The first-quarter 2015 results season began this week and there are already signs that the general pull-back on property catastrophe reinsurance underwriting continues, as companies reduce their exposures to the most under-pressure rates.
The majority of reinsurers have been pulling back on underwriting property catastrophe business for well over a year now, as the impact of rate declines manifested and competition ramped up. As pricing has declined across property catastrophe reinsurance zones reinsurers have sought to reduce exposure and have been choosing not to renew accounts deemed under-priced.
With the increased competition presented by well-capitalised specialist property catastrophe reinsurers and from the growing pool of more efficient alternative capital and ILS players, the pressure continues and so does the pull-back it seems.
Aspen also reported and gave a flavour of what to expect from the reinsurers, revealing a 9% decrease in property catastrophe reinsurance premiums underwritten in Q1 2015, compared to the prior year period.
Aspen increased its specialty and casualty reinsurance business underwritten and also its insurance business, to report a general increase in premiums written in the quarter, demonstrating the ongoing shift towards more mixed business at these global reinsurers.
Perhaps also telling, Aspen’s overall reinsurance business underwritten in the quarter was less profitable, with reinsurance underwriting income across all lines down almost 21% on the first quarter of 2014. That suggests lower profitability in the business, a sign of the impact of lower pricing.
CEO Chris O’Kane commented; “We continue to see the results of our diversified strategy across insurance and reinsurance, and across property, casualty, and financial risks, executed on a broad geographical basis.”
For reinsurance businesses like Aspen the diversified approach is ever more important as they seek to find avenues of underwriting that provide returns still, as maintaining those ROE’s will be a key target (note, Aspen’s operating income ROE slipped to 12.4% from 14.8% for Q1.
Stephen Postlewhite, CEO of Reinsurance, also made reference to the need for diversity; “Reinsurance had another very strong quarter. We grew premiums slightly while achieving an impressive accident year ex-cat loss ratio of 44.5%. The January and April renewals have been highly successful, achieved through superior client relationships, nimble underwriting, creative client solutions, and a comprehensive approach to distribution all of which make us a preferred market for our clients. We manage capital in an effective way; withdrawing capital from areas where rates and terms and conditions do not meet our requirements and deploying it in areas where the business is better rated. As we navigate the marketplace, we continue to capitalize on our established regional strategy, with Asia Pacific, Latin America and MENA gross written premiums rising 25% in the first quarter. Aspen Capital Markets is maintaining its trajectory of growth as we leverage our access to third party capital.”
Meanwhile Allied World also reported its results this week and revealed an 11.6% decrease in reinsurance premiums underwritten, which it said was “driven largely by the non-renewal of business, including certain property and crop treaties.”
AWAC has been on a consistent pull-back from property reinsurance lines, but has been shifting some risks to third-party capital through its relationship with ILS specialist manager Aeolus.
Similarly, it’s likely that Aspen will have shifted some more business in property catastrophe over to its Aspen Capital Markets unit and the Silverton Re collateralized reinsurance sidecar.
As reinsurance pricing continues to look less attractive to these firms, who struggle to underwrite it on their own balance-sheets, the lower-cost and more efficient third-party capital vehicles could see further growth, providing more opportunities for ILS investors.
It’s also worth noting that both Aspen’s and Allied World’s expense ratios have been creeping up, both being higher than the prior year period. As the current soft reinsurance market continues to bite, it seems likely that the expense numbers are going to have to come down a little to offset for lost profitability on underwriting.
Insurer and reinsurer ACE Limited also reported this week, saying that it had reduced its global reinsurance net premiums written by 1.4%, or 9.1% on a constant-dollar basis. ACE also saw its expense ratio creep up, but only very slightly.
Perhaps also worth a mention on ACE’s results is the fact that while it underwrote more North American P&C insurance business than in Q1 2014, the operating income earned from it was down on the prior year, perhaps reflecting the decline in rate increases causing income to be eroded a little here, although FX issues also contributed.
Evan Greenberg commented that competition remains an issue; “We obviously have the headwinds of foreign exchange, an underwriting environment that continues to grow more competitive for our commercial P&C businesses, as well as low interest rates.”
Also of note, RLI Corporation noted pricing pressures on its property lines of business, resulting in lower gross premiums written, again signifying a pull-back on the most competition exposed areas of the insurance and reinsurance market.
RLI Corp. Chairman & CEO Jonathan E. Michael said; “Challenging pricing conditions in the property segment drove a slight decline in gross premiums for the quarter.”
Finally, Travelers, the U.S. primary insurer, showed in its results that the rate deceleration across primary P&C lines is continuing and perhaps beginning to bite, as rate rises no longer keep up with cost-inflation. A trend to watch, particularly as ILS and alternative capital finds new ways to access and provide risk capital to this space.
So there’s nothing too unexpected in the results season so far, but it is another confirmation that pressure continues, property catastrophe rates are dropping below some underwriters risk appetites, alternative capital and ILS continues to make its presence felt and, as a result, reinsurers continue to look for diversification.
All factors that should help to keep the growth trajectory of alternative, or ILS, capital on track and the M&A wheel turning.