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Global
Reinsurance
Highlights 2018
PUBLISHED BY:
Global Reinsurance Highlights
2018 Edition
For further information, please visit our global reinsurance topic page:
www.spratings.com/GRH
Global Reinsurance Highlights | 2018 3
Contributors
For S&P Global Ratings For Intelligent Insurer
Project leaders Editorial Project Coordinator Publisher
Johannes Bender Fleur Hollis Graeme Cathie
Taoufik Gharib Tel: +44 (0) 203 301 8238
David Masters Editorial Team gcathie@newtonmedia.co.uk
Heather Bayly, London
Contributors Jennie Brookman, Frankfurt Editor
Johannes Bender, Frankfurt Jenny Ferguson, Paris
Wyn Jenkins
WenWen Chen, Hong Kong Cathy Holcombe, Hong Kong
Tel: +44 (0)203 301 8214
Sebastian Dany, Frankfurt Valerie Lord, Toronto
Charles-Marie Delpuech, London Jo Parker, Toronto wjenkins@newtonmedia.co.uk
Taoufik Gharib, New York Greg Paula, Centennial
Maren Josefs, London Daniela Stauble, Frankfurt Sub editor
Milan Kakkad, Mumbai Ros Bromwich
Ali Karakuyu, London
Saurabh Khasnis, Centennial Director
Hardeep Manku, Toronto Nicholas Lipinski
David Masters, London
Aurelie Salmon, London
Design and Production
Eunice Tan, Hong Kong
Garrett Fallon
Simon Virmaux, Paris
Russell Cox
Data Team Tina Eldred
Ruchika Agrawal, Mumbai
Yevhen Deriy, New York Cover image
Patrice Mizeski, New York istock photo / Pavel1964
Claire Latchford, London
Aurelie Salmon, London
Simon Virmaux, Paris
Antun Zvonar, New York
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Global Reinsurance Highlights | 2018 5
Contents
8 Soundbites
10 Reinsurance Outlook
The Top Global Reinsurers Are Breaking Away From The Pack
18 The Cost of Capital
Global Reinsurers’ Returns Will Barely Cover Capital Costs In 2018
And 2019
22 Catastrophe Risk
Are Global Reinsurers Ready For Another Year Of Active Natural
Catastrophes?
28 Capital Adequacy
Capitalization Remains A Pillar Of Strength For Global Reinsurers
36 ILS
How Reinsurers Have Learned To Align Third-Party Capital With
Their Needs
42 M&A
Bulking Up: The Global Reinsurance Sector Marches Toward
Consolidation
48 China
A Decade Since The Sichuan Earthquake, Catastrophe Reinsurance
Is Gaining Momentum In China
52 Life Re
Global Life Reinsurers’ Strong Fundamentals Fuel Future Growth
58 Mortgage Reinsurance
Running At A Steady Pace: U.S. Mortgage Reinsurance Continues To
Grow Despite The Credit Cycle Passing Its Peak
63 Global Reinsurance Peer Review
70 Top 40 By Company
72 Global Reinsurers By Country
84 Ratings Definitions
86 Addresses
6 Global Reinsurance Highlights | 2018
Foreword
A Marathon Rather Than A Sprint:
Reinsurers Take A Breather After 2017
Catastrophe Losses
By Johannes Bender, Taoufik Gharib, and David Masters
D
iscussions for 2019 renewals in Monte Carlo are Global reinsurers are having to review their long-term
happening after a tough natural catastrophe year in 2017, relevance in a tough market that features heightened competition,
which was among the costliest years on record, reminding limited growth opportunities, and continued pressure on pricing.
the sector of its tail exposure. After years of declining property/ In Bulking Up: The Global Reinsurance Sector Marches Toward
casualty rates, renewals in 2018 brought modest increases and Consolidation, we discuss merger and acquisition strategies to
a temporary breather for the sector. However, this effect is now build scale, acquire expertise, and diversify.
fading and the sector continues to face weak business conditions. In A Decade Since The Sichuan Earthquake, Catastrophe
In our lead article, The Top Global Reinsurers Are Breaking Away Reinsurance Is Gaining Momentum In China, we have a closer
From The Pack, we discuss why we still view business conditions look at how the reinsurance sector participates in the growth of
as weak even after modest price increases in 2018 and a slightly the Chinese economy and insurance market as well as the risks
upward trend in earnings anticipated for 2018 and 2019. We also from expanding into the Chinese nonmotor property/casualty
outline that the sector’s strong enterprise risk management and lines of business.
robust capitalization are the main pillars for our stable outlook While the global property/casualty reinsurance sector
on the sector and for the majority of the reinsurers we rate. The suffered heavy losses in 2017, the global life reinsurance sector
article also discusses which players in our view are best placed remained solid, with stable returns and growth rates. In Global Life
to be winners in the market and addresses the question: What Reinsurers’ Strong Fundamentals Fuel Future Growth, we explain
would happen to our view on the sector if its return on capital falls how high barriers to entry and advanced risk management and
sustainably below its cost of capital? underwriting capabilities are ensuring sound business conditions
The article Global Reinsurers’ Returns Will Barely Cover for the global life reinsurance industry, allowing it to outperform
Capital Costs In 2018 And 2019 discusses the development the property/casualty reinsurance sector in 2018–2019.
of the sector’s returns compared with its cost of capital. In U.S. mortgage reinsurance has been one of the few reinsurance
2017, cost of capital increased again after years of decreases, business lines that has performed well in recent years, providing
while returns were hit heavily in 2017 following large natural some relief to reinsurers troubled by the difficult market
catastrophe losses. Although we observed moderate environment. In Running At A Steady Pace: U.S. Mortgage
reinsurance rate increases, we believe reinsurers’ profitability Reinsurance Continues To Grow Despite The Credit Cycle Passing
will barely exceed its cost of capital in 2018-2019 and reinsurers Its Peak, we discuss reinsurers’ increasing appetite for this type of
continue to compete with alternative capital sources that risk, profit opportunities, and the main risks in the U.S. mortgage
typically have a lower cost of capital. reinsurance business.
