Equator Re business review

During a year of extreme catastrophe activity, QBE’s operating divisions benefited from material recoveries under reinsurance protections purchased from Equator Re. The external reinsurance purchased by Equator Re on behalf of the Group responded to limit the impact of this claims activity on the Group result.

Jim Fiore
Group Chief Reinsurance Officer & President   •   Equator Re

Gross written
premium (US$M)

1,580

17% from 2016 1
Net earned
premium 1 (US$M)

847

379M from 2016
Underwriting
result 1 (US$M)

(350)

487M from 2016
Insurance (loss)
profit 1 (US$M)

(323)

487M from 2016
Combined
operating ratio 1,2

140.9%

2016 70.2%
Insurance (loss)
profit margin 1

(38.1)%

2016 35.0%

2017 Overview

2017 was the costliest year on record for natural catastrophes, resulting in a net cost to the global insurance and reinsurance industry of $135 billion 3. Consistent with global reinsurance peers, our underwriting result was materially impacted with Equator Re reporting its second ever underwriting loss, the first being in 2011.

The divisions received excess of loss premium rate reductions averaging 0–5% on non‑loss affected portfolios. Despite softer excess of loss reinsurance pricing and some divisions opting for higher retentions, premium income increased overall reflecting additional divisional proportional purchases.

Equator Re continues to play an important role in bridging the gap between the Group risk appetite and that of each of the operating divisions. During 2016, the Group announced its ambition to reduce external reinsurance spend without materially increasing exposure. This was partly achieved by Equator Re retaining proportional business that had previously been ceded externally such as North American Crop. At the same time, Equator Re increased its participation on numerous internal divisional quota share treaties.

Supporting divisional growth ambitions has been a focus of Equator Re in recent years and this is perhaps best demonstrated by Equator Re’s recent facilitation of the Group’s multinational product offering. QBE’s underwriters all over the globe are now able to offer multinational insurance solutions, comfortable in the knowledge that there is an efficient and robust infrastructure equipped to transact and support this complex product offering.

The captive continues to play a pivotal role in optimising the Group’s capital requirements. During 2017, Equator Re facilitated the loss portfolio transfer (LPT) of $436 million of North American legacy reserves to a third party. The LPT generated a net gain for the Group and removes the potential for further adverse prior accident year claims development in relation to these portfolios, while freeing up capital for redeployment elsewhere.

To assist year on year comparability, the commentary hereafter refers to the 2017 and 2016 results excluding the impact of LPT transactions.

  1. Adjusted for LPT transactions with North American Operations.
  2. Combined operating ratio adjusted to exclude the impact of changes in risk-free rates used to discount net outstanding claims.
  3. Source: Munich Re, 4 January 2018.

Operating and financial performance

Underwriting performance

Equator Re reported a combined operating ratio of 141.3%, up from 70.7% in the prior year. Excluding the impact of movements in risk-free rates used to discount net outstanding claims liabilities, the combined operating ratio was 140.9%, up from 70.2% in the prior year.

Equator Re’s underwriting result was heavily impacted by adverse catastrophe experience as well as higher than expected large individual risk claims. The Group’s external reinsurance programs responded with significant recoveries limiting the severity of the gross claims experience.

Adjusting for large individual risk and catastrophe claims retained by Equator Re in excess of the Group’s aggregate reinsurance protections, the underlying combined operating ratio would have been around 89%. Relative to 2016, this underlying increase partly reflects the increase in proportional business which typically operates at a higher combined operating ratio than Equator Re’s excess of loss business.


