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Despite catastrophes and drought-related crop losses, the largest U.S. reinsurers posted double-digit gains in profit during 2012.
James Eck, New York-based vice president and senior credit officer at Moody's Investors Service, said that while the losses incurred by reinsurers in 2012 pale in comparison to those seen in 2011, they were still high above historical averages for insured catastrophe losses.
“Superstorm Sandy is neck and neck with Hurricane Andrew for being the second-worst hurricane loss in history,” Mr. Eck said. “You also had large crop losses which made their way into the reinsurance sector in a number of ways, through both reinsurance written and primary coverages,” he said.
Nonetheless, according to a March survey by the Reinsurance Association of America, the combined ratio for the 19 participating reinsurers improved to 96.2% for 2012 compared with 107.2% in 2011. Moreover, net written premiums for the group rose 11.7% in 2012.
“If you take a step back and look how the sector did, it did pretty well considering the severity of the natural catastrophe losses,” Mr. Eck said.
In addition to the fairly strong combined ratios, returns on equity have generally been higher than recent years, said Dennis Sugrue, London-based director and reinsurance sector lead for EMEA at Standard & Poor's Corp. “One of the things we are seeing is that capital is strong.”
However, while the capital influx is good for the market's financial strength, it may have a somewhat depressing effect on rate increases, which he said are necessary to counteract the sector's dwindling investment income.
“Another challenge is that returns on investment were down in 2012 relative to 2011,” Mr. Sugrue said. “We are not seeing any indication there may be a real turn in interest rates, and we think reinsurers' investment returns are going to continue to drop over the next few years. This will be a challenge for the sector, particularly long-tail players, as it puts a bigger focus on profitability in underwriting business.”
Mr. Eck agreed that the incoming capital likely will inhibit large price increases.
“It doesn't look like pricing
is headed up strongly after two back-to-back bad catastrophe years and that is largely a function of the industry continuing to generate capital, as well as increasing participation from alternative markets, such as catastrophe bonds and reinsurance sidecars,” he said.