In Are Global Reinsurers Ready For Another Year Of Active This year’s Global Reinsurance Highlights again includes a
Natural Catastrophes? we take a closer look at the 2017 natural peer comparison supplement that exhibits some of the important
catastrophe losses and how they compared with reinsurers’ data points and trends that we’ve identified from our analysis of
exposure and modeling capabilities. Moreover, we discuss the the sector. This year’s publication captures the key issues facing
sector’s appetite for catastrophe risk after 2017 losses and reinsurance management, investors, and other stakeholders.
earnings and catastrophe budget buffers for 2018. We hope that you will enjoy the 2018 edition and welcome your
In 2017, the top-20 global reinsurers lost their capital feedback on possible enhancements for future years. n
redundancy at the ‘AAA’ confidence level for the first time since
the 2008 financial crisis. However, capital remained a strength Johannes Bender
for the sector. In Capitalization Remains A Pillar Of Strength For Frankfurt, (49) 69-33-999196
Global Reinsurers, we have a closer look at the development of risk johannes.bender@spglobal.com
profiles and capital adequacy of the sector.
Alternative capital in the form of insurance-linked securities Taoufik Gharib
has transformed the market, especially in the property catastrophe New York, (1) 212-438-7253
space, and even the natural catastrophe losses of 2017 have taoufik.gharib@spglobal.com
not dented investors’ enthusiasm for the asset class. In How
Reinsurers Have Learned To Align Third-Party Capital With Their David Masters
Needs, we discuss what effect continued growth of alternative London, (44) 20-7176-7047
capital has on reinsurers’ competitive positions. david.masters@spglobal.com
Global Reinsurance Highlights | 2018 7
Soundbites
Reinsurance Outlook
By Taoufik Gharib, Johannes Bender, David Masters, and Hardeep Manku
• Robust capitalization, strong enterprise risk management, and still-rational underwriting continue to support
our stable outlook on the global reinsurance sector.
• The sector is facing weak business conditions, as the influx of alternative capital continues to challenge
reinsurers’ business models.
• We’ve revised our 2018–2019 earnings forecast slightly upward following modest reinsurance price increases,
with an expected combined ratio of 96%–99% and a return on equity of 7%–9%.
• We could revise our outlook on the global reinsurance sector to negative if reinsurers’ return on capital falls
sustainably below their cost of capital.
The Cost Of Capital
David Masters and Taoufik Gharib
• The cost of capital has consistently fallen in recent years, but appears to have reached a floor at end-2016,
rising through 2017 due to rising interest rates and the volatility caused by heavy catastrophe losses.
• We think reinsurers’ profitability is likely to barely exceed their cost of capital in 2018 and 2019.
• The tide of cheaper alternative capital continues to compete with traditional players, who typically have a
higher cost of capital.
• Despite these challenges to industry fundamentals, market valuations for listed reinsurers remain at decade-
long highs.
Catastrophe Risk
By Charles-Marie Delpuech, Johannes Bender, and Taoufik Gharib
• Our relative natural catastrophe benchmark has performed well against 2017 experience, with losses
relatively in line with our expectations.
• Events in 2017 highlighted disparities in reinsurers’ exposure and modeling with return periods ranging from
below 1-in-10 years to 1-in-60 years for the annual aggregate loss.
• On average, reinsurers’ property catastrophe risk appetite at a 1-in-250-year return period rose only slightly, to
31% of shareholder equity, but we have seen increases or reductions by up to 10 percentage points for some
reinsurers.
• The top-20 reinsurers in aggregate expect a catastrophe budget of about $11 billion or 8% of the combined
ratio for 2018. If not exceeded, this should enable the sector to report pretax profits of about $21 billion in
2018, reflecting a consolidated buffer of about $32 billion before capital would be hit in a natural catastrophe
stress scenario.
Capital Adequacy
By Taoufik Gharib, Charles-Marie Delpuech, Johannes Bender, Aurelie Salmon, and Simon Virmaux
• In 2017, the top-20 global reinsurers lost their capital redundancy at the ‘AAA’ confidence level for the first
time since the 2008 financial crisis.
• Although lower than in previous years, capital adequacy remained a strength in 2017, and was redundant by
7% at the ‘AA’ confidence level.
• Reinsurers have gradually shifted their underwriting appetite to primary and proportional reinsurance
business.
• Liability risks continue to dominate the top-20 global reinsurers’ capital consumption.
• Catastrophe losses in 2017 weighed on reserve risk, while investment risk has been fairly stable.
• If 2018 ends up being an average catastrophe year, it is not implausible to assume that the top-20 global
reinsurers could regain their ‘AAA’ capitalization.
8 Global Reinsurance Highlights | 2018
Soundbites
ILS
By Maren Josefs, David Masters, Taoufik Gharib, and Johannes Bender
• Even after severe natural catastrophe events in 2017 there was more than enough inflow of alternative capital
to renew coverage for cedants. This had the effect of limiting extreme price hikes. ILS funds now manage just
under $100 billion of capital.
• Reinsurers have embraced third-party capital through instruments like sidecars, collateralized reinsurance,
and catastrophe bonds. Increasingly, the retrocession market depends on this convergence capital.
• Overall, the use of alternative capital has helped the reinsurance industry to increase its premiums while
maintaining its net exposures.
• Having demonstrated its capabilities in property catastrophe business, we continue to see alternative capital
testing products in new areas, such as casualty or life reinsurance. The increased complexity and longer tail of
products in these sectors have yet to strike a chord with investors, however.
