A.M. Best has ‘significant concerns’ about global reinsurance industry after 2016 accident year combined ratio tops 100%

The global reinsurance market is “far from thriving” and while the Lloyd’s market “maintains an excellent business profile,” its accident year combined ratio in reinsurance exceeded 100, A.M. Best Company Inc. said in a report released Tuesday.

Each September, Oldwick, N.J.-based A.M. Best releases a report on the global reinsurance market, which includes a list of top 50 reinsurers ranked by total premiums.

In this year’s report – Down But Not Out: Reinsurers Look to Reposition Amid Market Disruption – A.M. Best reported the reinsurance industry had a combined ratio of 95.2% in 2016, up 4.8 points from 90.4% in 2015.

The 2016 accident year combined ratio, however, was 101%.

“This is the first time we’ve seen an accident year loss in over ten years, with the exception of 2011, which had several significant global catastrophes,” A.M. Best noted. “Since 2013, the sector’s combined ratio and return on equity have both deteriorated.”

A.M. Best “changed its outlook for the reinsurance sector to negative in the summer of 2014,” and noted the deterioration in the past few years has been masked by several factors, including favourable loss reserve development.

“A.M. Best has significant concerns,” the rating firm stated in the report. “If the reinsurance market is booking the accident year combined ratio at a loss in a relatively benign catastrophe years, and that in and of itself if not the impetus for change, the next logical question is: what will it take to turn the market?”

In 2015, A.M. Best noted there were several merger and acquisition transactions “aimed at gaining scale or building a broader market footprint.” Among them were the acquisition of Platinum Underwriters Holdings Ltd. by RenaissanceRe Holdings Ltd. and XL Group Plc’s acquisition of Catlin Group Ltd.

This year, Fairfax Financial Holdings Ltd. announced it completed its acquisition of about two-thirds of Allied World Assurance Company Holdings AG, with third party-partners (such as the Ontario Municipal Employees Retirement System) contributing cash towards the acquisition and getting a minority stake. This past March, SOMPO Holdings Inc. completed its acquisition of Endurance Specialty Holdings Ltd.

“The trend now for M&A appears to be leaning toward finding a home in a larger organization, where a company can have autonomy and be nimble, but have some parental protection as seen with the Endurance/Sompo and Allied/World/Fairfax acquisitions,” A.M. Best said in the report.

Allied World reported US$3.06 billion in gross written premiums in 2016, of which US$706 million was from reinsurance. Toronto-based Fairfax’s holdings include Stamford, Conn.-based OdysseyRe, which provides commercial specialty and reinsurance.

OdysseyRe was ranked 29th in A.M. Best’s list of the world’s top 50 reinsurance groups, ranked by total gross written premiums in 2016, including life and non-life.

The top 6 this year were Swiss Re, Munich Re, Hannover Re, SCOR, Berkshire Hathaway and Lloyds. Swiss Re and Munich Re had net written premiums in non-life of US$21.43 billion, and $17.9 billion respectively. Hannover Re, Berkshire Hathaway and SCOR had net premiums written in non-life of $8.4 billion, $8 billion and $5.3 billion respectively.

“If a company or group’s GPW for reinsurance is 75% or more of its entire gross premium volume, all gross premiums written are counted in the ranking as reinsurance premiums,” A.M. Best said of its methodology. “Conversely, if a company’s or group’s reinsurance/insurance split consists of less than 75% reinsurance premiums, only the reinsurance premiums are counted and the insurance premiums are excluded.”

A.M.  Best reported that in 2016 the Lloyd’s market had US$8.69 billion in non-life net premiums written.

While A.M. Best says the Lloyd’s market “maintains an excellent business profile,” the “performance of Lloyd’s reinsurance segment deteriorated in 2016.”

The property, casualty, and specialty sub segments “reported accident-year combined ratios above 100%, although reserve releases supported calendar-year combined ratios below 100%,” A.M. Best said of the Lloyd’s market. “The property reinsurance segment was affected by the year’s catastrophe events, in particular Hurricane Matthew and the wildfires in Fort McMurray, Canada, as well as a number of smaller catastrophe and risk losses, which contributed to the increase in the accident-year combined ratio. By contrast, 2015 was a benign catastrophe-loss year.”

Overall, the reinsurance market had net premiums written in non life of US$139.5 billion in 2016, up from US$137.6 billion in 2015, while the combined ratio during the first half of 2017 was 94.8%.

The reinsurance market is “far from thriving and appears to be operating amid malaise,” A.M. Best said.