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Reinsurance firms battered by enormous losses


Large losses from natural disasters weighed heavily on the reinsurance sector in 2011.

Insured losses from catastrophes including floods in Australia and Thailand, earthquakes in New Zealand, and a quake-initiated tsunami that devastated part of Japan were evident in a survey of U.S. reinsurers' results by the Washington-based Reinsurance Assn. of America.

In light of the catastrophe losses, combined ratios deteriorated for a majority of reinsurers in the group, with Bermuda-based Everest Reinsurance Co. posting a combined ratio of 133.1%—the highest among the 19 reinsurers participating in the RAA survey (see chart).

“In 2011, we saw the second-highest catastrophe losses in the history of the industry,” said Gregory Locraft, executive director covering property/casualty insurance at New York-based Morgan Stanley. “There were more $1 billion loss events than any year in history, so it was just the frequency and severity of the catastrophes that is driving results.”

Despite the conventional wisdom that geographic diversification lessens a reinsurer's risks, “if you were very diversified in your cat risk (during 2011), you may have come out worse than others,” said Brian Schneider, senior director of insurance at New York-based Fitch Ratings Ltd.

James Eck, vp and senior credit officer at Moody's Investors Service, noted that while some reinsurers that were not exposed in Japan and Thailand fared better than others last year, none was unscathed.

“Most of the reinsurers are now global in their reach. So when something big happens, they are going to have some loss,” Mr. Eck said. “It's just a question of how much. It's just a year where reinsurers got hit everywhere.”

Adding to the financial head winds for reinsurers was the ongoing challenge of low investment income.

“The drop in interest rates is a drag on earnings,” Mr. Locraft said. “Investment yield is at a multidecade low, so the ability of insurers to earn money on the float has been badly damaged.”

Amit Kumar, vp and senior analyst for property/casualty insurance at New York-based Macquarie Capital (USA) Inc., said reinsurers that were able to surmount the investment income challenge fared better than their counterparts.

“The driver for a positive net income for 2011 was investment income, which offset the underwriting loss stemming from an active catastrophe loss year,” Mr. Kumar said. “With reinvestment rates remaining low and capital impacted from these losses, reinsurers are between a rock and a hard place.”

Mr. Locraft said a route reinsurers could take to improve their financial performance is improving their risk selection, charging higher prices in disaster-prone areas or exiting a market if prices are insufficient.

“What you will see is a sharpening of the pen when it comes to risk exposure,” he said. “In areas where big losses were taken, such as New Zealand and Japan, you are seeing capacity shrink.”

In addition, Mr. Kumar noted that reinsurers will continue to push for higher prices as a way to improve results.