M&A
By Hardeep Manku, Ali Karakuyu, Taoufik Gharib, and David Masters
• Scale, diversification, and value-added services will become increasingly important if reinsurers are to meet
cedants’ changing expectations and remain relevant.
• Reinsurers view mergers and acquisitions as a viable option that will keep their activity levels up, though it is
no panacea for the sector’s woes.
• Deals have leaned toward broadening of product suites and convergence of primary insurance and
reinsurance.
• Overall, we continue to have a neutral view on M&A, with a slight negative bias because of the industry’s
mediocre track record.
China
By WenWen Chen and Eunice Tan
• China’s property casualty reinsurers have a mission to increase catastrophe and related coverage, because of
the country’s geographic vulnerability to natural disasters, including major quakes.
• The ongoing expansion into nonmotor business offers new growth avenues but will expose reinsurers to
potential volatility.
• We expect reinsurance cession rates to stabilize at around 9% by 2020.
• In our view, market participants will take on more investment risk, through allocations to high-risk
investments, to offset pressuring on underwriting margins.
Life Re
By Sebastian Dany, Johannes Bender, Milan Kakkad, Taoufik Gharib, and WenWen Chen
• Operating performance should stay sound in the global life reinsurance sector over the next two to three
years, with premium growth of about 3% and a return on equity at about 10% over 2018–2020.
• Despite some recent M&A activity and, the emergence of alternative capital in some markets, we expect the
fundamental strengths of the global life re industry will remain intact.
• The industry’s advanced risk-management and underwriting capabilities should continue to protect it against
volatility it faces from changes in key actuarial assumptions for calculating premiums, regulatory risks, and
data restrictions.
Mortgage Re
By Hardeep Manku, Saurabh Khasnis, and Taoufik Gharib
• U.S. mortgage reinsurance has been one of the few reinsurance business lines that has performed well in
recent years, providing some succor to re/insurers beset with the difficult market environment.
• This business should retain its appeal despite modest rate increases on certain other reinsurance business
lines following the 2017 catastrophe losses.
• The appetite for mortgage risk is expanding as new players enter the market, although the underwriting cycle
is past its peak; however, some re/insurers are becoming cautious.
Global Reinsurance Highlights | 2018 9
Reinsurance Outlook
The Top Global Reinsurers Are
Breaking Away From The Pack
By Taoufik Gharib, Johannes Bender, David Masters, and Hardeep Manku
For the past several years, the global reinsurance sector has weathered unfavorable and
continuously changing business conditions. The challenges have included a prolonged soft
reinsurance pricing cycle, heightened competition, limited organic growth opportunities, a record
influx of alternative capital, low interest rates, mergers and acquisitions, and large catastrophe
losses. Against this backdrop, reinsurers are trying to pull whatever levers they can not only to
remain relevant but also to sustain profitability.
W
eak market conditions have and proportional reinsurance and away reinsurers it rates (Charts 1 and 2). This
driven reinsurers to rethink from nonproportional reinsurance, and is mostly because of reinsurers’ still-
their short- and long-term they’re actively managing their capital robust capital adequacy and because
strategies. This has led many to pursue structures through share buybacks, underwriting has remained relatively
mergers and acquisitions (M&A), divest special dividends, and refinancing their disciplined, at least so far, supported
nonperforming businesses, diversify into maturing securities with more cost- by overall strong enterprise risk
less-commoditized lines of business, and effective ones. management (ERM). At the same time, we
embrace third-party capital. They’ve also S&P Global Ratings is maintaining its continue to believe the global reinsurance
adjusted risk exposures while shifting stable outlook on the global reinsurance sector is facing weak business conditions
their underwriting appetite to primary sector and on the majority of the because the fundamental challenges of
istock photo / Pavel1964
10 Global Reinsurance Highlights | 2018Reinsurance Outlook
the sector have not abated, even after Robust Capitalization And Strong insurance—as well as life reinsurance.
2017’s heavy natural catastrophe losses. ERM Keep Reinsurers In Good Stead In addition, it reflects the sector’s sound
The cost of capital has consistently Global reinsurers continue to enjoy robust ERM capabilities, which help them
fallen in recent years but appears to capitalization despite severe catastrophes, maintain catastrophe losses generally in
have reached a floor at year-end 2016, which racked up more than $138 billion line with risk appetites and leverage the
increasing through 2017 due to rising in insured losses globally in 2017. These retrocession market through alternative
interest rates and the volatility stemming catastrophe losses wiped out 2017 capital while ceding some of the tail risks.
from heavy catastrophe losses. Operating earnings for a number of reinsurers and Therefore, the 2017 hit to capital was
conditions for global reinsurance remain became a capital event for a few outliers. not severe enough to cause industrywide
difficult despite modest 2018 renewal The sector demonstrated its resilience, panic or major declines in risk-adjusted
rate increases. We believe reinsurers’ managing the record catastrophe year with capitalization. But in addition, the losses
returns will be close to their cost of just a relatively small net loss, though the were not severe enough to lead to sustained
capital in 2018 and 2019. If the industry’s specific impact varied widely by reinsurer. industrywide price hardening. When overall
return on capital declines sustainably This reflects the sector’s industry capitalization deteriorated, we
below its costs, which causes market diversification benefits from writing viewed it as manageable, with most of
growth prospects to suffer, we could other noncatastrophe-exposed lines of the affected companies positioned to
reassess our view of the sector. business—such as casualty and primary replenish their lost capital with a year or
two of normalized earnings. As a result, the
2017 catastrophe losses resulted in only a
Table 1: Credit Conditions For Global Reinsurers 2018–2019
handful of negative rating actions.
