A.M. Best: European Reinsurers Report Strong Results, Growth Limited

April 6, 2015

Major European reinsurers have posted very strong full-year results for 2014 and continue to be well capitalized, with profitable underwriting results due to the absence of sizable natural catastrophes and ongoing reserve releases.

Nevertheless, reinsurers face challenges as soft market conditions persist and concerns mount regarding the sustainability of reserve releases, according to a new A.M. Best special report, titled, “European Reinsurers Post Strong Performances but Growth Limited.”

Organic growth is limited, the report affirmed, with rates remaining under pressure and certain lines of business underperforming, which is leading to a need to underwrite risks more selectively. In addition, reinsurers are seeking opportunities for expansion into emerging markets, such as Asia and Latin America, as well as new lines of business.

Best analyzes the full-year financials for Lloyd’s and the four largest European reinsurers – Munich Re, Swiss Re, Hannover Re and SCOR SE. The report also identifies trends among the six listed (re)insurers operating at Lloyd’s – Amlin, Beazley, Brit, Catlin, Hiscox and Novae.

Technical results also have been bolstered by continued reserve releases, the report said, although skepticism remains regarding their sustainability. Munich Re, for example, reported reserve releases with a net effect of 5.3 percent on the full-year combined ratio after allowing for commission changes, whereas Swiss Re disclosed positive prior-year reserve developments equivalent to 3.9 percent of its combined ratio.

“The largest four reinsurers and Lloyd’s have posted good investment results, with returns on investment (ROIs) of between 2 percent to 4.6 percent in 2014,” said Carlos Wong-Fupuy, senior director, analytics.

He added: “These are encouraging given the low interest rate environment; however, A.M. Best observes that returns are being driven partly by historical fixed interest investments, which are still generating relatively high yields, and realized gains on equities and real estate.”

Unsurprisingly, reinsurers are increasingly looking for yield, the report said. “There has been a limited but gradual shift to equities and alternative investments, including private debt placements, mortgage books and the financing of special projects such as renewable energy. Investments have also been made in infrastructure and new technologies, with further expansion in these areas expected to continue,” A.M. Best continued.

Investment returns remain healthy considering the low interest environment, the report said. These returns are partially supported by the cautious reallocation of assets in investment portfolios, which in general benefited from a positive revaluation effect during the year.

However, not all companies are necessarily increasing their holdings in riskier asset classes, the report said. “Swiss Re, for example, posted a reduction in its listed equities and alternative investments in 2014, realizing profits while reducing exposure.”

On the whole, group portfolios still remain heavily concentrated in fixed income and cash, typically representing more than 90 percent of total assets, as was the case for Swiss Re and Hannover Re in their 2014 results.

In the London Market, companies generally have more conservative investment strategies, with portfolios historically weighted to U.S. and U.K. bonds. However, Lloyd’s participants are actively seeking better investment returns and have very cautiously and very modestly increased holdings in corporate bonds and equities.

The major reinsurers all enjoy strong capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), yet still achieve a strong return on capital and surplus. As yields are at record lows in other economic sectors, investors remain attracted to the reinsurance market, the report said.

Reinsurance rates and terms and conditions are under competitive pressure from alternative capital, which is evidenced by the January 1 renewal period. In A.M. Best’s opinion, further price reductions are likely.

Traditional and alternative capacity remains plentiful and a single large catastrophe is not expected to have a significant impact on current market conditions, according to the report.

Yvette Essen, director, industry research, Europe & emerging markets, noted: “Major losses combined with a sustained recovery in interest rates could reduce the sector’s attractiveness to alternative capital. However, the exceptionally low yield environment is expected to continue with any increases in interest rates likely to be gradual. Furthermore, alternative capital is increasingly provided by pension funds rather than opportunistic investors, which may be less likely to reallocate their investments given that insurance-linked securities represent only a relatively small proportion of their substantial asset portfolios.”

Source: A.M. Best Company

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