Reinsurers see strong 2013, but 2014 results may lagReprints
Light catastrophe losses and strong underwriting results helped propel the largest reinsurers to strong 2013 results.
But analysts say pricing softness and an abundance of capacity make it doubtful that reinsurers will have as strong a year in 2014.
Overall net income jumped and the combined ratio improved among the 18 reinsurers reporting 2013 results to the Reinsurance Association of America.
Net income for the 18 reinsurers totaled $12.40 billion for 2013, up 55% from net income reported by 19 reinsurers to the RAA for 2012.
Net written premiums declined to $26.84 billion while reinsurers' collective combined ratio im-proved to 86.8% in 2013. Investment income inched up to $8.47 billion, and policyholder surplus increased to $138.74 billion in 2013.
“Premium growth was pretty modest for these companies year-to-year,” said Jim Auden, managing director at Fitch Ratings Inc. in Chicago.
“The big thing is the underwriting results greatly improved, but catastrophe losses definitely influenced the results by a lot,” he said.
“There were probably below-average natural catastrophe losses, and a lot of that business is underwritten by the Bermuda market,” said Meyer Shields, managing director and an analyst at Keefe, Bruyette & Woods Inc. in Baltimore. “So to the extent that not much of that happened over the course of 2013, they were overearning relative to long-term underwriting potential.”
Last year was a good one in general for reinsurers, said Paul Newsome, managing director and senior insurance analyst at investment banking firm Sandler O'Neill & Partners L.P. in Chicago. “It was a relatively uneventful year, which is good for the reinsurance industry.”
With fairly steady investment income, “whatever earnings improvement there was, it was on the underwriting side,” Mr. Auden said.
“I don't think you saw a lot of returns on equity that were really spectacular,” Mr. Newsome said. “The low interest rate environment is hampering the return on equity.”
After such a strong 2013, reinsurers likely face challenges in replicating those results this year.
“Reinsurers had solid results for full-year 2013 despite more competition and a further pinch in investment income,” said Kevin Lee, senior credit officer at Moody's Investors Service Inc. However, they “took a back seat to a cheerless outlook for 2014 that was echoed by most management teams on their earnings calls.”
“I think it was midyear last year when you really saw the softness begin in the reinsurance market,” Mr. Newsome said. “It became even more competitive at the January renewals” this year.
“It's already begun, but it will get worse,” said Mr. Shields. Reinsurers' second-half 2014 results will depend on the strength of the midyear renewals, he said. “If, as I suspect, there's more softness in the market at June and July, then you'll see even more of a head wind burning its way into premiums and results in the third and fourth quarters.”
“The catastrophe reinsurance market may give up more ground before it finds a floor in pricing,” Mr. Lee said.
“Catastrophe results will influence 2014 results, but it will probably be difficult to duplicate this (strong 2013 result) in 2014,” Mr. Auden said.