Business conditions Business outlook Sector outlook Three-quarters of our financial
(current) (12 months) (12 months) strength ratings on the top 40 rated
Global Weak Somewhat stronger Stable global reinsurers are in the ‘A’ category,
reinsurers while the remaining quarter is in the ‘AA’
Table 2: Drivers Of Business Conditions For Global Reinsurers
Potential driver Trend for Observations
2018–2019
Pricing Neutral to positive Reinsurance pricing declines have modestly reversed in 2018, with average price increases
of 0%–5% expected for 2018 but with wide variations among lines and regions. However,
momentum is fading heading into 2019.
Loosening of terms Neutral to negative Large reinsurers appear to have been able to push back on cedants demanding wider terms
and conditions and conditions. They didn’t slip further, while ceding commissions slightly improved (200
bps–300 bps) but remained high.
Organic growth Neutral to negative Opportunities for organic growth (outside large/tailored transactions for a select few
reinsurers) are limited. There are pockets of growth, but companies pursue them quickly.
Cedant demand Neutral to positive There is some evidence of greater arbitrage (cheaper to front business then reinsure it on the
back-end) as rates continue to remain low, together with large/tailored one-off transactions.
M&A activity Neutral After a brief lull following a hectic 2015, M&A within the sector has resumed in 2018. We do
not expect transactions to have a material impact on industry capital. Future deals will be
partially inhibited because of high market valuations.
Alternative capital Neutral to negative The influx of alternative capital continued in 2017 and through the first quarter of 2018 despite
the temporary uncertainties caused by 2017 hurricanes, limiting reinsurance price increases.
Low investment Neutral to negative Investment returns remain low, but it seems that we have seen the bottom in 2017. As
returns interest rates are rising—at least in the U.S.—we expect slight improvements in net
investment returns as new money is invested in higher-yielding securities. However,
reinsurers’ total returns could be affected by unrealized capital losses.
Reserves Neutral Overall, the reinsurance sector’s reserves have been stable, averaging 6.3% of favorable
development impact on the combined ratio during the past five years. In addition, 2017 was
the 12th consecutive year in which the U.S. primary property/casualty industry generated
favorable reserve developments. However, in 2017, the re/insurance industry incurred
unfavorable developments in U.K. motor. Furthermore, the following U.S. lines of business
continue to be challenging: commercial auto liability, other liability-occurrence, excess
casualty, and private passenger auto liability. Lastly, if inflation unexpectedly increases
materially, reserve adequacy would be adversely affected.
Global Reinsurance Highlights | 2018 11Reinsurance Outlook
Chart 1: Rating Distribution Of S&P Global Ratings’
Top 40 Global Reinsurers
16 Equally important to the 2017
Chart 1: Rating Distribution Of S&P Global Ratings’
14 Top 40 Global Reinsurers losses has been the trend in underlying
of reinsurers
16
12 underwriting performance. When we strip
14
10 out the effects of catastrophe losses and
of reinsurers
12
8 reserve releases, accident-year combined
10 ratios have worsened during the past five
NumberNumber
6
48 years, reflecting pricing pressure. The 2018
renewals brought modest reinsurance
26
price increases, though the momentum
04
2
seems to be fading into 2019. We forecast
AA+ AA AA- A+ A A-
a slight improvement in profitability in
0 Financial strength rating on core operating subsidiaries as of Aug. 15, 2018
AA+ AA AA- A+ A A-
2018–2019, with an estimated combined
Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
ratio of 96%–99% and an ROE of 7%–9%
Financial strength rating on core operating subsidiaries as of Aug. 15, 2018
(Table 3). As interest rates are rising,
Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
at least in the U.S., we expect slight
improvements in net investment returns
Chart 2: Outlook Distribution Of S&P Global Ratings’ as new money is invested in higher-
Top 40 Global Reinsurers*
yielding securities. In addition, reinsurers
Chart 2: Outlook Distribution
Positive Of S&P Global Ratings’
Negative writing life reinsurance should benefit
Top 40 Global Reinsurers*
(10%) (10%)
from higher margins, as this line of
Positive Negative
business is expected to generate an ROE
(10%) (10%)
of just above 10% in 2018–2019.
Although we are slightly increasing
our projected earnings for the sector,
the increase is lower than that following
Stable similar large losses (such as in 2005). The
(80%)
industry benefited from the hardening
Stable market after such events, which hasn’t
(80%)
been the case to the same extent this time,
*As Of Aug. 15, 2018. indicating that pricing cycles are becoming
Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
less pronounced. Therefore, we don’t
*As Of Aug. 15, 2018.
expect material price increases to persist
Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
category. In addition, 80% of reinsurers year in 2018, it is reasonable to assume into 2019. Similarly, we don’t foresee a
have stable outlooks, with the rest evenly that the top 20 global reinsurers could significant positive long-term shift in the
split between positive and negative recover their ‘AAA’ capitalization (see sector’s operating performance.
outlooks (Charts 1 and 2). “Capitalization Remains A Pillar Of
Strength For Global Reinsurers”). Reinsurers’ ERM Is A
Capitalization Remains A Strength, The global reinsurance sector’s Differentiating Factor
Supported By A Slight Expected operating performance has deteriorated More than 80% of the top 40 global rated
Improvement In Earnings during the past five years, mainly reinsurers carry an ERM score higher
Chart 3: ERM
Global reinsurers’ Assessment
robust Distribution
capitalization Of S&P
reflecting Global
the soft Ratings’
global P/C reinsurance than adequate (Chart 3), highlighting the
remainsTop 40 Global
a pillar of the Reinsurers*
industry. Indeed, pricing. As a result, the top 20 global industry’s increased focus on ERM. Once
S&P GlobalChart 3: ERM
Ratings Assessment
continues to viewDistribution
the reinsurers’Of S&P
ROEGlobal
declinedRatings’
to 9.5% in 2016 again, the 2017 natural catastrophe
Topsector’s
reinsurance 40 Global Reinsurers*
Adequate
capital adequacy as from 13.9% in 2013 Very strong
(Table 3). During this losses tested reinsurers’ ERM programs.
