By William Wilkes 

One morning last September, Dwayne Elgin unbolted the front door of his home on the island of St. Martin and gazed upon a wasteland of flipped cars, uprooted trees and flattened homes.

Irma, the strongest Atlantic hurricane on record, had laid waste to the Caribbean island overnight, and as head of Nagico Insurances, a local insurance firm, Mr. Elgin knew almost all of his policyholders would turn to him for help. But he was prepared: Like many insurers, he had unloaded a large portion of firm's risk to reinsurers, the industry's last line of defense.

Irma and an extraordinary string of other natural disasters in 2017 saddled insurers and reinsurers globally with more than $135 billion in losses, according to Munich Re's 2017 Natural Catastrophe Report.

Typically, that would lead reinsurers -- the largest of which include German and Swiss firms such as Munich Re, Swiss Re and Hannover Re -- to raise prices, helping them to bounce back from the losses.

However, this year the industry has struggled, in the latest illustration of how loose monetary policy is challenging Germany's financial sector.

Reinsurers fared poorly in January during annual price-renewal negotiations with insurers, according to industry analysts, with easy money opening up new ways for insurers to spread risk beyond reinsurers, such as issuing bonds, pressuring prices.

The combination of soaring catastrophe losses and low renewal rates -- the annual price difference in policies sold by reinsurers -- has, in some cases, all but wiped out profits.

Munich Re recently reported a 85% fall in full-year profit because of natural disasters, reducing its return on equity -- a closely watched measure of financial productivity -- to 1.3% from 8.3% the previous year. That's far below the long-term industry average of over 10%, calculated by Standard & Poor's. The company's average renewal rate increases of 0.8% will do little to compensate for the losses, analysts say.

Munich Re's Chief Financial Officer Jörg Schneider said the company had a sufficient capital buffer to cope with the disaster-related losses and that he expected reinsurance prices to rise in future renewal negotiation rounds.

The company is the world's second-largest reinsurer by premiums written behind Swiss Re.

Rival Hannover Re has also been hit, with a spokesman saying its disaster losses for 2017 would be the largest in its 52-year history. It is set to report full-year earnings next month. Its profit margin fell sharply in the third quarter.

To be sure, U.S. firms face similar issues, with Berkshire Hathaway Inc. -- set to report full-year results on Friday -- citing hurricanes and an earthquake in Mexico for its insurance-underwriting arm swinging to a third-quarter loss.

However, as home to some of the world's largest reinsurers, the industry's travails have sparked concern in Germany, with a spokesman for the country's financial watchdog, BaFin, saying it was watching the sector. The situation doesn't pose an immediate threat to the country's financial system given its diversified economy and deep pool of savings.

The main reason for reinsurers' loss of pricing power is growing competition, which has come in part from insurance-linked securities such as catastrophe bonds. Such bonds essentially package insurance risk as debt that doesn't have to be repaid in full or at all if a disaster stipulated in the bond's contract strikes.

Offering relative yields of up to 8%, the bonds have proved popular with sophisticated investors looking for higher returns after bond buying by central banks drove bond prices higher and yields lower.

Global issuance of catastrophe bonds hit a record $10.5 billion in 2017, according to Property Claims Services, a U.S. industry body. Such forms of alternative capital now account for around 14% of total reinsurance capital, up from 4% in 2006, according to U.S. insurance broker Aon Corp.

With monetary policy only starting to normalize around the world, the pricing environment for reinsurers looks unlikely to improve in the near term, according to David Flandro, head of analytics at JLT Reinsurance Brokers.

The other side of the profit equation -- natural disasters -- is impossible to predict but some reinsurers don't think 2017 was an exception.

The 2017 events "are giving us a foretaste of what is to come," Torsten Jeworrek, a Munich Re board member said last month. "Our experts expect such extreme weather to occur more often in future."

Disasters caused a record $330 billion in damage to property in 2017, according to Munich Re's Natural Catastrophe Report.

The trio of Atlantic hurricanes Harvey, Irma and Maria made the September 2017 hurricane season the costliest on record. A Sept. 19 earthquake that rocked parts of Mexico City and failed crops in Europe because of a late frost added to the bill.

Without reinsurers, the level of claims from policyholders could have exhausted cash reserves at several large and small insurers in disaster zones.

Back in St. Martin, Mr. Eglin's Caribbean-based Nagico had signed reinsurance agreements before the hurricane season. This translated into a $250-million early payout for the insurance company, which allowed it to start paying claims to policyholders -- and putting St. Martin back on its feet.

"Insurance money is the only thing keeping the economy moving right now, " Mr. Elgin said.

Write to William Wilkes at william.wilkes@wsj.com

(END) Dow Jones Newswires

February 19, 2018 09:19 ET (14:19 GMT)