Rising competition and lower renewal rates are taking a toll on
the sector
By William Wilkes
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (February 20, 2018).
One morning last September, Dwayne Elgin unbolted the front door
of his home on the island of St. Martin and gazed upon a wasteland
of flipped cars, uprooted trees and flattened homes.
Irma, the strongest Atlantic hurricane on record, had laid waste
to the Caribbean island overnight, and as head of Nagico
Insurances, a local insurance firm, Mr. Elgin knew almost all of
his policyholders would turn to him for help. But he was prepared:
Like many insurers, he had unloaded a large portion of firm's risk
to reinsurers, the industry's last line of defense.
Irma and an extraordinary string of other natural disasters in
2017 saddled insurers and reinsurers globally with more than $135
billion in losses, according to Munich Re's 2017 Natural
Catastrophe Report.
Typically, that would lead reinsurers -- the largest of which
include German and Swiss firms such as Munich Re, Swiss Re and
Hannover Re -- to raise prices, helping them to bounce back from
the losses.
However, this year the industry has struggled, in the latest
illustration of how loose monetary policy is challenging Germany's
financial sector.
Reinsurers fared poorly in January during annual price-renewal
negotiations with insurers, according to industry analysts, with
easy money opening up new ways for insurers to spread risk beyond
reinsurers, such as issuing bonds, pressuring prices.
The combination of soaring catastrophe losses and low renewal
rates -- the annual price difference in policies sold by reinsurers
-- has, in some cases, all but wiped out profits.
Munich Re recently reported a 85% fall in full-year profit
because of natural disasters, reducing its return on equity -- a
closely watched measure of financial productivity -- to 1.3% from
8.3% the previous year. That's far below the long-term industry
average of over 10%, calculated by Standard & Poor's. The
company's average renewal rate increases of 0.8% will do little to
compensate for the losses, analysts say.
Munich Re's Chief Financial Officer Jörg Schneider said the
company had a sufficient capital buffer to cope with the
disaster-related losses and that he expected reinsurance prices to
rise in future renewal negotiation rounds.
The company is the world's second-largest reinsurer by premiums
written behind Swiss Re.
Rival Hannover Re has also been hit, with a spokesman saying its
disaster losses for 2017 would be the largest in its 52-year
history. It is set to report full-year earnings next month. Its
profit margin fell sharply in the third quarter.
To be sure, U.S. firms face similar issues, with Berkshire
Hathaway Inc. -- set to report full-year results on Friday --
citing hurricanes and an earthquake in Mexico for its
insurance-underwriting arm swinging to a third-quarter loss.
However, as home to some of the world's largest reinsurers, the
industry's travails have sparked concern in Germany, with a
spokesman for the country's financial watchdog, BaFin, saying it
was watching the sector. The situation doesn't pose an immediate
threat to the country's financial system given its diversified
economy and deep pool of savings.
The main reason for reinsurers' loss of pricing power is growing
competition, which has come in part from insurance-linked
securities such as catastrophe bonds. Such bonds essentially
package insurance risk as debt that doesn't have to be repaid in
full or at all if a disaster stipulated in the bond's contract
strikes.
Offering relative yields of up to 8%, the bonds have proved
popular with sophisticated investors looking for higher returns
after bond buying by central banks drove bond prices higher and
yields lower.
Global issuance of catastrophe bonds hit a record $10.5 billion
in 2017, according to Property Claims Services, a U.S. industry
body. Such forms of alternative capital now account for around 14%
of total reinsurance capital, up from 4% in 2006, according to U.S.
insurance broker Aon Corp.
With monetary policy only starting to normalize around the
world, the pricing environment for reinsurers looks unlikely to
improve in the near term, according to David Flandro, head of
analytics at JLT Reinsurance Brokers.
The other side of the profit equation -- natural disasters -- is
impossible to predict but some reinsurers don't think 2017 was an
exception.
The 2017 events "are giving us a foretaste of what is to come,"
Torsten Jeworrek, a Munich Re board member said last month. "Our
experts expect such extreme weather to occur more often in
future."
Disasters caused a record $330 billion in damage to property in
2017, according to Munich Re's Natural Catastrophe Report.
The trio of Atlantic hurricanes Harvey, Irma and Maria made the
September 2017 hurricane season the costliest on record. A Sept. 19
earthquake that rocked parts of Mexico City and failed crops in
Europe because of a late frost added to the bill.
Without reinsurers, the level of claims from policyholders could
have exhausted cash reserves at several large and small insurers in
disaster zones.
Back in St. Martin, Mr. Eglin's Caribbean-based Nagico had
signed reinsurance agreements before the hurricane season. This
translated into a $250-million early payout for the insurance
company, which allowed it to start paying claims to policyholders
-- and putting St. Martin back on its feet.
"Insurance money is the only thing keeping the economy moving
right now, " Mr. Elgin said.
Write to William Wilkes at william.wilkes@wsj.com
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February 20, 2018 18:13 ET (23:13 GMT)
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