(18%) (15%)
a strength. The top 20 global reinsurers’ period, benign natural catastrophe losses Given the strength of their ERM practices,
capital adequacy hasAdequate remained robust hampered the combined Very strong ratio by only 2 the losses were typically contained within
(18%) (15%)
and redundant: 7% at the ‘AA’ confidence to 5 percentage points (ppts), which is their risk limits, with only a few outliers.
level in 2017 relative to 15% in 2016. In below the budgeted catastrophe load, Overall, 2017 catastrophe loss reserves
2017, this group of global reinsurers and strong reserve releases improved it
Adequate with
have been stable so far and mostly
lost its capital redundancy
strong risk controls at the ‘AAA’ by 6 to 8 ppts. Strong
In 2017, the industry had contained within the booked reserves.
(35%) (33%)
confidence level for the
Adequate withfirst time since a wake-up call, as it suffered significant However, Everest Re Group Ltd.
the 2008 financial
strongcrisis, with a deficiency catastrophe losses
risk controls that hurt its combined
Strong experienced unfavorable reserve
(35%) (33%)
of 5% compared with a redundancy of ratio by 21.5 ppts. These losses wiped out developments in the first and second
*As Of We
2% in 2016. Aug. believe
15, 2018. if the industry slightly more than a full year of earnings, quarters of 2018 from the 2017 catastrophe
Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
experiences an average catastrophe resulting in an ROE of negative 1%. events, which could call into question
*As Of Aug. 15, 2018.
Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
12 Global Reinsurance Highlights | 2018Reinsurance Outlook
Chart 1: Rating Distribution Of S&P Global Ratings’
Top
Table 3: Top 20 Global Reinsurers’ Combined Ratio 40 ROE
And Global Reinsurers
Performance
16
2013
14 2014 2015 2016 2017 2018f 2019f
Number of reinsurers
Combined ratio % 1284.6 84.6 87.5 91.9 111.8 96-99 96-99
10
(Favorable)/unfavorable reserve development % (5.7) (6.8) (7.5) (7.1) (4.4) (5.0) (5.0)
8
Natural catastrophe losses % 4.4 2.5 2.3 5.2 21.5 8.0 8.0
6
Accident-year combined ratio excluding 486.0 88.8 92.7 93.9 94.7 93-96 93-96
catastrophe losses and reserve releases % 2
ROE % 013.9 13.4 11.0 9.5 (1.0) 7-9 7-9
AA+ AA AA- A+ A A-
The Top 20 global reinsurers are Allied World, Arch, Aspen, AXIS, Everest Re, Hannover Re, Hiscox, Lancashire, Lloyd’s, MS Amlin, Munich Re,
PartnerRe, Qatar, RenRe, SCOR, Sirius, Swiss Re, TransRe, Validus, andstrength
Financial XL. f: Forecast.
rating on core operating subsidiaries as of Aug. 15, 2018
Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
the conservatism built into its original We expect both China Re and GIC Re to
loss estimate. So far, these adverse “Cedants’ expectations grow at healthy rates given their domestic
developments have been largely unique to have evolved:
Chart They
2: Outlook now Of S&P
Distribution markets’ forecast
Global strong GDP growth and
Ratings’
Everest, but we will continue to monitor how look for
Top 40not only
Global capacity
Reinsurers* increasing insurance penetration (Table
losses play out for the rest of the industry. 5). Furthermore, many global reinsurers
providers but also for risk
Positive Negative
(10%) have recently
(10%) established their presence in
The Leaders In The Reinsurance partners.” China and India to capitalize on the growth.
Race Are Looking To Separate However, these markets’ risk profiles are
Themselves From The Pack volatile due to increasing catastrophe
The top 10 global reinsurers (Table 4) business—at both the subsidiary and the exposures, dwindling underwriting margins,
based on net reinsurance premiums corporate levels. As a result, we assume soft pricing, aggressive competition,
written (NRPW) continued to write the the leaders are well-placed to defend their insufficient underwriting expertise and
Stable
lion’s share of business. Their market positions and will continue
(80%) to gain market experience, and rising regulatory costs.
share increased by 140 basis points (bps) share in a consolidating market. We believe that the top five global
to 73.7% of NRPW in 2017 from 72.3% in In 2017, two new entrants— China reinsurers will likely continue defending
2008. However, within the same timeframe Re (seventh) and15,India-based
*As Of Aug. 2018. GIC Re their dominant market position given
their NRPW jumped a whopping 60% to (10th)—joined the
Copyright © top
2018 10 relative
by Standard toFinancial
& Poor's theirServices
strongLLC.
relationships with cedants
All rights reserved.
$171.1 billion from $106.8 billion. 2008, reflecting the growing demand for and access to business. However, we
The top five global reinsurers continue reinsurance in Asia. China Re continues to believe the rest of the pack can also
to lead the reinsurance sector and have be predominately focused on its domestic score some wins and narrow the gap by
defended their competitive positons well market, generating less than 10% of its focusing on cedants’ needs, becoming
in the past decade. In our view, their client 2017 gross premiums written overseas. more like risk partners, and proposing
relationship management differentiates On the other hand, although GIC Re wrote innovative solutions rather than just
them from the rest of the pack. Cedants’ less than 25% of its gross premiums providing reinsurance capacity that can
expectations have evolved: They now internationally in 2017, it plans to increase easily and less expensively be replicated
look for not only capacity providers but its overseas business significantly. through the capital markets.
also for risk partners. Reinsurers that
Chart 3: ERM Assessment Distribution Of S&P Global Ratings’
can provide a plethora of value-added
Top 40 Global Reinsurers*
services, assist in evaluating risk, provide
customized solutions, and implement
Adequate Very strong
risk and capital management solutions (18%) (15%)
are reaping the benefits.
Moreover, cedants—especially large
multinational insurers—have been
consolidating their reinsurance panels.
