Best: “Difficult” Earnings Year For Reinsurers
Insurance ratings agency A.M. Best yesterday [Jan.9] issued a report for global reinsurers in 2011, predicting a difficult earnings year for the industry.
The Bermuda-based reinsurance industry is a global powerhouse, writing more than $60 billion in premiums according to statistics compiled by the Association of Bermuda Insurers & Reinsurers.
Bermuda’s reinsurers provide an estimated 40 percent of US property catastrophe reinsurance capacity and provide up to one third of US crop reinsurance in key states. Locally based carriers also support 25 percent of the US medical liability insurance and reinsurance market and more than a quarter of broker-placed European reinsurance.
For the fifth consecutive year, A.M. Best Co. is maintaining a stable outlook in 2011 for the global non-life reinsurance industry.
The current outlook implies that the majority of 2011 reinsurer rating actions are likely to be affirmations, with only a modest number of anticipated rating or outlook changes.
The outlook reflects A.M. Best’s view that the majority of global reinsurers continue to maintain a very strong capitalization position, which should provide sufficient cushion for most companies to withstand the continuing soft reinsurance market that is entering its fifth year.
Meanwhile, 2010 is proving to be a reasonable year in terms of underwriting performance, bolstered by the absence of a major US hurricane and continued favourable reserve development, which has helped to mitigate losses incurred from a rash of global catastrophes occurring mostly in the first half of the year.
The continuing recovery in investment markets further enabled the segment to regain capacity in terms of both realised and unrealised investment gains.
Net investment income, while positive, is a noticeably smaller component of the bottom line, as investment yields continue to shrink against a growing invested asset base.
The top line is also under pressure as reinsurers continue to maintain underwriting discipline and ceding companies choose to retain larger shares of their books of business.
Over the past several years, reinsurers have shifted their focus to underwriting shorter tailed classes, where pricing has proven to be more attractive, especially given the current investment yield.
This discipline, however, is absolutely necessary to mitigate future underwriting losses, which inevitably will emerge from underpriced long-tail casualty classes, and could be compounded by the future threat of inflation.
This shrinking demand for reinsurance capacity has necessitated more stringent capital management from reinsurers, which overwhelmingly has been in the form of share repurchases.
Merger and acquisition activity has been fairly muted thus far because of depressed valuations, which is also a concern for financial flexibility.
However, capital markets recently have been receptive to debt financing, for which there has been a recent uptick in issuances to facilitate capital management initiatives.
Factors that necessitate constant vigilance and that could change the global reinsurance sector’s outlook to negative include the sector’s inability to effectively manage capital in both the short and long term; further erosion in pricing, terms and conditions with a particular focus on longer tailed casualty business; and the potential impact of looming inflation on loss reserves.
From an earnings perspective, A.M. Best expects 2011 to be a difficult operating year, with results dependent on losses stemming from catastrophes.
In the mid- to longer term, A.M. Best believes the global reinsurance segment’s earnings will be increasingly pressured by the evaporation of loss reserve releases, and that the recent pricing environment will be more reflected in calendar-year results, which at this point are believed to be running at a loss for longer tailed business.
The segment’s return measures also will be pressured as a result of companies holding higher levels of capital, and prudently so, due to broad-based economic concerns coupled with low interest rates and a conservative investment posture since 2008.
A.M. Best believes that for reinsurers to manage current market conditions, underwriting discipline and the ability to maintain pricing integrity likely will be factors in their success.
However, the combination of a return of higher catastrophe losses and the reduction of favorable prior-year loss-reserve development could swing the pendulum toward lower margins when compared with the results reported during four of the past five years.
