A.M. Best has published a review of the international reinsurance market, which analyzes the performance of the largest reinsurers (rated by gross premiums written). Although the figures – based on 2011 – do not reflect more recent developments in the reinsurance market, as the third quarter of 2012 draws to a close, Best has contrasted the catastrophe dominated first quarter of 2011 with the so far more or less benign events in 2012.
In 2011 most of the players within the P&C reinsurance sector “produced an underwriting loss for the year,” said Best. “Overall earnings were generally breakeven, and capital came through the year relatively flat.”
However, Best also noted that “underwriting losses were offset by a combination of net investment income and a modest level of realized capital gains to produce a small overall profit for the year. Unrealized capital gains attributed to declining interest rates against fixed income portfolios also helped to stabilize the composite’s capital position, as did some minor capital-raising activity.”
The report points out that most of the larger reinsurers now underwrite both life and P&C coverage, which in turn affects their capital base and loss ratios. As an example the world’s largest reinsurer, Munich Re, posted a total gwp of$33.719 billion in 2011, but more than $12 billion was attributable to life reinsurance.
The other top four reinsurers, Swiss Re, Hannover Re and Berkshire Hathaway, followed a similar pattern, while the fifth largest, the Lloyd’s market, posted gwp of $13.621 billion, all of it from P&C coverage.
There were some differences between the European reinsurers, their Bermuda counterparts and the U.S. Best noted that “European reinsurers’ capitalization seemed to hold up better as compared with Bermuda,” which it attributed to the fact that Bermuda is primarily a P&C market. Generally “Europe’s reinsurers “also benefit from a significantly larger capital base and greater diversification in business classes globally.”
Best also indicated that has been optimistic concerning the industry’s prospects for 2012, and that the “January, April and July renewals would be favorable for the global reinsurers.” To some extent this has been the case, but, Best pointed out that “ample capacity tempered the benefit, and pricing improvements have dwindled as the year progressed. Any meaningful pricing improvements generally were limited to loss exposed regions and property catastrophe covers.
“For other regions and classes, pricing improvements were sparser and seemed to defy the underlying weak economic fundamentals, which should be placing more upward pressure on pricing, especially for longer tailed classes of business. Only time will tell how the current set of challenges will shape the reinsurance market.”
Best’s report also discusses an “emerging trend,” which it said “seems to be a result of the difficult investment climate.” The trend comprises the emergence of “a new breed of reinsurers backed by hedge funds.”
Although none of them are as yet among the ranks of the top 50, Best said “these reinsurers aim to augment investment returns utilizing their hedging expertise. Recognizing the greater asset risk, these new company formations are not as levered on the underwriting side as a traditional reinsurer, but feel that they can leverage their investment acumen to produce superior total returns for their investors.
“This new business model also is supposed to enable insurance underwriters to maximize the benefits of managing the insurance underwriting cycle by being better able to allocate capital to underwriting opportunities only when market conditions are at their peak. It will be interesting to track the performance of these new ventures over the next several years against the segment’s more established players.”
Although Best’s report is factually oriented, it’s possible to draw the conclusion that this new breed of reinsurers and their business methods are to some extent focused on skimming the cream off the top of the reinsurance market, while letting established players handle the remainder.
Best, nonetheless, remains relatively upbeat concerning the future of the reinsurance industry. The report said that “despite numerous challenges, the rating outlook on the global reinsurance segment is being held at stable, supported by continued strong risk-adjusted capitalization, prudent enterprise risk management and an improving pricing environment across a broadening spectrum of business classes.”
Best said it “believes these strengths should provide reinsurers the ability to successfully navigate future obstacles that may arise from the increasingly uncertain and turbulent global macroeconomic conditions.”
The full report is available from A.M. Best
Source: A.M. Best