Multinational insurers prefer dealing with Adequate with
strong risk controls Strong
fewer reinsurers that are well-capitalized (35%) (33%)
with strong financial strength, good
product expertise, and broad product
offerings. These cedants want to trade *As Of Aug. 15, 2018.
with global reinsurers in all lines of Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
Global Reinsurance Highlights | 2018 13Reinsurance Outlook
Table 4: Top 10 Global Reinsurers—2017 Versus 2008
2017 2008
Rank Rating* Reinsurer Net Rank Rating** Reinsurer Net
reinsurance reinsurance
premiums premiums
written (Bil. $) written (Bil. $)
1 AA- Munich Re 36.45 1 AA- Munich Re 29.08
2 AA- Swiss Re 32.32 2 A+ Swiss Re 24.30
3 AA+ Berkshire Hathaway Re 24.21 3 AAA Berkshire Hathaway Re 12.12
4 AA- Hannover Re 19.32 4 AA- Hannover Re 10.20
5 AA- SCOR 16.16 5 A SCOR 7.50
6 A+ Lloyd’s 10.75 6 A+ Lloyd’s 6.70
7 A China Re 9.97 7 AA- Reinsurance Group of 5.35
America
8 AA- Reinsurance Group of 9.84 8 A+ TransRe 4.11
America
9 A+ Everest Re 6.24 9 AA- PartnerRe 3.99
10 Not rated General Ins. Corp. of India 5.80 10 A+ Everest Re 3.51
(GIC Re)
Top 10 171.07 Top 10 106.85
Top 40 231.98 Top 40 147.71
* Financial strength rating on core operating subsidiaries as of Aug. 15, 2018. ** As of Aug. 15, 2009
The Cost Of Capital—A Marathon We expect the sector’s profitability to be investors had yet to see major losses on
Not A Sprint about the same as the cost of capital over their investments, their reaction to a loss
When it comes to analyzing the the next two years. For this reason, we from a peak peril that affected numerous
reinsurance sector’s profitability, we are not revising our outlook on the sector investments simultaneously could lead
consider this to be more akin to an to negative. However, we would likely do to unexpected flight of capital. However,
endurance race than a 100-metre sprint. so if the sector’s profitability remains the 2017 hurricanes demonstrated that
We focus on the longer-term view of below its cost of capital. despite the reported negative investment
profitability relative to cost of capital returns, investors stood firm.
rather than a snapshot at a single point in Alternative Capital Is Still An For many years, alternative capital has
time. This is consistent with our view last Achilles Heel, But Reinsurers Are been viewed as something of an Achilles
year, when we stated that “if reinsurers’ Learning To Live With The Pain heel for the reinsurance sector—a source
profitability falls sustainably below their Alternative capital continues to erode of vulnerability for reinsurers given the
cost of capital, we will likely revise our traditional reinsurers’ margins and is near-constant supply of new capital
outlook on the sector to negative”. The key constituting a growing portion of global into the sector. This has exacerbated the
word there is “sustainably.” In this context, reinsurance capacity. Indeed, it accounted softening market conditions, particularly
we believe the weighted average cost of for about 16% of the $610 billion global within property catastrophe lines. More
capital (WACC) will remain at 7% to 8% for reinsurance capital as of the end of first- recently, however, reinsurers have been
the foreseeable future (2018 and 2019). quarter 2018, according to Aon (Chart 4). dealing with alternative capital in much
While reinsurers clearly tripped Nevertheless, reinsurers have embraced the same way athletes train at altitude.
up in 2017 when thinking about their third-party capital through instruments For an athlete, altitude training hurts,
profitability relative to their cost of like sidecars, collateralized reinsurance, but come race day, all those oxygen-
capital, the longer-term track record has and catastrophe bonds. Increasingly, deprived training sessions lead to better
been stronger. The sector’s profitability the retrocession market depends on this performance. Similarly, while reinsurers
has, on average, exceeded its cost convergence capital. have suffered from the presence of
of capital by approximately 100 bps The convergence markets’ response alternative capital in terms of pricing,
annually over the past five years, despite to the 2017 events should dispel any by increasingly using alternative
the negative spread in 2017. However, the remaining questions over the permanence capital for retrocession purposes (and
performance gap has been narrowing. of its capital. Some had argued that because competing against it on the inwards
14 Global Reinsurance Highlights | 2018Reinsurance Outlook
AD PROOF
Table 5: Real GDP Growth Of Select Countries And The Eurozone
Country or Sovereign foreign-currency 2016 2017 2018f 2019f 2020f 2021f
region rating as of Aug. 15, 2018 % % % % % %
U.S. AA+/Stable/A-1+ 1.5 2.3 3.0 2.5 1.8 2.3
China A+/Stable/A-1 6.7 6.9 6.5 6.3 6.1 6.0
India BBB-/Stable/A-3 7.1 6.6 7.5 7.8 7.9 8.1
Eurozone N.A. 1.8 2.6 2.1 1.7 1.6 1.4
Germany AAA/Stable/A-1+ 1.9 2.5 2.0 1.8 1.5 1.3
France AA/Stable/A-1+ 1.1 2.3 1.7 1.6 1.7 1.6
U.K. AA/Negative/A-1+ 1.9 1.8 1.2 1.4 1.6 1.3
f: Forecast. N/A: Not applicable. Source: S&P Global Ratings.
reinsurance side), sophisticated during Jan. 1 renewals, is fading. With price hikes that would sufficiently
traditional reinsurers’ business models that, any hope for a permanent reset of compensate for the loss. That wasn’t the
are becoming more efficient. rates has largely vanished. Reinsurers case, and pricing at mid-year renewals
are particularly chafing from the was nothing to write home about.
