbate the situation, they may not be able to avoid the worst forever.
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