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High rates, low cat losses boost reinsurer profits


U.S. reinsurers reported strong underwriting results for the first half of 2006, a trend that is expected to continue into next year despite softening casualty rates, say observers.

Sharp increases in property catastrophe rates over the past year should easily eclipse any fall in casualty income. Light catastrophe losses so far in 2006 and improved loss reserve levels for most lines of business also are contributing to the bright picture for reinsurers, observers say.

In a survey by the Washington-based Reinsurance Assn. of America, 23 reinsurers reported an average combined ratio of 96.5% for the first half of 2006 vs. 105.8% reported by a comparable group for last year's first half.

The sector's 2005 results were impacted in part by Princeton, N.J.-based American Re-Insurance Co.'s 266.5% combined ratio, which reflected a $1.6 billion boost in its reserve. American Re has since changed its name to Munich Reinsurance America Inc.

The top 20 reinsurers, based on net premiums written, posted a 96.7% combined ratio for the first half of this year vs. the 104.1%, based on a weighted average, posted by the same group in the year-earlier period.

The reinsurers reported $4.72 billion in net income in the first half of 2006, a 262.4% increase from the total reflected by a comparable group in 2005. The top 20 reinsurers reported $4.68 billion in net income, a 263.4% increase from the total reported by the top 20 in 2005.

Net premiums written for the entire RAA group fell 1.7% to $12.98 billion, while net premium income for the top 20 fell 1.5%, to $12.95 billion.

"The results were very strong, stronger than expected," said Adam Klauber, managing director at Cochran, Caronia & Co. in Chicago.

"The first-half results look fine," said Bruce Ballentine, vp and senior credit officer at Moody's Investors Service in New York. "The major themes are the hard market for catastrophe risks, and a neutral to softening market for other risks."

He noted also, "One area that has been a challenge over the past several years--U.S. casualty reserves--has seen significant improvement, or has been addressed by the reinsurance industry through substantial reserve strengthening, from a low point of reserve deficiency, in our view, at around year-end 2000, to a much stronger position by year-end 2005."

Robert DeRose, assistant vp at Oldwick, N.J.-based A.M. Best Co. Inc., said, "Certainly, those companies that are taking on property are benefiting from the hard property market currently," although most U.S. companies are doing so "with a great deal of caution." Much of the business is going offshore and passing through capital markets, either through sidecars or catastrophe bonds, he said.

However, John L. Ward, chief executive officer of Cincinnati-based Cincinnatus Partners L.L.C., said despite the strong results, "There's a cloud of uncertainty that looms in some ways over the reinsurance segment."

While the 2005 catastrophes caused reinsurers to take a fresh look at their modeling, it now looks like 2006 catastrophes are going to be fewer than weather experts had projected, "raising doubts if modelers had a good handle on the exposures or not," said Mr. Ward.

He also noted a decline in net premiums written. "The prices are firming, but primary companies are retaining more of the risk, so you're actually seeing some real softening on a net premiums-written basis, even in a semihard premium environment," Mr. Ward said.

Several other observers, however, say that the outlook is positive. Absent catastrophes, reinsurers should continue to show improved results, despite the softening rate environment, through year-end 2007, "although probably moderating significantly in the second half of 2007 as the impact of rate decreases continues to chew its way into the business," said John D. Gwynn, managing director at Morgan Keegan & Co. Inc. in Memphis, Tenn.

"The expectation is that things will be pretty good," with higher property rates and the "very distinct potential for very low catastrophe losses this year," said J. Paul Newsome, vp and senior equities analyst with A.G. Edwards & Sons Inc. in St. Louis.

While casualty rates are softening, "If you look at what's going to move profitability, the property rates should more than compensate for lower casualty rates," he said.

Another positive factor is "in general remarkable stability in claims costs, both in property and on the liability side," which is good for the reinsurers, said Mr. Newsome. "You're just seeing a lack of major issues at the moment."

Reserves more settled

"Even if we get back to a normal cat season, reinsurers should have a pretty good year," said James B. Auden, senior director at Chicago-based Fitch Ratings. The reserves issue has "settled down a bit" and property rates have increased considerably, which should help generate continued profits, he said.

"You still may see more developments in the '05 losses, but we don't think it will be very large sums at this point," Mr. Auden said. "There could be a company or two with a surprise."

The outlook is "a little bifurcated, I think," said Mr. Klauber. "Companies with bigger than average property exposures will continue to have very strong earnings growth. Companies that are more diversified will have solid earnings going into next year." Although underlying casualty rates will continue to soften, "early indications are that property pricing should stay at much higher than historical levels," he said.

An issue for next year, though, is whether property market competition will increase or if it will "remain pretty disciplined," Mr. Klauber said.

Mr. Newsome agreed. The "biggest question," he said, is whether the hard property market "will turn quickly given the lack of catastrophe losses this year."