Property in transition as some reinsurers become scaredy-cats

Reinsurance executives on second quarter earnings calls expected continued pricing improvements at the upcoming 1 January renewal but this comes against a backdrop of the uncertainty caused by inflation and some pulling back from property business in response to volatility.

After lagging the primary insurance and retro markets for some time, reinsurers are now seeing some momentum on pricing.

For example, AM Best in a report released in August noted that pricing was strong in the reinsurance segment in 2021, with many companies reporting that a third to a half of their premium growth could be attributed to pricing increases rather than exposure growth.

The pricing momentum has continued into this year. AM Best forecasts more of the same for next year but with the caveat that not all will maintain their premium growth levels.

“Rate increases in many of the reinsurance lines are expected in 2023, although they will vary by line of business and territory,” AM Best said. “However, growth could be countered by reductions in property cat reinsurance premium, as many companies have begun to withdraw or substantially reduce their participation in that market.”

As the rating agency noted, reinsurers have undertaken a reassessment of their commitment to the property catastrophe market.

Moody’s also highlighted this in a report on US and Bermuda reinsurers’ Q2 results.

“Reinsurance management teams took different strategic approaches to property catastrophe writings during the quarter, with companies such as Arch and PartnerRe reporting healthy growth in property lines, while others such as Everest Re and Alleghany [parent of TransRe] chose to reduce property catastrophe exposures,” Moody’s said.

The property pullback was also a big topic of discussion on reinsurers’ earnings calls.

A prominent example was Axis Capital, which during the second quarter announced its complete exit from property reinsurance business, after scaling back in recent times. This led to its overall reinsurance renewal volume dropping by 32 percent at the 1 July renewal.

Axis Re is being repositioned as a specialist reinsurer focused on casualty, specialty, accident and health, and credit lines.

Axis president and CEO Albert Benchimol on an earnings call explained: “We find that reinsurance remains an attractive channel to access specialty risks that we can’t easily obtain through our insurance business. It provides additional scale, balance and geographical diversification to our consolidated portfolio, and we’re very good at it.

“On the other hand, we do not believe that the Axis we are building is the best market for volatile property and catastrophe reinsurance lines. We felt it best to be clear with our broker partners and customers as to the sustainable long-term risk appetite of our business.”

Benchimol noted the strong reinsurance price increases Axis has been getting on the business it is writing, with an average increase of close to 9 percent in Q2 and 8.5 percent year to date. Aviation generated increases of more than 13 percent in Q2, and liability was up more than 11 percent. Professional lines were up 9 percent, while motor, marine, credit and surety all saw modest gains below 5 percent.

Property improvement predicted for 1.1

Benchimol stressed that his company’s exit “is not a view on the catastrophe business within the broader industry”.

“Indeed, we expect that this line will continue to improve at the 1 January renewals. Rather, this is a strategic decision to advance our progress towards the company we choose to be: a leader in specialty underwriting with a strong and consistent earnings profile,” he said.

Other reinsurers displayed an appetite for writing catastrophe business.

Arch Capital CEO Marc Grandisson said the June and July renewals “showed a property cat market in transition”.

“While I hesitate to make predictions, we are cautiously optimistic that this momentum will continue into 1.1.23,” he said. “The general psychology of the market appears to have shifted to requiring substantial rate increases to accept cat exposure.”

He added: “As an example, in Florida, where capacity remains constrained, property cat rates were up in excess of 30 percent and our PML in a 1-in-250-year event increased as we selectively expanded our writings.”

Grandisson said that rate pressure was also evident also beyond Florida. “However, we will need a few more quarters to confirm we are facing a hard property cat marketplace,” he said.

Juan Andrade, president and CEO of Everest Re, said overall reinsurance market conditions have steadily improved over the course of 2022.

Discussing property cat, the executive said Everest is “seeing improved economics”. He added: “Everest’s position as a preferred market has allowed us to reposition our participation in key programs, further away from frequency losses and achieve better expected profit or reduced cat exposure.”

RenaissanceRe president and CEO Kevin O’Donnell described the Florida renewal at 1 June as “dislocated with continued upward rate momentum driven by reduced reinsurer and third-party appetite, limited retro capacity and severe financial distress at many domestic Florida insurers”.

He estimated industry rate increases in Florida averaged 10 percent to 30 percent with pricing particularly challenged in the lower layers.

RenaissanceRe has been reducing exposure to Florida over the last five years and currently only provides material support to six domestic insurers. Southeast wind remains the peak risk in its portfolio, however, as the reinsurer has moved away from Florida domestic carriers to more regional and nationwide programs.

“Overall, at the mid-year renewals, we decided to hold our PMLs flat while taking the benefit of increased rate,” O’Donnell said. “More broadly, across the US we saw a significant increase in demand mid-year with about $5bn of new limit purchased. This was a mixture of mid-year renewals and some 1 January clients coming back to buy additional limit.”

As a result, O’Donnell said favourable pricing continued into 1 July with non-loss-impacted risk-adjusted business rates up 10 percent to 20 percent, while loss-hit programs were up by over 50 percent in some cases.

