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Cats hurt P&C (re)insurance 2017 underwriting results

The majority of P&C (re)insurers in our coverage reported an underwriting loss for 2017 due to the impact of the year's catastrophe events.

The year is set to be one of the costliest on record for the industry, with claims estimated at more than $100bn.

Hurricanes Harvey and Irma were initially expected to cost $30bn each, while Maria losses were pegged as high as $50bn+ after the storm devastated Puerto Rico. However, those initial estimates were much higher than incurred losses and claims tallies are expected to further decrease as companies continue to report less impact than first anticipated.

Acquisition costs ratio

However, the earthquakes in Mexico along with the wildfires in California in October and December added further billions to the loss tally.

Bermuda

Due to their heavily cat-oriented portfolios, Bermuda-based carriers were among the most exposed to hurricane losses, along with London-based carriers and the global reinsurers, with losses from the events equivalent to around 10 percent of shareholders' equity.

Compared to other peer groups, Bermudians struggled the most last year as they not only saw six quarters of profits wiped out by major catastrophe losses, but also experienced higher underlying claims inflation.

Management teams consistently addressed the issue of increased frequency and attritional losses during earnings calls.

Bermuda loss ratios

Moreover, executives noted that loss inflation had been one of the main drivers in pushing for rate rises at the January renewals, although initial hopes of a meaningful correction quickly dissipated towards the end of the year.

A number of carriers talked about further portfolio restructuring and exiting lines of business if rate increases failed to match loss-cost inflation.

Another earnings headwind was the issue of decreased contributions from reserve releases.

The reserve releases ratio for the group decreased from 5.9 percent to 4.0 percent in 2017 - the smallest contribution in the past five years. The ratio had been running at around 6-7 points on the combined ratio in prior periods.

US specialty

Some of the trends noticed at Bermudians were also echoed at US specialty carriers. Underlying erosion was present as well, as the specialty insurers posted higher core loss ratios in three of the four quarters of 2017 compared to the corresponding periods the previous year.

Prior-year developments

Management at several companies addressed the need to offset claims inflation by pushing for rate increases or by shifting their business mix. In particular, specialty players continued to shrink their reinsurance books over the past year, focusing instead on primary specialty, where risk-adjusted returns were more attractive.

Meanwhile, reserve releases reduced year on year at every specialty player in our composite except American Financial Group.

London

London-based (re)insurers again reported higher acquisition costs than the wider market, with the cost of placing business coming to 27 cents on the dollar for Beazley and Lancashire and 24 cents on the dollar for Hiscox. By comparison, the acquisition cost ratio for Bermudian carriers was 17.6 percent last year.

The London market has been struggling with elevated acquisition costs, a trend also noticed at Lloyd's.

Beazley's expense ratio ticked up by 70 basis points to 41.4 percent - its highest since 2013. The increase was entirely driven by the acquisition costs ratio, which rose to 27.8 percent last year from 27.1 percent in 2016, providing further evidence of London's systemic cost issue.

But these trends were offset by the performance of the carrier's specialty book, which had the best divisional underwriting result with a combined ratio of 89 percent, mainly supported by increased reserve releases.

The Londoners have also been pushing for growth in the US while reducing writings domestically.

For example, Hiscox reduced its London market portfolio while describing its US operation as "the standout performer". It noted that the US business had a "more normal loss experience and modest hurricane exposure".

Cat ratios

Lancashire was by far the most impacted by the 2017 catastrophes among its peers. Its loss ratio for the year was 78.4 percent, of which 42.5 points was attributable to cat losses, with exposure to Harvey, Irma and Maria, the Mexico City earthquake and the California wildfires. The company also posted lower contributions from reserve releases as well as an uptick in its core loss ratio.

Global Re

At our group of global reinsurers, results were mainly in line year on year when excluding catastrophe losses. Cats added more than 20 points at Everest Re, Munich Re and Swiss Re.

Underlying performances were varied, and reserve releases were also relatively similar to the prior year.

PandC combined ratios
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