Report: January 2021 Renewals
The publication of the results of the January renewals of the major reinsurers confirms, in our view, that the reinsurance sector is going through a phase of hardening rates. We expect the market leaders in particular to benefit from this through profitable growth. This positive assessment can also be translated to the CAT bond market.
2020 brought the triple whammy to the reinsurance sector. Covid-19 caused massive losses on several business lines such as business interruption and event cancellation. Rising excess mortality in some regions triggered for the first time a pandemic bond and mortality XL covers. Cat losses and large man-made losses (such the explosion in the port of Beirut or the Boeing 737 Max crisis) were above expectations and the hurricane season had more named storms than ever before. Finally, capital markets showed significant turbulences triggered by the pandemic and reinsurers needed to weather an almost perfect storm on both sides of the balance sheet. Still, none of the large reinsurers were forced to recapitalise . In fact, Solvency Ratios stayed in the target ranges despite substantial declines.
The reinsurance market reacted at the January 2021 renewals in its usual fashion: it was payback time! Rate increases were reported across the board in both primary insurance and reinsurance. Primary insurance markets hardened particularly in North America which filtered through to the proportional reinsurance segment. On the non-proportional reinsurance side, property, marine and aviation showed strongest rate increases.
Within the subset of the four market leading listed European reinsurers – Munich Re, Swiss Re, Hannover Re and Scor – Hannover Re and Scor are in our view in the sweet spot. Being significantly smaller, leaves them more flexible to reallocate capacity than Munich Re and Swiss Re. Hannover Re and Scor have both reported a much stronger growth of renewed premiums, especially on the non-proportional side. While the price change data are not fully comparable, we believe that Scor showed a slightly better outcome of the renewal season than peers.
Swiss Re trailed peers with a premium decline of 11%. This looks somewhat counterintuitive but we note that the issuer continued its portfolio management actions and terminated some underperforming long-tail casualty business. The resulting shift in the business mix should be credit positive for Swiss Re. Overall, Swiss Re was able to achieve price increases of 6.5% on the renewed portfolio.
Munich Re reported a renewed premium increase of 10.9% on the back of rate increases of 2.4% on average. However, this tends to be much more conservatively calculated than peers. The issuer achieved high rate increases in North America driven by social- and claims inflation as well as a high level of cat losses on 2020. There was less upward pressure on rates in Europe but low local interest rates support the price hardening (as investment returns contribute less to the overall result in a low yield environment). Munich Re cut back on its non-proportional casualty business as volume changes amounted to -28.0% compared to price increases of 3.2%. However, the reinsurer compensated this in the proportional casualty business where volume changes were up 16.0% and prices +1.4% on average. Growth drivers were – besides the non-proportional property business where prices were up 7.9% and volumes by 4.3% on average – the marine and aviation lines. The latter two delivered double-digit volume changes and strong price increases of 6.1% and 9.8%, respectively. A bit unusual was the price softening by 0.6% in credit.
Hannover Re reported a renewed premium increase by 8.5% driven by a significant 5.5% price increase. Price changes were also for this issuer more significant in the Americas than in EMEA. Unlike Munich Re, Hannover Re reported substantial price increases in Credit & Surety of 9.0% in proportional business and 14.7% in non-proportional which is in line with our view that Hannover Re has here a relative advantage over Munich Re. Marine and Aviation were also for Hannover Re sources of disproportional price increases (+15.2%). Premium growth in structured reinsurance, which plays traditionally a bigger role for Hannover Re, stood at 10% and its share of the business mix increased marginally.
Scor outperformed in our view during the January renewals as renewed premium was up 15.9% on the back of average price changes of 7.8% as the issuer emphasised that the hardening of the reinsurance market accelerates. The issuer appears to be more cautious in North America where it achieved outstanding price increases of 20.2% but renewed premium income still declined 1.5% compared to 6.3% price increases and renewed premium growth of 22.0% in Europe. In APAC, the issuer showed relative moderate growth in the mature markets with 4.1% price increases and 12.3% renewed premium growth. However, the issuer pursued a strong growth approach in its “Fast Growth Markets” at 25.7%, which came at the expense of a lower price increase of only 1.7% on average. Scor’s specialty business saw substantial price hikes for single large commercial risks with renewed premium going up a massive 16% at prices jumping 23%.
Funding of growth stemmed mostly from existing excess capital. I.e. Munich Re and Hannover Re scrapped special dividends and share buybacks for the first time in many years. This is in line with their long-stated strategy that both prefer to redeploy excess capital into the business rather than returning it to shareholders. So we apparently get closer to the inflection point where reinsurers find more attractive business opportunities than there is excess capital to fund it. Swiss Re also stopped paying special dividends and share buybacks despite having reported a top line decline. However, the reinsurer disclosed a net loss for FY20 which is the first time since 2008 that one of the four large reinsurers reported a net loss. Scor relevered slightly in FY20 but also did not pay a dividend in 2020 as requested by the regulator for all French insurers. Scor does not pay a catch up dividend and the retained capital provides some funding for top line growth.
In terms of outlook, we expect the market hardening to continue at the next renewal dates in 2021. In particular, the July renewals in the US which comprise a higher share of catastrophe business will offer further strong growth potential. In this context, we do not exclude opportunistic new debt issues by those reinsurers which have a lower leverage than their peers.
We expect the cat bond market to mirror the trajectory of the renewals. I.e. we expect significant capital inflows into the market and accelerated new issue activity from both existing and new issuers. While the additional supply will somewhat supress the rate hike, we believe this segment to remain highly attractive for investors seeking positive yields and diversification.
In case of further questions please do not hesitate to contact us.
Kind regards
Your Plenum-Team