Discussing international renewals, O’Donnell said renewals in Australia were dislocated because of losses over the last year while European business also experienced rate increases, although at a more moderate pace.

Responding to an analyst who suggested “property reinsurance has increasingly become a negative word for a lot of your competitors”, O’Donnell noted that “supply is decreased, but it’s pretty closely matched to where the market is buying”.

The executive added: “I think with increased demand at 1.1, we’re going to see further rate pressure come into the market and reinsurance-led pricing, which we haven’t seen for a long time, or at least that’s what I’m optimistic for.”

Swiss Re eyes cat growth

The European reinsurance giants have also been taking divergent paths on property business.

Swiss Re reported that it achieved price increases of 12 percent at the July reinsurance renewals. However, the reinsurer said it was needed to fully offset higher loss assumptions, reflecting a view on inflation and other changes in exposure.

Year to date, Swiss Re has seen 6 percent price increases in its P&C reinsurance business.

At the July renewals, the reinsurer said nat cat growth was in line with January/April renewals, with the company shifting capacity to higher-attaching layers with attractive economics

For property business, Swiss Re has reduced proportional property year to date, largely driven by July renewals to mitigate inflationary impacts.

“We do indeed see cat as an attractive area to grow further,” Swiss Re group chief underwriting officer Thierry Leger said on an earnings call. “We think the market has arrived to a hard market positioning, and we feel that continued hardening will happen in the next 18 months or so. So we are very optimistic with regard to the market out there.”

However, CFO John Dacey also indicated that Swiss Re believes the Florida market is still not well priced, and the company remains underweight there.

Scor during the June and July property casualty renewals reduced its 1-in-250-year PML by 21 percent, which was significantly ahead of its original 11 percent projection for 2022 at the start of the year.

“Since then we have reshaped our cat risk profile, reducing both earnings at risk and capital at risk,” said Scor CEO Laurent Rousseau on an earnings call.

The executive added that Scor has also reduced volatility by cutting the net PML by 50 percent in its agriculture portfolio and rebalancing it towards non-proportional business to improve the profitability.

Jean-Jacques Henchoz, chairman of the executive board at Hannover Re, highlighted “an improving reinsurance market price environment”.

He said at the mid-year renewals Hannover Re saw “favourable demand overall” while “limit management and inflation were the most notable topics during the renewal”.

Hannover Re has not changed its view on nat cat-related business in the Americas, and so has not increased risk appetite for US wind and earthquake-exposed business.

Commenting on the P&C reinsurance market in general, Henchoz said: “Inflation will clearly be one of the key topics, both in renewal negotiations ahead of 2023, but also in discussions with our investors. In our pricing, we adjust the inflation expectation regularly and have done so last year and this year, in particular.”

He added: “The recent renewals show that we are in a position to ask for higher rates, and we were able to integrate these higher inflation expectations in our pricing.”

Joachim Wenning, chairman of the board at Munich Re, also noted the impact of inflation on the P&C reinsurance business on his company’s earnings call.

“We have seen significant nominal price increases in this year’s renewals which were, to a large extent, driven by inflation and will be supportive for a continuation of the hardening market,” he said.

Casualty cedes stabilising

On the casualty side, Everest Re’s Andrade said the market remained stable with some tightening of terms driven by concerns over social inflation and emerging risks.

“The market is showing signs of discipline, especially in pro rata, where cedes appear to be stabilising,” he said.

Jim Williamson, group chief operating officer and head of reinsurance at Everest Re, added the levelling off of pro rata commissions was certainly seen in the US and some of its international treaty casualty businesses.

Williamson added, however, that there are still areas of the market where ceding commissions are increasing. The executive noted that there has been three and a half years of rate increases in casualty.

“We’ve also seen really significant re-underwriting actions by many of our cedants,” Williamson said. “That’s risk selection, that’s attachment points, that’s limits, that’s terms and conditions. And that builds a significant amount of underlying margin into the treaties that we’re writing.”

RenaissanceRe’s O’Donnell also highlighted the stabilisation in the casualty market on his company’s earnings call.

“In our traditional casualty book, we are seeing reduced overcapacity on the best deals as well as reduced pressure on ceding commissions,” he said. “These trends are in response to underlying rate moderation and general inflationary fears, and we expect them to persist and drive bottom-line profitability.”

O’Donnell added that market conditions in RenaissanceRe’s specialty book continued to improve, driven by uncertainty from the Russia-Ukraine war and concerns related to cyber risk.

“Cyber has presented an ongoing opportunity with demand consistently exceeding supply and rates up significantly,” he said.

The Moody’s report reflected the feedback on the overall reinsurance market from the earnings calls, with the rating agency stating that pricing conditions will remain favourable into 2023 January renewals but risks remain.

Moody’s said that, with the Atlantic hurricane season still to run its course, it is too soon to determine whether reinsurers will post strong profit for the full year 2022, while inflationary pressures will also drive pricing momentum.

“Management teams remain focused on improving the underlying margins for property catastrophe coverages,” it said. “Despite the favourable pricing conditions, the sector remains exposed to potentially large catastrophe events, rising loss costs as a result of economic and social inflationary trends, and uncertainty with regard to exposures related to the ongoing military conflict in Ukraine.”