Reflecting upon results
Insights are provided by Kevin Lee, senior credit offi cer at Moody’s and Taoufik Gharib, director of Standard & Poor’s Insurance Ratings.
What picture of the industry’s general health emerged from the global re/insurance results of 2012?
Kevin Lee: Reinsurers posted results that ranged from fair to good, depending on the size of their Sandy losses. Notwithstanding Sandy, 2012 was a far better year than 2011, thanks to fewer catastrophe losses. Consequently, industry capital continues to grow, meaning capital adequacy continues to strengthen, although ample capacity is holding down prices.
Taoufik Gharib: Generally, 2012 was a strong year for the global reinsurance sector on both sides of the Atlantic, with a weighted average combined ratio of 90 percent, and a return on equity of 13 percent. These fi gures compare favourably to those of 2011. When you take into account the $65 billion in insured catastrophe losses globally in 2012, the global reinsurance sector’s operating results remained strong, benefi ting from strong underwriting results on an accident yearbasis and prior year favourable reserve releases. As a result, the sector remains on a stable footing entering 2013 with a strong capitalisation. This strong capital base and rate renewals being generally fl at may have been the impetus for many global players returning capital to their shareholders through special dividends, increased regular dividends, and share buybacks.
How did Bermuda players fare in relation to the global competition?
Gharib: In 2012, the Bermudian re/insurers were strongly positioned relative to the global competition as shown by a more than 5 percent increase in their gross premiums written, which reached more than $70 billion. In addition, their consolidated net income signifi cantly improved to more than $10 billion in 2012, despite Hurricane Sandy losses.
Lee: Bermuda re/insurers generally did not fare as well as European reinsurers in the fourth quarter. Sandy showed that bigger European reinsurers are more diversifi ed than many Bermuda counterparts andtherefore less vulnerable to certain types of big events. This was true for Hurricane Katrina and it was true for Sandy.
Did any Bermuda companies stand out as having a particularly successful or troubled 2012? Why?
Lee: RenaissanceRe stood out positively. One would instinctively expect a property catastrophe specialist to take losses after a big event like Sandy, but RenaissanceRe still managed to turn a profit in the fourth quarter because its exposure was largely limited to its signature reinsurance business. In contrast, some of its Bermuda peers such as Arch, Allied World, AXIS and Validus suffered Sandy losses from multiple classes of insurance as well as reinsurance. Overall, though, nearly all Bermuda re/insurers generated at least respectable returns in 2012.
Gharib: From an underwriting perspective, Lancashire and RenaissanceRe stood out as the best underwriting performers in 2012 with combined ratios of 50.4 percent and 57.8 percent, respectively. Both companies have benefited from very strong underwriting results and favourable development on prior accident years reserves.
On the other hand, the three Bermudian companies that generated underwriting losses were Endurance Specialty, Argo Group, and Oil Casualty Insurance. Endurance’s underwriting results were impacted by Superstorm Sandy in the property line and from net losses from the Midwest drought in the agriculture line. Similarly, Argo’s underwriting losses were due to catastrophe losses, notably from Hurricane Sandy. Furthermore, oil casualty suffered from an increase in losses and adverse reserve developments.
In which lines and geographies were the major successes achieved by Bermuda players?
Gharib: Bermuda continues to be a property and property catastrophe underwriting hub with these lines of business representing more than one-third of the Bermudian gross premiums written in 2012. However, other lines of business, such as excess liability, general liability, and professional liability have been gradually contributing to the top line growth and strengthening the Bermudians’ value proposition.
The Bermudian re/insurers continue to generate about half of their gross premiums written from the US, 25 percent from Europe, 7 percent from Bermuda, 7 percent from Asia-Pacific, and about 10 percent from the rest of world.
Lee: After the series of catastrophes in 2011, Bermuda re/insurers still stepped up to the plate with capacity, reflecting adequate risk management that kept 2011 losses manageable. Bermuda remains an important source of property cat reinsurance capacity in the US and Asia, and to a lesser extent in Europe.
What strategies have the most successful Bermuda players adopted in order to strengthen their position?
Lee: A number of Bermuda players were able to attract third-party capital for property cat sidecars in 2012, reinforcing their relevance as sources of property cat capacity. In many cases, these sidecars are set up for offensive reasons to allow reinsurers to scale capacity based on the volume of opportunities. It’s a way for Bermuda players, which are smaller than their European counterparts, to punch above their weight. In other cases, companies are considering sidecars because they don’t want to miss out on the opportunity to tap into this growing investor interest in cat risk after seeing their competitors access this alternative source of capital.
Gharib: As a group, the Bermudians have a sophisticated enterprise risk management (ERM) framework. Overall, we consider the Bermudians’ ERM capabilities to be strong, and they are among the leading practitioners in the industry.
The significant majority of the Bermudians have benefited from their relatively brief operating history, as they are not saddled with legacy, operational and risk-management issues. Most of them have focused on ERM since inception, and their risk-management framework and processes are ingrained in the organisational culture.
"In many cases, these sidecars are set up for offensive reasons to allow reinsurers to scale capacity based on the volume of opportunities. It's a way for Bermuda players, which are small than their European counterparts, to punch above their way."
The Bermudian companies have embedded strong controls into their daily operations. In addition, they have invested a significant amount of time and money into their risk management tools, models, and systems as they continue to use and refine them. Most of the Bermudians are relatively small to mid-size companies, more nimble, and with fewer offices than the larger carriers on both sides of the Atlantic. Although the Classes of 2001 and 2005 re/insurers expanded into additional lines of businesses, they remain focused on a limited number of specialty lines. Recognising the inherent volatility of their business, these reinsurers tend to stay away from aggressive investment strategies. The Bermudians’ ERM capabilities have helped them manage their various risks and generate overall strong earnings. Their ERM practices have been tested through natural and man-made catastrophes and the financial crises over the past decade.
How do you see investor appetite for Bermuda re/insurance following 2012’s results? What sets the best performing priceto- book companies apart from the competition?
Lee: We have been concerned for a long time about whether smaller Bermuda players would be able to reload capital after a big loss. When most companies were trading at 50-70 percent price-to-book, we were concerned that a lot of core investors had left the sector or at the least become more selective on names. Valuations have bounced back since then, but we’re still not comfortable that all Bermuda players would be able to raise hard equity if they had to. One positive sign is that investors seem to have a large appetite for catastrophe risk, at least in cat bond or sidecar format.
Where do you see the most significant opportunities for growth and profitability for Bermuda players looking ahead?
Gharib: Developed economies and products are becoming saturated, so smart product innovation will help differentiate Bermudian players. Furthermore, successful Bermudians will be able to evolve and support capital market needs (such as through alternative capital) and the industrialisation of emerging economies (such as Latin America, the Middle East, and the Asia Pacific). However, profitability in the emerging markets can be questionable especially when entering lines of business or regions when prices do not adequately reflect risks.
Lee: We don’t see significant opportunities for growth in core reinsurance lines. Supply continues to outstrip demand. If anything, multinational cedants are buying less reinsurance, not more. By comparison, there are more growth opportunities in insurance lines. Insurance rates have been trending up while reinsurance rates have generally been flattish. For example, we expect to see some Bermuda players grow in crop insurance, accident and health insurance and certain excess-and-surplus lines that move over from admitted markets. Emerging markets still present growth opportunities, which take time to materialise and involve some risk.