The global reinsurance industry demonstrated resiliency following the record level of catastrophe losses in 2017, as very strong capitalization and effective risk management enabled the sector to absorb the multiple hits from Mother Nature and broadly maintain financial strength. Favorable investment performance allowed reinsurers in aggregate to still expand shareholders’ equity for the year despite elevated underwriting losses.
Nevertheless, reinsurers continue to face competitive market conditions that are serving to dampen price increases in 2018, as well as challenges in spurring demand from cedents that have gained risk management sophistication over time. As such, acquisitions of marginalized reinsurance market participants are expected to persist.

The devastating North Atlantic hurricane season, combined with California wildfires, pushed global insurance and reinsurance industry catastrophe losses to $144 billion in 2017—the highest on record, according to Swiss Re’s latest sigma study.
This figure is up significantly from the 10-year (2007-2016) average level of $58 billion and surpasses the $139 billion of insured catastrophe losses reported in 2011.

Hurricanes Harvey, Irma and Maria combined to produce $92 billion of insured losses over a condensed time span from late August through September. This makes the 2017 North American hurricane season the second costliest on record, trailing only 2005 when Hurricanes Katrina, Rita and Wilma caused insured losses of $112 billion (in 2017 dollars).
As a result, a group of 25 non-life global reinsurers posted a 2017 aggregate combined ratio of 110.1 percent, up from 91.2 percent in 2016, with catastrophes adding 23.3 loss ratio points in 2017 compared to 6.8 points a year earlier.
This result is the weakest since global events in 2011 (including the Tohoku earthquake and tsunami in Japan, New Zealand earthquake and Thailand floods) led to a 112.9 percent combined ratio.
That this volume of severe events did not produce larger losses for traditional reinsurers is in many ways a testament to a disciplined approach to managing aggregate exposures in catastrophe-prone regions.

Also, a more meaningful percentage of 2017 losses were borne by government entities and alternative reinsurance capital providers. Aon Benfield reports that alternative capital now represents approximately 15 percent of global reinsurer capital, which is up from 9 percent five years earlier in 2012.
Reinsurer benefits from favorable loss reserve development fell off in 2017 as well. This reflects modest deterioration in reserve strength amid weakening recent underwriting performance as well as material charges for many on U.K. liability business following the cut in the Ogden discount rate, which may be partially reversed in the future. (Editor’s note: The Ogden rate is used in the U.K. to calculate lump-sum settlements awarded by U.K. courts for bodily injury claims.)
Still, favorable earnings from investments and operations outside of non-life reinsurance enabled the group of 25 reinsurers to produce positive earnings for the full year, with a net income ROE of 2.0 percent in 2017, down from 8.5 percent in 2016. Positive earnings and a pause in share repurchase activity when large catastrophe losses materialized contributed toward a modest increase in shareholders’ equity for the full year.

Rate Pressures Continue

Looking forward, hopes for a sharp improvement in pricing are not exactly materializing. While many reinsurers were generating strong double-digit returns on capital as recently as 2014, underlying market fundamentals can make it difficult for them to generate an adequate return on capital in 2018, even if catastrophe losses revert to historical norms.
Reinsurance market combined ratios are projected to move to the mid-90s in 2018, which corresponds with a return on equity of approximately 7 percent.
Market capacity is relatively unchanged, and alternative market capital has reloaded relatively swiftly following the 2017 events. Reinsurance pricing has finally bottomed out and turned largely positive in 2018 renewals. However, the rate increases were not as sizable or as widespread as many market participants had anticipated. Furthermore, the April 2018 renewals suggest that the improved pricing environment is narrower in scope and may not prove sustainable. The magnitude of rate increases tapered off from January 2018 levels, and greater difficulty is emerging in raising rates on loss-free accounts.
The June 2018 reinsurance renewals will be particularly telling as this phase primarily relates to Florida property-catastrophe risk, which was significantly affected by Hurricane Irma. However, the absence of an even costlier event—such as a direct hurricane landfall in Miami, a path Irma fortunately averted—might serve to temper Florida property reinsurance rate increases.
Terms and conditions generally have held, with terrorism and cyber risk often no longer being included in standard reinsurance programs. In casualty reinsurance, pricing turned slightly positive in 2018, with ceding commissions easing downward from the high-30 percent level into the low-to mid-30 percent level.

Premium Growth
Benefits from price increases and covered exposure growth could lead to higher 2018 written premium growth than the 4 percent the group of 25 reported last year. However, the combination of excess market capacity and limited avenues of profitable growth continues to influence reinsurer behavior. Several reinsurers, including RenaissanceRe, Everest Re and Hannover Re, reported written premium growth of approximately 20 percent in 2017. More underwriters seek to expand in specialty lines, such as mortgage reinsurance, crop insurance, and accident and health business.
A wider net for new business will likely be cast going forward as reinsurers look to provide capacity and private market underwriting solutions in areas like flood insurance and terrorism risk. Also, the potential for property reinsurance growth globally is evident from the gap between economic and insured losses when catastrophes strike.

M&A Activity Continues
Reinsurance market M&A activity persists as profit and growth challenges, combined with a growing quantity of suitors willing to pay material premiums to current market and book value, are enticing companies to consider a sale.
Two significant reinsurance entity deals were announced thus far in 2018, and similar tie-ups may follow. Several market reports indicate that Aspen Insurance has recently launched a sale process. AXA’s sizable acquisition of XL Group for $15.3 billion (1.5x book value) is expected to close in 2018. XL will become part of a very strong, larger multiline organization in combining with AXA, the largest insurer in Europe by gross premiums written.
This acquisition follows AIG’s January 2018 announcement that it will acquire Bermuda-based Validus for $5.6 billion (1.5x book value), expected to close in mid-2018, providing AIG with a profitable reinsurance and Lloyd’s market platform. Other recent notable deals have also involved entities seeking to deploy capital abroad and grow business outside their home region and core markets. Canada-based Fairfax Financial acquired Bermuda re/insurer Allied World for $4.9 billion (1.35x book value) in July 2017, while Japanese non-life firm Sompo purchased Bermuda-domiciled Endurance Specialty for $6.3 billion (1.4x book value) in March 2017, with the entity rebranded as Sompo International.
The lack of adequate returns on reinsurance capital will also continue to push insurers and reinsurers to acquire diversifying businesses outside of reinsurance. This was demonstrated with AXIS Capital’s $0.6 billion (1.5x book value) October 2017 purchase of Lloyd’s re/insurer Novae Group. This acquisition shifts AXIS to a strong majority (61 percent) of business in insurance from its more historically balanced split of reinsurance vs. insurance business.

Creating larger insurers and reinsurers with more diverse operations through acquisitions can foster success amid more difficult reinsurance market fundamentals if revenues and capital are allocated toward more profitable segments as opportunities materialize. However, acquisitions also entail considerable risk and uncertainty tied to potential overvaluation, particularly when assessing reserve adequacy of a target company and considerable challenges in execution and efficient integration.
Global reinsurers are responding to a challenging environment with shifts in underwriting capacity, expanded capital management activity and increased consolidation. Sufficient size and scale has become a more important characteristic for reinsurers. However, size alone is no substitute for underwriting expertise and prudent risk management practices to mitigate and absorb inevitable volatility from unforeseen events.