Favourable underwriting environment driving reinsurer combined ratios

Boosted by a slight hardening of rates on some lines and a relatively benign period of catastrophe activity, it seems many reinsurers have responded to the difficult investment environment by improving the profitability of their underwriting books. A number of reinsurers have posted healthy combined ratios for their 2012 results in recent weeks.

RenaissanceRe posted a combined ratio of 57.8 percent for its 2012 full-year results, Everest Re posted a result of 93.8 percent while PartnerRe achieved a combined ratio of 87.8 percent on its non-life operations.

Michael Klien, analyst at financial services group and investment bank Nomura, said the underwriting environment has turned in the favour of reinsurers. “This is due to past pricing improvements. There is also a consensus that there is a lot of discipline in the market,” he said.

Martyn Street, director at rating agency Fitch, agreed that there have been more underwriting discipline in the reinsurance market recently while reinsurers have also been deploying their capital more cautiously.

“It is clear that reinsurers have a greater focus on non-proportional business, because it gives a greater ability to control their terms and conditions,” he said.

Greg Reisner, managing senior financial analyst at rating agency AM Best, said that, for the most part, 2012 proved to be a solid underwriting year for reinsurers. “It has been in-line with what we expected,” he said.

“Not all companies have reported yet, so we haven’t rolled up the entire composite, but so far results are in line with what we expected.”

The results indicate that pricing across the majority of lines of business is adequate to strong, particularly on property/catastrophe lines, according to Street.

Another trend being observed is that reinsurers have been releasing a significant amount of reserves. This behaviour is due to several factors. Firstly, many reserves are redundant, so need to be realised. Secondly, some reinsurers are experiencing claims patterns below their expectations.

“But the third reason is that reinsurers are willing to release reserves because they want to improve both their results and capitalisation,” said Klien.

Reisner adds that while this favourable reserve development has been a factor for several years, AM Best predicts that the level of reserve releases will eventual begin to reduce. “The amount of favourable reserve releases is finite. It cannot be taken indefinitely, and at some point will stop being a crutch,” he said.

Looking to 2013, it appears unlikely rates will improve to a greater extent unless there is major loss event. This has resulted in companies beginning to return capital, through vehicles like special dividends and share buy backs, according to Dennis Sugrue, director at rating agency Standard and Poor’s.

“Perhaps this is recognition by reinsurers that rates are not likely to spike up to the extent that many had hoped for. This could help to remove some capacity from market,” he said.