1.1 cat reinsurance: who’s in, who’s out and who’s in doubt?

Public statements compiled by this publication from 19 reinsurers throw a spotlight on the contrasting strategies around property cat appetite, ahead of what is expected to be one of the most challenging January renewals in years.

Inflation and climate change are acting as the main influencing factors of the January renewal season, with market observers striving to predict the impact these will have on the capacity that will be made available by traditional reinsurance capital at 1 January.

Surging inflation this year has fuelled demand for higher limits as the expected losses on perils continue to rise.

Last week, we noted that if the US property cat/all risks reinsurance market is ~$200bn in limit then a 10 percent increase to accommodate inflation would mean cedants requiring an additional $20bn in 2023 just to – in effect – stand still.

A number of nationwide carriers have already privately indicated a desire to expand their limit bought, including Allstate, Liberty Mutual and State Farm. We expect this list to increase in size next month perhaps also with the addition of some large European cedants.

Meanwhile, there is a growing perception among reinsurers that climate change – through its impact on loss frequency and severity for primary and secondary perils (see graphic below) – has not been adequately priced in so far or properly modelled.

But even before these factors came onto the scene, many reinsurers had begun shifting their appetite away from property lines, placing additional pressure on the capacity for quota share support for cedants in 2022.

The market already experienced that capacity shortage at the mid-year renewals as placements struggled amid rate increases and a squeeze in cat appetites.

But while there is a broad perception of a forthcoming 2023 supply deficit – particularly for QS property reinsurance, cat agg and lower layer XoL – individual reinsurers are in fact taking notably different approaches to their cat/all risks exposure strategies in the run-up to the 1.1 renewals.

Indeed, commentary from the latest earnings calls and public statements at the Monte Carlo Rendez-Vous show that while some reinsurers have drawn a line in the sand by reducing their exposure on a permanent basis (at least for now), others are intending to profit opportunistically from the better rate environment and terms and conditions that are expected.

And some are even eyeing the opportunity for an outright expansion in the segment amid the emerging hard market conditions that the demand-supply imbalance is creating.

Strategic retreats

Among those that have made a strategic decision to reduce exposures are mid-size reinsurers Axis and Axa XL.

The former announced in June that its reinsurance unit Axis Re was exiting the property treaty segment entirely as part of a shift to specialty underwriting.

This came after the company looked into selling the business but found limited interest in the unit.

At the time of the announcement, the move meant Axis was giving up a $706mn-premium portfolio, which the company had scaled down since peaking at just over $1bn in 2019.

Axis’ cat retrenchment followed that of Axa XL, which was among the first to undertake a strategic move to cut PMLs.

As revealed by this publication in November last year, Axa XL stopped writing property catastrophe reinsurance out of London as the business looked to undertake a “material reduction” in its cat exposures across its portfolio.

In May this year, Axa’s CFO Alban de Mailly Nesle said the group remained focused on “disciplined execution”.

“We have been repositioning our reinsurance portfolio with nat cat exposure already trimmed by 40 percent across first quarter’s renewals,” he said.

US reinsurer Markel was also among the early movers in withdrawing from the segment.

In October 2020 it announced it was closing its Markel Global Reinsurance property catastrophe unit, with its ILS fund manager Nephila becoming the single point of entry for the business.

In June this year, Lloyd’s player Tokio Marine Kiln (TMK) unveiled the details of a proposed restructure which is expected to see an accelerated reduction of its property reinsurance book at 1 January 2023.

The plan will see TMK’s quota share reinsurance Syndicate 557 cease underwriting and instead merge into the group’s flagship Syndicate 510.

At a group level, Tokio Marine also took a strategic decision to cut back its reinsurance exposures when it sold its Bermuda reinsurer Tokio Millennium Re to RenaissanceRe for $1.5bn in 2018.

Global reinsurer Scor has also retreated, reducing its 1-in-250-year PML by 21 percent during the June and July property casualty renewals, 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.

Big four global reinsurers’ contrasting de-risking strategies

Scor’s defensive stance stands in contrast with that of its European global reinsurance peers.

Indeed, German reinsurers Munich Re and Hannover Re are perceived to be approaching 1 January with a more forthcoming attitude and no outright intention to reduce exposures, though still maintaining a prudent position on pricing.

Commenting on the P&C reinsurance market in general, Hannover Re’s CEO Jean-Jacques 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.”

Meanwhile Munich Re’s reinsurance CEO Torsten Jeworrek said the group had “no ambition to shrink our cat capacity” and wanted to remain a “very reliable partner to our clients.”

Jeworrek said the firm will maintain its appetite for natural catastrophe as long as pricing is “prudent and conservative”.

