Reinsurers should make reasonable profits

WEDENSDAY, JAN. 9: Ratings agency AM Best said Bermuda and American reinsurers should expect “reasonable growth” in capital for 2013.

Best added that the rating outlook on the global reinsurance segment is being held at stable. It added that is supported by continued strong risk-adjusted capitalization, judicious enterprise risk management practices and a relatively stable pricing environment across a broadening spectrum of business classes.

The ratings firm said in a press release: “Given the uncertain and turbulent global macroeconomic conditions that currently confront this global industry segment, these strengths should help sustain reinsurers’ overall financial position over the longer term.

“A disciplined underwriting posture has enabled reinsurers to produce reasonable profits from underwriting activities, helping to mitigate the continuing deterioration in investment earnings.”

The company said following the devastating catastrophe losses that occurred in 2011, reinsurers rebounded quickly to produce an average return on equity in the low double-digit range through the first nine months of 2012. It expects that even with consideration for the catastrophe loss that occurred recently in the fourth quarter, reinsurers are still well positioned to put forward an acceptable level of underwriting and overall profit for the full year.

“From a capital perspective, U.S. and Bermuda reinsurers are well capitalized and capable of absorbing significant losses from a combination of events.

“The ongoing weakness in the global economy presents unprecedented levels of uncertainty and challenges.

Risks associated with underwriting and investment activities are manageable from a capital perspective, and A.M. Best continues to monitor (re)insurance companies through various capital stress scenarios as issues emerge to gain an additional level of comfort.

Catastrophe losses

“Assuming a continuing stabilization in the global economy and a normal level of catastrophe losses globally, A.M. Best expects reasonable organic growth in reinsurers’ capital for 2013, tempered by active capital management strategies.”

The ratings firm said  it still remains concerned that the stabilization in reinsurance pricing may be short-lived, even in light of the recent volatility in underwriting earnings.

“While Superstorm Sandy had little effect on pricing going into the January renewal, some regional accounts that were impacted did experience price increases.

“Furthermore, while reserve releases have helped to bolster profits and will likely continue to do so, this crutch will provide less and less support over time.

“The continuing low interest rate environment, however, appears to be reinforcing a focus on underwriting discipline, which should translate into a positive for the segment.

Given that operating performance helps drive balance sheet strength, pricing, terms and conditions are an important aspect to the overall equation.

“With operating returns pressured by low investment yields, overall earnings must be driven by underwriting profits for the foreseeable future.”