Reinsurance Pricing Momentum Is experience during mid-year renewals, Global reinsurance pricing was up
Running Out Of Steam which is dominated by Florida renewals. slightly (0%–5%, in aggregate) during
What are a few large natural catastrophes Reinsurers had already tempered their the year-to-date renewals. Specific
to a sector beset with pricing malaise? expectations, but considering the hit from increases varied by line of business,
Not much, apparently, as the rate of price Hurricane Irma in September 2017, there region, and whether reinsurance
increases, which peaked earlier this year was still an expectation for reasonable contracts had experienced any losses.
publi_MapfreRe_210x130-ENG_05-18.pdf 7 1/6/18 14:29
London
Munich
Paris Brussels
C
Toronto Milan
Lisbon
New Jersey Madrid Beijing Tokyo
M
Y
Manila
CM
Mexico City
Labuan
MY Singapore
Bogota
CY
CMY
K São Paulo
Santiago de Chile
Buenos Aires
Beijing [China] | Bogota [Colombia] | Brussels [Belgium] | Buenos Aires [Argentina]
Labuan [Malaysia] | Lisbon [Portugal] | London [United Kingdom] | Madrid [Spain] | Manila [Philippines]
Mexico City [Mexico] | Milan [Italy] | Munich [Germany] | New Jersey [USA] | Paris [France] | Santiago de Chile [Chile]
São Paulo [Brazil] | Singapore | Tokyo [Japan] | Toronto [Canada]
www.mapfrere.com
Global Reinsurance Highlights | 2018 15
12 Global Reinsurance Highlights 2018Adequate with
strong risk controls Strong
(35%) (33%)
Reinsurance Outlook
*As Of Aug. 15, 2018.
Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
Chart 4: Global Reinsurance Capital—Breakdown Between their ability to continue as independent
Traditional And Alternative Capital reinsurers and compete effectively.
Alternative capital Traditional capital Furthermore, cedants’ expectations have
changed as they look for risk partners
100
rather than just capacity providers.
90 Evolving market expectations and tough
80 operating conditions are increasingly
70
challenging current business models
and forcing reinsurers to review their
60
relevance in the long run. Reinsurers
(%)
50 are looking to bulk-up, as those that
40 have scale, a broad product suite, and
strong underwriting capabilities and that
30
can add value to the reinsurer/cedant
20
relationship are the ones that will thrive.
10 Therefore, we anticipate M&A
0 activity to continue over next few years,
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q1 leading to sector consolidation that
2018 will increasingly differentiate larger,
Sources: Company financial statements, Aon Benfield Analytics, and Aon Securities Inc. more diversified, stronger players from
Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
others. We also expect a continuation
of trends of attaining economies of
Caribbean business—including Puerto years. More importantly, terms and scale, broadening of product suites, and
Rico—had double-digit rate increases conditions didn’t slip further, while convergence of primary insurance and
(10%–40%). During the Florida June ceding commissions slightly improved. In reinsurance. There is some potential for
1 renewals, the largest property addition, reinsurers will get a pick-up in large deals, but we foresee more activity
catastrophe market in the world, rates from proportional business, as they in small bolt-on transactions, especially
reinsurance rates increased by low single have shifted their underwriting appetite considering the current valuations.
digits on average but were below industry to this type of business. As a result, Small-to-midsize specialty carriers that
expectations. Loss-affected layers had they’re benefiting from some of the rate have good underwriting track record
risk-adjusted rate increases in the mid to increases on the primary insurance and profitable books of business remain
Chart 5: Top Challenges And Opportunities
high single digits, and nonloss-affected side in reaction to the 2017 catastrophe appealing targets.
layers of loss-affected
Challengesaccounts had Opportunities
flat losses and the recent heightened loss We maintain an overall neutral view
to low-single-digit increases. Pricing in experience in certain lines. Furthermore, on M&A, with a slight negative bias
Economic conditions
nonloss-affected accounts was largely thererisk
and geopolitical could be some gains in renewing because of the industry’s mediocre track
flat. If this was the experience in a region
Disruptors 16 portions of multi-year
U.S. tax reform deals for loss- record. While M&A is not a panacea for
that just suffered heavy catastrophe 14 affected accounts. weak market conditions, a well-executed
Others M&A and sector
losses, it seems likely that the next rate 12 The situation, though not ideal, is strategic deal that has a sound rationale
consolidation
cycle won’t be any better. 10 providing opportunities for reinsurers to can improve prospects for the combined
Cyber threat and 8 Reinsurance pricing
Reinsurance pricing pressures—while optimize their portfolio
data privacy and increase their
adequacy entity through a stronger competitive
6
varying—exist across business lines 4a participation on better-performing deals. position. This could help maintain—
resultReserve adequacyreinsurance capacity
of abundant Nevertheless, underlying Investment returns
market forces or potentially even strengthen—the
2
and U.S. property catastrophe business 0 remain at work and competition is high, consolidated entity’s creditworthiness.
subsidizing other lines and other regions which could result in Meeting
Expense management/
pricinginvestorsʼ
momentum
to a certaincostextent in recent benign years. losing its steam heading
control into 2019.
expectations Sector Issues Are At The Top Of
Nevertheless, the sector has had a bit of Reinsurers’ Minds
Growth and Technology investments
relief. Property catastrophe pricing is up, M&A Could Position Some
diversification
In a recent survey on the sector’s key
if only slightly. And with the margins from Reinsurers To Be More Competitive opportunities and challenges over next
Talent management Uncertainty of modeling risk
property catastrophe business under In The Longer Term two to three years, unsurprisingly the
Alternative capital impact on
constant Regulatory
pressure,framework/changes
reinsurers have been Growth opportunities are somewhat more than 20 global reinsurers that
the reinsurance sector
Climate change impact
reluctant to give much ground on other limited,
on underwriting
and returns are barely meeting responded identified the same key issues
lines of business. cost of capital. Some players that might facing the sector that we did (Chart 5).
