Reinsurance margin attrition ongoing, but slowing: Munich Re

Munich Re, currently the second largest reinsurance company in the world, said this morning that the attrition to reinsurance underwriting margins continues but at a slower pace, saying that global reinsurance pricing and terms are stabilising.

“Pressure on prices, terms and conditions remained high in this renewal round, in particular for natural catastrophe covers,” which make up around 21% of the business Munich Re renewed at recent mid-year renewals, the company said in its second-quarter 2016 results this morning.

Even reinsurance giants like Munich Re have been under pressure in recent years, as excess capital in the reinsurance system combined with low levels of loss, exacerbated by inflows of alternative capital, help to reduced prices.

At the recent renewals, around 21% of the business Munich Re underwrote was natural catastrophe reinsurance related, but rates only declined on average by 0.4%, compared to a 2.1% decline at the July 2015 renewal.

“There were thus further signs of stabilisation,” Munich Re explained, with its premium volume remaining roughly stable, and the firm said it was able to “almost entirely offset price and cycle-management-related decreases in business volume” by securing new underwriting opportunities that the firm found attractive.

“Thanks to our strict cycle management, our portfolio remains profitable,” Torsten Jeworrek, Member of Munich Re’s Board of Management, commented.

Munich Re’s quarterly results, which you can read in full here, showed that catastrophe losses during the second-quarter caused €542m (approx $600m) of impact to the reinsurance firm, more than double seen the year before and more than the firm experienced in the first six months of 2015. The result is profit down 9% on the prior year quarter.

But, more than half a billion dollars worth of major loss expenditure could not dampen the reinsurers quarterly results completely, as Munich Re beat most analysts estimates, helped by investment income and gains, savvy foreign exchange moves made due to Brexit and positive underwriting income.

Reserve releases played a big role in maintaining property and casualty reinsurance segment profitability, with €230m released from prior year claims reserves. For the first-half of 2016 €470m of reserves have now been released.

That helped the reinsurer keep its combined ratio under 100, reporting a 99.8% P&C reinsurance combined ratio, but with the reserve releases corresponding to 5.1% of it.

Munich Re noted that it continues to “set the amount of provisions for newly emerging claims at the very top end of the estimation range, so that profits from the release of a portion of these reserves are possible at a later stage.”

With the more active catastrophe loss activity in recent months Munich Re will have been able to build up some more reserves that will contribute to its results in years to come.

But the best news for Munich Re and its reinsurance competitors, as well as the insurance-linked securities (ILS) fund market, is that rates are clearly stabilising, with almost every company citing slowing declines in their core areas of business at recent renewals.

Munich Re said that while recent market trends do continue, the rate of price reduction is slowing further. One impact of this is that top line profitability is shifting to casualty, Munich Re noted, which is going to make underwriting skill more important across the industry as so many companies are experiencing this shift now.

While attrition on reinsurance margins might be slowing, the shift to casualty profits raises all sorts of different issues for the industry over the longer-term, such as how would a major casualty loss no impact reinsurers as they shift focus to longer-tailed lines?

So rate declines are generally slowing, but it is excess of loss reinsurance business that remains the most pressured, while proportional business pricing is more “resilient”, according to Munich Re. Hence the increasing shift to casualty, to avoid the more pressured areas of P&C reinsurance.

“In reinsurance – with our broad base, close client relations and innovative strength – we are still in a position to write pro table business, despite the difficult market conditions we are experiencing,” CEO of Munich Re Nikolaus von Bomhard explained.

But von Bomhard said that it is becoming increasingly likely that a pricing floor will be established, with recent loss experience of the reinsurance industry potentially going to accelerate price stabilisation.

“Encouragingly, price erosion has decelerated again in the July renewals. It is therefore becoming more likely that prices will bottom out, also because there has been a significant increase in natural-catastrophe losses in the second quarter, following a whole series of quarters with very few major losses,” von Bomhard said.

Of course the question remains whether traditional reinsurers can sustain low pricing in areas of the market such as excess of loss, or whether the pressure on margins makes this even less attractive to underwrite as losses erode what little profit there was left for them.

Could this result in a push for price rises? And will price rises be supported by alternative reinsurance capital providers, or will they push for greater market share at that point in time, wielding efficiency to force traditional companies further out of these markets? Time will tell.

Thanks to the reasonable results reported, Munich Re remains on target for its full-year profit, according to von Bomhard. “With our half-yearly result of €1.4bn, we are well on track to reach our annual target of €2.3bn.”