It may come as a bit of a surprise, but some reinsurance companies aren’t pulling back on underwriting U.S. catastrophe reinsurance business, as the margins available continue to be attractive to firms for which the hurdle rate is sufficient to meet cost-of-capital.
Over the last two or more years there has been a gradual pull-back from U.S. catastrophe business by many of the world’s leading traditional reinsurance companies, as the softening market brought rates down to a level where certain business began to be shed.
With U.S. catastrophe reinsurance rates approaching the technical level, where some traditional reinsurers are unable to meet their cost-of-capital, the pull-back has continued and even accelerated.
Most reinsurers are now diverting capacity to other lines of business, such as longer-tailed casualty risks, or even into primary insurance and as a result non-renewing the lowest-priced U.S. catastrophe reinsurance business.
The key phrase here is once again ‘cost-of-capital’. Reinsurers all have different cost’s-of-capital, defined by how they are capitalised in the first place, the size of their operations, how efficient those operations are, how high their expense ratio is, as well as their underwriting philosophy and how they approach diversifying their portfolio.
One reinsurer that feels comfortable enough with pricing so that it can continue to expand into U.S. catastrophe reinsurance is Qatar Reinsurance Company LLC (Qatar Re).
Qatar Re has revealed that during the January 2015 renewals it actually expanded its underwriting activities into certain lines and segments of the market it finds attractive, one of those being U.S. catastrophe reinsurance business.
At the same time Qatar Re pulled-back on some less attractive areas of its portfolio, around 15% of its total renewal base, but overall the reinsurer increased its property, casualty and specialty renewal portfolio by 25%.
Interestingly, where Qatar Re found rates most unattractive was in the Lloyd’s of London market, where it cut back its underwriting by almost one-third, due to “declining return expectations.” Qatar Re even expanded its property business, where it felt rating pressures were most pronounced.
However, the firm notes that this reduction in Lloyd’s business was more than offset by “strong growth in more attractive catastrophe and specialty lines of business.”
For a firm like Qatar Re, which has only been in operation since 2009, it is still attractive to underwrite U.S. catastrophe reinsurance business. The reinsurer is capitalised to the tune of $4 billion, with a full guarantee of $1.6 billion from parent Qatar Insurance Company (QIC) making up a large part of its capital-base.
Due to the fact it is still building out its global and diversified reinsurance portfolio, plus the way it is capitalised (particularly with the guarantee) meaning its cost-of-capital could be considered lower, Qatar Re finds it continue to grow into the one market that the rest of the reinsurance world feel is most under pressure.
This shows the attractiveness of U.S. catastrophe reinsurance returns. That the rates, while low, are still considered sufficient on a risk-adjusted basis for some players to meet their capital costs and demonstrates why insurance-linked securities (ILS) fund managers and collateralized reinsurers continue to target this market as a key component of their portfolios.
Larger, older and as a result sometimes less efficient reinsurers are finding U.S. catastrophe risks increasingly poorly priced. But don’t let that fool you into thinking the returns aren’t attractive anymore.
As the pull-back from U.S. catastrophe reinsurance continues, companies like Qatar Re and the ILS market, as well as those others with lower-cost capital to deploy, will happily underwrite what new business becomes available to them as a result, as long as it meets their technical hurdles.