Gross written premium and net earned premium (US$M)
Gross written premium and net earned premium

Combined operating ratio (COR) and insurance (loss) profit margin (IPM) (%)

 

Combined operating ratio

Underwriting result

FOR THE YEAR ENDED
31 DECEMBER
2017 2017 1
Adjusted
2016 2016 1
Adjusted
2015 2014 2013
Gross written premium US$M 1,580 1,580 1,532 1,349 1,007 642 783
Gross earned premium US$M 1,614 1,614 1,429 1,246 994 764 802
Net earned premium US$M 732 847 651 468 367 525 509
Net incurred claims US$M 982 1,107 453 268 297 389 400
Net commission US$M 74 74 50 50 17 18 21
Expenses US$M 16 16 13 13 13 13 8
Underwriting result US$M (340) (350) 135 137 40 105 80
Net claims ratio % 134.2 130.7 69.6 57.3 80.9 74.2 78.6
Net commission ratio % 10.1 8.7 7.7 10.7 4.6 3.3 4.1
Expense ratio % 2.2 1.9 2.0 2.8 3.5 2.4 1.5
Combined operating ratio % 146.5 141.3 79.3 70.7 89.0 79.9 84.2
Adjusted combined operating ratio 2 % 146.1 140.9 78.9 70.2 89.9 75.0
Insurance (loss) profit margin % (42.8) (38.1)  24.9  35.0 28.1 27.7 26.5
  1. Adjusted for LPT transactions with North American Operations and related external LPT of same portfolio.
  2. Combined operating ratio adjusted to exclude the impact of changes in risk-free rates used to discount net outstanding claims. Management-basis results were not reported in 2013.

Premium income

Gross written premium increased 17% to $1,580 million, largely driven by an increase in proportional business.

Net earned premium grew 81% to $847 million. Growth in proportional income, which is mostly retained by Equator Re, coupled with savings associated with the renewal of the core external reinsurance programs, was partly offset by an increase in the external whole account quota share reinsurance to 35% from 30% previously.

Claims expense

Equator Re’s net claims ratio was driven by significant catastrophe activity coupled with increased large individual risk claims incidence and higher attritional claims from increased proportional business.

Net large individual risk and catastrophe claims totalled $734 million or 86.6% of net earned premium compared with $119 million or 25.3% in 2016. This includes gross claims of $433 million in relation to hurricanes Harvey, Irma and Maria, which devastated the Americas in September 2017, as well as $86 million from Cyclone Debbie, which impacted the Queensland coast in March 2017.

The net claims ratio also includes 11.5% or $97 million of adverse prior accident year claims development which compares with positive development of 11.9% or $56 million in the prior year. The adverse claims development largely relates to reduced recoveries on prior year aggregate reinsurances.

Heightened catastrophe claims activity has resulted in a material increase in Equator Re’s claims reserves. To maintain a strong claim reserving probability of adequacy, the result also includes a risk margin strengthening of $28 million.

Commission and expenses

Notwithstanding the significant increase in proportional business which is subject to higher commission charges relative to non‑proportional business, the commission ratio improved to 8.7% from 10.7% in the prior year. Higher gross commission expense was more than offset by additional reinsurance commissions following an increase in cessions under the external whole account quota share to 35% from 30% in 2016.

Equator Re’s expense ratio improved to 1.9% from 2.8% in the prior year, reflecting the significant growth in net earned premium.

Outlook

After several years of premium rate softening and following the significant catastrophe activity of 2017, the market has begun an orderly correction. Whilst a more aggressive hardening of reinsurance rates may have been expected given the size of the insured losses, the more subdued price correction reflects the continued over supply of capital and the dispersion of the cost of catastrophe claims, much of which was retained by the primary market through multiple events with significant retentions.

During the January 2018 renewal period there has been a general, albeit modest, increase in pricing across a wide range of classes (not just property catastrophe classes where loss impacted covers saw more significant increases). This should allow for an improved market in 2018.

Most of Equator Re’s excess of loss business was renewed in January 2018 with rate and/or attachment point increases achieved in conjunction with improved underwriting actions in each of our divisions. At the same time, Equator Re will not incur significantly higher reinsurance costs in 2018 reflecting the fact that 50% of the core catastrophe and per risk treaties and 100% of the aggregate cover was placed for two years commencing in January 2017.