Best’s Briefing: Catastrophe-Ridden 2017 Could Drive Global Re Sector’s Profitability Level to Six-Year Low

OLDWICK, N.J.--(BUSINESS WIRE)-- A catastrophe-ridden 2017 could drive the overall profitability level for A.M. Best’s composite of global reinsurers to a six-year low, according to a new Best’s Briefing.

The briefing, titled, “Global Reinsurance – Where Have All the Losses Gone?” projects an estimated combined ratio of 110% for this sector, with return on equity (ROE) ranging from 0% down to -5%. This compares with a five-year average combined ratio of 91% and a five-year average ROE of 11%. The last time the global reinsurance composite reported a combined ratio above 100% was in 2011, due to a series of global catastrophes, which included earthquakes in Japan and New Zealand, and widespread flooding in Thailand.

Company reserving estimates associated with hurricanes Harvey, Irma and Marie, along with the central Mexico earthquake, indicate that accumulated insured losses could reach $90 billion, well below other published modeled loss figures. These estimates were drawn from a survey of A.M. Best’s Global Reinsurance segment, which includes Bermuda market companies. Based on this company feedback, net catastrophe losses for reinsurers will range from $20 billion to $25 billion, with an equal amount of losses incurred by alternative capital, mostly in the form of collateralized reinsurance.

The report notes that the difference with these particular hurricane events in 2017 compared with previous catastrophe-heavy years is the material participation by alternative capital and the unique features of that capacity. The response from this capacity will have a definite near- and long-term effect on the dynamics of the market; however, the report cautions that overall losses may keep rising.

“Using history as a lesson, it is not uncommon for losses related to catastrophe events to develop adversely over time, and the complexity is usually a determining factor in this regard,” said Robert DeRose, senior director. “Given the complexity of the hurricane events, it would not be surprising to see losses develop well into next year.”

To gauge the earnings impact, A.M. Best determined the net income loss coverage, a measure of net catastrophe losses divided by 2016 net income. This is indicative of how long it may take companies to earn back these losses based on their own recent earnings. The average for the Global Reinsurance composite is 1.23 times, which means it will take approximately five quarters to recover what has been paid out.

“Granted, improved rates can speed up this timeline, but some companies may take closer to two or three years to earn back these losses – again, looking at it strictly through this lens,” said Greg Reisner, director. “Arguments can be made to normalize or adjust earnings for certain companies, but this is an unadjusted view of the data and an observation of the range.”

To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=267949.

A.M. Best is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2017 by A.M. Best Rating Services, Inc. and/or its subsidiaries. ALL RIGHTS RESERVED.

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A.M. Best
Robert DeRose
Senior Director
+1 908 439 2200, ext. 5453
Greg Reisner
+1 908 439 2200, ext. 5224
Christopher Sharkey
Manager, Public Relations
+1 908 439 2200, ext. 5159
Jim Peavy
Director, Public Relations
+1 908 439 2200, ext. 5644

Source: A.M. Best