Citing figures from a Swiss Re sigma study, A.M. Best has indicated that “despite a subpar operating climate, global reinsurers have managed to squeeze out relatively reasonable returns on capital and compensate investors while sustaining organic growth in capacity. Quite an accomplishment, especially considering all the various obstacles they have and continue to navigate.”
They have managed to do so “over the past two-and-a-half years” in the face of catastrophes worldwide that “have inflicted approximately $190 billion in insured losses,” according to Swiss Re’s report.
As far as global reinsurers are concerned, Best said: “These events were primarily a drag on earnings, as balance sheets remained robust. The challenge of managing loss accumulation from global catastrophes was evident in 2011, and since 2008 reinsurers have faced numerous hurdles due to a weakened global economy: deteriorating investment returns; more volatile investments; suppressed growth opportunities; increased client retentions and competitive pricing.”
Recently they have also faced competition from “third-party capital. With excess capacity prevalent among the traditional reinsurers, pricing in the market is already very competitive. This is most evident in longer tail casualty classes, leaving only shorter tail specialty and property classes up for the chase.”
Best explained that “while the capital markets historically have provided capacity out on the tail for property/catastrophe risk, generally in the form of catastrophe bonds, industry loss warranties (ILWs) and other collateralized structures, it now appears investors, asset managers and bankers are showing more interest in the lower layers of catastrophe programs, as well as in other specialty and casualty classes.
“Various reinsurance brokers have reported that as much as $45 billion of additional capacity has entered the reinsurance market in recent years, representing 14 percent of the current global property limit. Hedge funds, pension funds, endowments and trusts looking for a bigger slice of the pie are lured by the relatively favorable returns, float and uncorrelated risk that the reinsurance business offers.”
Best added, however, that “industry headlines may be aggrandizing the true reinsurance appetite of this third-party capital. Front-line sources indicate that capital is entering methodically and precisely, not just rushing in blindly.
“A few hedge funds have chosen to enter the reinsurance market directly by forming new reinsurance companies, which certainly has drawn attention. However, with hedge fund-backed companies, not all of the capital is dedicated to providing reinsurance capacity.
“A substantial portion of that capital supports investment risk. Other investors have found it easier to collaborate with traditional reinsurers or collateralized facilities that already have the operational infrastructure, established relationships and, most important, the intellectual capital to succeed at building a profitable underwriting portfolio.”
Source: A.M. Best