AshDesign /
12 June 2014ILS

A.M. Best: Global reinsurer stocks face challenges in 2014

Stocks for publicly traded reinsurance companies (including the four large Europeans) performed below the overall market for the first quarter of 2014, according to a new A.M. Best report.

This is likely due to continued concerns over the decline in pricing for reinsurance risk.

Of the 20 worldwide reinsurers, eight outperformed the market, but only six finished with gains. All others declined between 0.5 percent (White Mountains) and 8.5 percent (Allied World).

During the first three months, global reinsurance companies experienced below-average catastrophe losses, and most continued to report favourable reserve releases that more than offset, on average, any cat losses incurred.

Management teams indicated that they remain focused on underwriting, adequate pricing and diversification.

Stocks for publicly traded reinsurance companies (including the four large Europeans) performed slightly below the overall market for the first quarter in part due to price declines for Allied World, Endurance and Validus compared with their peers.

Regardless of the low level of losses and continued favourable reserve releases from prior years, the pricing pressures for cat business continued during the Jan 1st and April 1st renewals. These declines of as much as 20 percent (more pronounced in the US) have been attributed to the absence of market-changing losses as well as increased retentions carried by ceding companies.

Some management teams indicated that the inflow of capital from the ILS market led to lower rates in US cat business.

Third-party capital remained a focus in the first quarter and is expected to remain so in the future as pension funds and other investors continue to drive bond offers well above their original amounts.

In 2013, $7.6 billion in cat bonds were issued, versus $6.2 billion in 2012. In the first three months of 2014, nearly $5 billion in bonds were issued, including the largest such deal ever taken to market, which was by Florida’s Citizens Property Insurance Corp. Everglades Re Ltd. (Series 2014-1). This transaction grew from its original $400 million to reach $1.5 billion when it was competed May 2nd 2014.

This continued interest by investors in cat bonds, particularly for US risks, and the lack of any major losses over the past few years continues to drive down process for global risks, including European wind, US hurricane and Japanese exposures.

New capital and reduced reinsurance purchasing by some large cedents are expected to make market conditions more challenging for reinsurers in 2014 and lead to continued pricing pressure in property and cat lines.

The intensified competition in these lines is starting to spill over to other lines of reinsurance as companies attempt to expand their product offerings and global presence. This, in turn, continues to put upward pressure on quota-share ceding commissions, leading to more multiyear contracts, broader contract terms and increased signings on aggregate covers.

Despite these pressures, most indicated that in general, profitability remains reasonable for the selective underwriter. Some companies said they would continue to reduce their property cat exposure if pricing continues to decline at the current rate and conditions turn.

Several companies indicated that they remained selective with the risks they picked up or renewed and will remain cautious and disciplined for the June/July 1st renewals. Most said they expect 2014 to be more challenging and lead to an even more careful approach to risk selection.

You can access the full report at A.M. Best's website, here.