CasualtyChartreinsurance achieved
is based on reinsurersʼ someto S&P
responses have been
Global patiently
Ratingsʼ survey. waiting for a better F r om r e i n s u r e r s ’ p e r s p e c t ive ,
modest Copyright
rate increases, and pricing
© 2018 by Standard market
& Poor'sisFinancial environment
Services and
LLC. All rights improved pricing
reserved. reinsurance pricing adequacy and the
somewhat more stable than in recent conditions are probably questioning longer-term impact of alternative capital
16 Global Reinsurance Highlights | 2018Sources: Company financial statements, Aon Benfield Analytics, and Aon Securities Inc.
Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
Reinsurance Outlook
Chart 5: Top Challenges And Opportunities seems there is a greater optimism about
Challenges Opportunities
gains from M&A—both for reinsurers that
are involved in one and for the broader
Economic conditions sector—hoping for less competition and
and geopolitical risk
greater underwriting discipline as the
Disruptors 16 U.S. tax reform
14 sector consolidates.
Others M&A and sector Overall, the survey response highlights
12
consolidation
10 a sector hard at work to shape up and
Cyber threat and 8 Reinsurance pricing
find its stride for a long road ahead.
data privacy adequacy
6
4
Reserve adequacy Investment returns Crossing The Finish Line
2
0
Reinsurers are not oblivious to a market
that is fundamentally changing in terms
Expense management/ Meeting investorsʼ
cost control expectations of the permanence of alternative capital,
increasing commoditization of business
Growth and Technology investments lines, and evolving cedant expectations
diversification
along with the increasing specter of new
Talent management Uncertainty of modeling risk technologies driving market disruption.
Alternative capital impact on
Regulatory framework/changes With business models under stress,
the reinsurance sector
Climate change impact reinsurers are in various phases of self-
on underwriting
discovery, trying to adapt their strategies
to remain relevant. Short-term tactical
Chart is based on reinsurersʼ responses to S&P Global Ratingsʼ survey.
Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved. moves might help but are not a lasting
solution. Rather, we believe most
reinsurers will need transformational
continue to dominate the agenda. These bottom lines, which was evident from changes to survive over time. Similar
two topics go hand in hand. With the the top two opportunities identified: to long-distance marathoners, sound
pricing sentiment changing, reinsurers growth/diversification and technology strategy, discipline, preparation, and grit
are trying not to let the recent gains slip. investments. To help find growth and are necessary ingredients if reinsurers
Although excess reinsurance capacity will offset the margin pressures, reinsurers are to succeed. Indeed, the competitive
continue to make life difficult, the sector are pursuing various initiatives to landscape could look very different a
is actively looking at ways to adjust to the diversify into new products and markets. couple of years from now. We are already
new normal of a heightened presence of For example, reinsurers have growing observing greater differentiation among
alternative capital. Discussions aren’t just interest in finding protection gaps in players, and this will only expand over
centered around the property catastrophe business lines such as cyber, flood, time. The market has shifted slightly,
business but also on how alternative mortgage, and life reinsurance, though boosting the power of brokers, the capital
capital can find its way into other business those lines come with their own risks. markets, and large cedants. If the sector
lines and how best to leverage it. Moreover, investments in technology to can coalesce around some large players,
In addition, reinsurers are keeping a update legacy systems can help achieve it could regain its balance. n
close watch on the economic environment, expense efficiencies, which will be key in
which has gained steam in recent years today’s pricing environment, but that is Taoufik Gharib
but is facing increased risk of higher just one aspect. New York, (1) 212-438-7253
trade tariffs and geopolitical concerns. Reinsurers are increasingly investing taoufik.gharib@spglobal.com
Depending on how far these risks in opportunities that are afforded by Big
escalate, it can start to put drag on the Data and machine learning, and they’re Johannes Bender
global economy, give rise to inflation, and looking for ways to tap into technologies Frankfurt, (49) 69-33-999-196
perhaps even disrupt business—all with like blockchain, which—if achieved— johannes.bender@spglobal.com
potential negative implications for global can provide a competitive advantage.
reinsurers. Furthermore, the regulatory Reinsurers are also optimistic about David Masters
compliance burden from managing interest yields and the resultant gains London, (44) 20-7176-7047
multiple regulatory regimes and evolving that would come through as the portfolio david.masters@spglobal.com
requirements remains a key concern. turns. With that, at least one driver
In response to key challenges, of operating income will move up and Hardeep S Manku
reinsurers have been pursuing offset to a certain extent the pressure Toronto, (1) 416-507-2547
strategies to address both top and on underwriting income. Furthermore, it hardeep.manku@spglobal.com
Global Reinsurance Highlights | 2018 17The Cost of Capital
Global Reinsurers’ Returns
Will Barely Cover Capital Costs
In 2018 And 2019
By David Masters and Taoufik Gharib
In 2017, the reinsurance sector generated returns on capital of only 1.2%. At 6.3% below its cost of
capital, this represents the worst level in more than 13 years.
T
he impact of the 2017 U.S. 2017 catastrophes, this remains close increased and the momentum is
hurricane season was a significant to reinsurers’ cost of capital, which we weakening, as witnessed through
factor, but even during the benign anticipate will increase modestly through the latest renewals. While reinsurers
first half of 2017, returns were only the rest of 2018 and in 2019, remaining welcome rate increases, their
1.0 percentage points higher than the within the 7%–8% range. profitability continues to be hampered by
cost of capital. S&P Global Ratings Despite the optimism reinsurers persistent competitive pressures within
expects the sector’s return on capital to showed when heading into the 1/1 2018 the property/casualty (P/C) underwriting
increase to around 6%–8% by year-end renewal season, overall reinsurance cycle and low investment returns, which
2018. Despite modest price rises the renewal rates have only modestly will initially lag the increase in benchmark
istock photo / 35007
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