With more than 60 percent of Munich Re’s treaty reinsurance premiums up for renewal in January, he said the company was taking steps to ensure factors such as inflation and exchange rate impacts were built into pricing at 1.1.

At the more dynamic side of the spectrum, Swiss Re appeared willing to lean in at the upcoming January renewal.

On an earnings call, group CUO Thierry Léger said: “We do indeed see cat as an attractive area to grow further.”

The reinsurer said nat cat growth at 1 July was in line with January/April renewals, with the company shifting capacity to higher-attaching layers with attractive economics.

“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.”

Standing still in cat exposures

Everest Re, RenaissanceRe and TransRe appear to be sitting in the middle of the road in terms of property cat appetite for 2022/23, with all three having pared back their exposures in recent quarters but now looking to maintain current levels.

Juan Andrade, president and CEO of Everest Re, said that overall reinsurance market conditions had steadily improved over the course of 2022 and the company was now “seeing improved economics”.

“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,” he added.

Meanwhile, fellow Bermudian RenaissanceRe held its PMLs flat as it benefited from increased rates at the mid-year renewals.

According to the company, Southeast wind still remains the peak risk in its portfolio, with the reinsurer having moved away from Florida domestic carriers to more regional and nationwide programs.

President and CEO Kevin O’Donnell said: “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.”

And speaking at the Monte Carlo Rendez-Vous last week, TransRe’s CEO Ken Brandt said the company’s de-risking from cat business was now complete but the plan was never to exit the segment entirely.

“We’ve pulled back some capacity over the last year, mainly in the lower layers, aggregate programs, where a lot of the secondary peril losses were coming from. We’re pretty satisfied with where our portfolio is now, and we still have a lot of limit committed to the cat market,” Brandt said.

In addition, Andrew Rippert, CUO at Aspen Reinsurance, recently told The Insurer TV that the group will target property lines – inclusive of property cat – but for margin growth only.

Rippert said that Aspen will look to strengthen its position in property at 1 January by capitalising on the “best opportunities”, after de-risking its book in 2019-21.

The group anticipates margin growth given the improved pricing opportunity, but confirmed it will not be growing its net cat exposures.

Seizing the opportunity

Aside from Swiss Re, there were other reinsurers that appeared willing to take advantage of the current hardening market.

Indeed, some observers suggest reinsurance pricing could rise as much as 20 percent on average at 1 January to account for inflationary pressures both this year and in 2023, as well as the uncertainty around secondary perils which has not been priced in.

Against this backdrop, established reinsurers like Arch, PartnerRe and Hiscox have communicated their intention to grow their exposures if the right conditions are present.

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.”

Grandisson reported that the Bermudian selectively expanded its writings in Florida as it eyed property cat rates up by more than 30 percent and grew its 1-in-250-year event PML.

The executive 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.

Meanwhile, PartnerRe’s CEO Jacques Bonneau said he was planning to present a business plan to its board later this month that will budget for a modest increase in cat capacity, which the reinsurer will deploy strategically along with its cyber capacity first to cedants where it can access other business it finds attractive.

And similarly, Hiscox’s group CEO Aki Hussain said property catastrophe continued to represent one of the “best areas for growth” for Hiscox Re & ILS, with rising rates and a capacity crunch leading to increased demand for limit.

Others looking to increase their exposures include Convex, Validus Re and Ariel Re.

Convex CEO Paul Brand said the group would likely see a modest shift in the balance of its portfolio towards reinsurance this year, reflecting premium growth on the back of price increases.

“Lots of people are running backwards from reinsurance at the moment, particularly for short-tail lines, which are having a pronounced impact on pricing,” he said. “While we are not growing our overall aggregate, we are growing premiums in that space.”

Validus Re CEO Chris Schaper said the reinsurer is actively quoting across the board as others retrench, as he described an “underwriter’s market” that the carrier is addressing from a position of strength after reshaping its book over a two-year period in which it has doubled in size to $3.1bn.

Meanwhile, Lloyd’s reinsurer Ariel Re said it was in active discussions with potential capital providers in a bid to increase Funds at Lloyd’s to support growth opportunities in 2023, including in cat reinsurance at the upcoming 1 January renewal.

Ariel Re was one of only a handful of reinsurers that looked to increase their presence at the mid-year US wind renewal.

Despite the new hardening conditions, there has been little in terms of new entrants to the markets, with a class of 2023 unlikely to emerge for the time being.

The only exception perhaps was Belgian insurance group Ageas, which announced the creation of Ageas Re.

The newly launched third-party reinsurance operation has long-term ambitions to write gross premiums of €1bn ($1.02bn) although it expects to have a “modest” and “limited” impact at the upcoming 1 January renewals.