Supply of reinsurance capital and capacity continues to “far exceed demand in worldwide property and casualty reinsurance” as market conditions remain challenging, according to Hannover Re, but the German reinsurer says “further indications of a bottoming out in prices could be discerned.”
Reporting a second-quarter set of results this morning that reveal an impact from global catastrophe losses such as the Fort McMurray fire, but still a reasonable profit as the diverse nature of the business continues to perform and investment profits grew, Hannover Re discussed the state of the global reinsurance market.
Group CEO Ulrich Wallin cited the “difficult state of the reinsurance market itself, with supply still clearly outstripping demand” in his letter to shareholders this morning, also explaining that the pressure is increased due to “protracted low interest rate environment is substantially cutting into the returns that can be earned on investments.”
Against this backdrop and given the higher losses suffered, it’s testament to the prudent nature of the reinsurers underwriting and its global footprint that profitability is maintained.
However Hannover Re has missed on analyst expectations for the first-half and the 9.2% of catastrophe losses are the highest since 2011. Reserve releases helped to boost profits so the result could have been considerably worse.
In fact, a EUR150m excess reserve release has pulled back the Hannover Re combined ratio to 96.1%, which analysts at J.P Morgan note could have been as high as 104.1% without that major release.
Walin explained the importance of this prudence, saying; “In the current soft market for property and casualty reinsurance we attach greater importance to safeguarding the profitability of the business than to boosting premium income. We continued to be guided by this principle in the latest treaty renewals as at 1 June and 1 July of this year.”
As at the 30th June 2016 Hannover Re reports further pulling back on premiums underwritten, with gross premiums down 3.5%. But the reinsurer explains that this is aligned with its strategy, in the current reinsurance market environment, saying; “This figure is in line with expectations, especially bearing in mind the intense competition in property and casualty reinsurance.”
Wallin continued; “For us, it is more important to preserve the profitability of the business than to boost premium income.”
The reason is largely the continued softened state of property and casualty reinsurance and the oversupply of capital and capacity that has ramped up competition and reduced rates as a result.
The company explained this morning; “Supply continued to far exceed demand in worldwide property and casualty reinsurance, although further indications of a bottoming out in prices could be discerned. In some areas this was also true of the treaty renewals as at 1 April 2016.”
At the mid-year reinsurance renewals, when many of the North American risks are renewed, Hannover Re noted continued rate pressure, but at a reduced rate, as the existence of a bottoming out of reinsurance rates continues to emerge.
“As had already been observed in prior rounds of renewals, we did, however, see some indications of a bottoming out in reinsurance prices,” Wallin said.
He added that the bottoming out of reinsurance rates was particularly evident at the U.S. renewals, saying that the reinsurer found opportunities to write “attractive” new business at the recent renewals. Hannover Re also saw growth in specialty lines at recent renewals, as it found more attractive opportunities to deploy capacity and overall grew its treaty business premiums renewed by 8%.
This is an interesting fact from recent renewals. That while the major reinsurers have all acknowledged a bottoming of pricing, they have also largely seen some growth in some of the areas where pricing is near the bottom. Something perhaps to watch out for should any major loss event, particularly in the U.S, occur.
While the reinsurance market remains challenging, Hannover Re hopes for improving conditions as this bottom of the market becomes more broadly visible. As well as a floor on pricing emerging in the U.S., Hannover Re also noted that European property catastrophe rate declines have also eased, which is a further positive sign.
Interesting, Hannover Re noted some rate increases on property business in Canada, which it attributes to the Fort McMurray wildfire loss. That is pleasing to hear, as it suggests a disciplined market. Hannover Re said that as a result of these rate increases it deployed more capacity here.
Despite the miss in the first-half of 2016 Hannover Re continues to maintain its target for full-year profitability, which it notes is conditional on major losses remaining below budget and capital markets remaining stable.
Wallin highlighted that “challenges facing the reinsurance and capital markets are currently very considerable,” but despite this he remains confident in the firms ability to profit.
The continued evidence of a pricing floor will help. But the question still remains, how long will reinsurance prices remain at the bottom of the price cycle? As profits will be increasingly harder to come by if this continues and reserves are increasingly used up to augment results.
Prudence will become increasingly important, an area in which the bigger reinsurers like Hannover Re excel. For the ILS market, minimum return requirements are going to remain key, for as long as the softness persists, and scale will assist as the larger ILS funds can better leverage diversification within their portfolios.