Riding out the storm - 2011 results
Drawing results from its annual review of the reinsurance market, Global Reinsurance Highlights, rating agency Standard & Poor’s found that 2011 proved to be a tough year for the Bermuda reinsurance sector. While the performance of individual companies differed widely, an examination of industry-wide trends (the survey takes in 22 Bermuda reinsurers, some of which are subsidiaries of larger entities) suggests that 2011 cat losses proved decidedly troubling for the sector.
According to research drawn from the S&P report, net reinsurance premium written by selected Bermuda players rose by 3.4 percent in 2011 to $12,664 million. However, pre-tax operating income entered negative territory, down from a total of $3,857 million across the 22 companies in 2010, to a $158 million loss in 2011. A few companies were able to generate proﬁts during 2011, but they were generally those with less of a property cat focus, often with a more diversiﬁed risk proﬁle that includes other lines of business such as marine, energy, professional liability and other long-tail casualty writings.
Meanwhile, combined ratios rose precipitously in 2011, rising from a surveyed average of 75.9 percent in 2010, to 113.7 percent in 2011. Some of the outliers certainly skewed the results somewhat, but it is evident that 2011 proved a tough underwriting year for Bermuda players—punctuated as it was by more than $100 billion of insured cat losses. Return on revenue suffered as a result, with levels declining from an average of 31 percent in 2010 to minus 1.3 percent in 2011. Total adjusted shareholders funds also declined in 2011, down from a total of $37,922 million for the surveyed group, to $36,811 million in 2011—a 2.9 percent decline. Despite troubled conditions however, all of the Bermuda players surveyed continue to be rated at investment grade by Standard & Poor’s—from AA to BBB+.
ERM: a reinsurer’s strength
ERM has played a signiﬁcant role in shielding Bermuda reinsurers from the worst of the global crisis. In its report, Natural and ﬁnancial catastrophes fail to rock global reinsurers and their ERM scores, S&P found “despite losses, global insurers have managed to endure the 2011 losses as an earnings event rather than a capital event, consistent with our opinion that this is a well-capitalised industry”.
“In addition, it is our opinion that ERM frameworks of global reinsurers were able to contain these losses largely within their risk tolerance. ERM is of high importance to our rating assessment of global reinsurers because of the complexity and volatility of the reinsurance business. Where reinsurers maintain their commitment to effective ERM practices and continuously improve their risk management frameworks, we believe it helps them to preserve their ﬁnancial strength and take advantage of any potential opportunities. Most reinsurers are continually developing their risk management culture, technical risk controls, and modelling capabilities, as their risk proﬁle and understanding of their risks evolve.
“Among the insurance groups we rate across the world, reinsurers ﬁgure prominently in the ‘excellent’ and ‘strong’ categories. In North America and Bermuda, two of the four groups with an ‘excellent’ ERM score and seven of the 19 groups with a ‘strong’ score are reinsurers.” Two Bermuda reinsurers, Endurance Specialty Holdings and RenaissanceRe, fared particularly well, attaining ‘excellent’ scores for their ERM capabilities. As S&P explained, “both groups have a material focus on writing severity-oriented natural catastrophe risks across the world. They differentiate themselves from reinsurers that we consider to have ‘strong’ ERM capabilities because they have well-seasoned and sophisticated ERM practices that have resulted in earnings volatility that is within their risk tolerances and in accordance with their risk proﬁles. At the same time, they have been able to take advantage of their modelling capabilities and strategic risk management frameworks to exploit proﬁtable niche segments. We believe that these companies’ long-standing commitment to ERM is an important factor in their good performance over the cycle”.
“Primary insurers seek quality reinsurers to help structure their reinsurance programs in a manner that is cost-effective and helps them operate within tolerances. Global reinsurers with highly developed ERM programs may be better able to serve the primary insurance market effectively.
“What’s more, in our opinion, reinsurers with strong ERM are wellpositioned to take advantage of an uptick in the market. They will also be better able to identify and quickly exploit niches of proﬁtability, while at the same time being equipped with tools and metrics to help them manage the risks within given tolerances. We believe that those reinsurers with strong and excellent ERM are better able to cope with the strains weighing on proﬁtability in an industry that will likely continue to be tried by shortcomings in the economy, pricing cycles, and capital over the next few years.”