A year of change

Cordoned off red carpet up stairs leading to gold trophy

The recession has taken its toll on combined ratios in reinsurance but the top-25 reinsurance groups are still well positioned to ride out the economic storm, writes Katherine Blackler.

For many reinsurers, 2008 was a hard year. Continuing losses from several years of poor hurricane seasons were exacerbated by poor investment returns.

The results for the top-25 reinsurers in 2008 demonstrate that AIG is far from the only insurer suffering considerable losses. It is no secret that Swiss Re had a turbulent 2008 - the company has been downgraded by ratings agencies Moody's and AM Best, put on negative watch by Standard and Poor's and has itself announced that it is to cut 10% of its staff by the end of 2010, as well as cutting its bonus pool by 50%. The (re)insurer's combined ratio has also been hit by the recession, rising from 90.2% for 2007 to 97.9% for 2008.

Yet, there is a silver lining surrounding the Swiss Re cloud this year, as evidenced in our tables; the firm has climbed to top spot this year with $23,437,509,000 in net written premium for 2008, pipping last year's leader Munich Re (which wrote $20,223,000,000 NWP). First quarter reports for this year also exceeded expectations: Swiss Re said that net income had slid to 150m CHF but this was still better than consensus estimates from analysts and JP Morgan's estimates of a 148m CHF net loss.

Swiss Re's new chief executive officer, Stefan Lippe, was positive about the company's future prospects when he spoke to Reinsurance in May: "It will take some time to reduce the asset risk in our portfolios and we may suffer volatility in the process. However, we see increased demand and reduced capacity in the reinsurance market driving prices higher. Swiss Re is in a strong position to seize such market opportunities."

Lippe highlighted that strong renewals should result in a much healthier set of financial results for 2009 for the reinsurer. He continued: "The successful 2009 renewals clearly underscore our ability to deliver unique value to our clients and confirm the trust they place in our reinsurance expertise."

Glancing down the table, it becomes evident that average non-life combined ratios rose considerably in 2008. One of the larger losers is Odyssey Re, with 101.2% compared to 95.5% last year. A company spokesperson told Reinsurance that the combined ratio for 2008 had deteriorated primarily because of exposure to Hurricaine Ike.

If the industry were to suffer a major event this year, with combined ratios already at a high level, some reinsurers may find themselves facing severe financial difficulties. Global actuarial consulting firm EMB said in a report in June that a catastrophic event approaching $100bn in damage would likely result in multiple insolvencies or forced mergers. However, the firm notes that even a catastrophic event of this level would be unlikely to thrust the reinsurance sector into similar levels of turmoil as those being faced by the banking industry. "The P&C industry was built with an expert understanding of risk management at its core," says Alice Gannon, senior consultant at EMB. "We are seeing organisations survive - and in some cases thrive - in conditions that have destroyed stalwarts in other industries."

Exposure danger

Will Curran, deputy underwriter at Kiln, notes that some reinsurers may be faced with difficulties should a major event occur but agrees that the sector is still in relatively good shape for this year's hurricane season. He says: "Natural catastrophes are things that reinsurers always have to be prepared for, not just from July to November during the hurricane season. Earthquakes, for example, can hit at any time of year. However, last year we had a kind of 'perfect storm': while Hurricane Ike was not a market-changing event on its own, when it was combined with the global financial crisis, the two contributed significantly towards hardening rates in 2009."

Curran continues: "The insurance market at Lloyd's has stood up well to the events of 2008, in part due to disciplined underwriting but also because of its long-standing, conservative - some might say boring - approach to investment. While some may have been less conservative in their approach in the past, all (re)insurers have taken steps to de-risk their investment portfolios. Despite this, the capital markets are still not as fluid as they were 24 to 36 months ago and so the scope to effect an annual joint venture arrangement with capital markets could be limited following a major catastrophe."

Financial strength ratings continued at a high level in 2008, indicating confidence in the ability of the industry to ride out the global economic storm. At the recent Standard & Poor's European Insurance Symposium (see p8) Jayan Dhru - managing director and global head of financial institutions ratings at Standard and Poor's - noted that confidence in financial services businesses is key to their survival.

Bryon Ehrhart, chief executive officer of Aon Benfield Analytics, believes that reinsurers are better placed than many to ride the storm: "The enterprise risk-management processes used by reinsurers enabled them to hold the core capital necessary to maintain an orderly market for renewals of 2009. Reinsurers maintained the core capital necessary to renew substantially all of their capacity and are therefore in a stronger position than many of their peers in the financial services sector."

However, Ehrhart warns that not all reinsurers are necessarily in the clear: "Of course, there are exceptions to this broad trend and the exceptions fall into two general categories: reinsurers that had substantially larger investment or debt leverage and reinsurers that rely more substantially on retrocessions as a source of capacity."

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