Reinsurers’ annualised Return On Equity (ROE) has declined significantly this year after large quarterly net losses dealt a blow to carriers’ balance sheets, but some losses could be offset by demand for additional reinsurance protection in 2018 as insurers re-evaluate their reinsurance purchases, according to Moody’s Investor Service.
The median annualised operating ROE was a modest positive as of 30 September 2017, a sharp decline from 7.8% at year-end 2016, however, analysts said if normalised for average annual catastrophe losses and more modest reserve releases historical ROEs would have been even lower.
Moody’s said its cohort of reinsurers reported a total net loss of $4.5 billion, this compares to a net income of $5.8 billion in Q3 2016 – showing the huge impact of the losses compared to earnings for the quarter.
The drop in ROE comes after reinsurers have seen years of declining profitability and have had earnings propped up with meaningful reserve releases and relatively benign catastrophe losses until the third quarter of 2017.
Reinsurers, however, remain well capitalised despite the challenging market environment and substantial losses; “in Q3 2017, our cohort of reinsurers, excluding Berkshire Hathaway Reinsurance Group and Swiss Re, returned $1.1 billion of capital to shareholders, down from $1.3 billion in the same period in 2016.
“With many reinsurers experiencing some erosion of capital relative to Q2 2017 shareholders’ equity as a result of catastrophe losses, and with the potential for rate firming in 2018, a number of reinsurers will limit their share buybacks and instead position themselves to deploy the capital opportunistically as rates improve.
“Some reinsurers have raised, or are planning to raise, additional funds to deploy in 2018 through sponsored third-party capital vehicles,” Moody’s said.
Market pressures will drive reinsurers to rethink potential share buybacks and carefully deploy capital to take advantage of any new market opportunities.
Some respite to market challenges could come from improved property catastrophe reinsurance prices, driven by higher demand from primary insurers following record level Q3 losses.
Moody’s expects average U.S. property catastrophe reinsurance rates to increase by 5% to 10% in upcoming renewals, with higher rate increases for loss-affected accounts, however, pricing increases are likely to be capped by the availability of alternative capital providers in a continuation of the increasingly competitive market environment of recent years.
