Insurers opting to return capital to shareholders rather than deploy it, rating agency finds

Lloyd's building

London market insurers performed well in 2012 despite losses from Superstorm Sandy and a challenging economic environment, according to a briefing from AM Best.

Results were helped by modest rate increases, noted the rating agency, and better-than-expected investment earnings in the second half of the year.

“In 2013, rates have continued to rise, but in the absence of a stronger broad-based upturn, many market participants have chosen to return rather than deploy the capital generated in 2012,” it added.

Convergence between the traditional reinsurance market and capital markets will continue to be an important feature in the London market in 2013. AM Best noted that Amlin, Beazley, Catlin and Hiscox now all have sidecars offering collateralised reinsurance.

Sandy drives up rates

In terms of catastrophe experience, 2012 was “considerably less extreme” than the previous year. However, companies had to contend with the impact of Superstorm Sandy, which caused insured losses of about $25bn. For Lloyd’s, net claims before tax are estimated at £1.35bn ($2.18bn).

Results were also dented by crop losses after a prolonged drought in the US, as well as the Costa Concordia cruise ship disaster off the coast of Italy.

“Ample capacity limited the impact of Sandy on reinsurance pricing at the January renewals, with material increases largely restricted to loss-affected catastrophe treaties,” wrote AM Best. “Outside the US, reinsurance rates came under pressure, particularly in Europe.

“Marine pricing is responding positively to poor loss experience in 2012, while in the casualty market rates have yet to fully reflect the impact of low investment yields and the prospect of lower reserve releases.”

Upward rate momentum has continued in the US for commercial lines, but this is expected to moderate due to the impact on demand of stagnant economic growth.

US insurers are under pressure to improve accident-year performance and to focus on core competencies. This should present an opportunity to London insurers, thought AM Best, with moderate to higher hazard risks returning to the US surplus lines market, which was led by Lloyd’s in 2011.

Challenging outlook

Difficult market conditions with low interest rates and declining reserve releases will mean a strong focus on capital management across the London market going forward.

While London insurers entered 2013 in a strong capital position, “economic uncertainty, competitive market conditions and final catastrophe experience” will continue to challenge carriers.

“Strong adherence to underwriting discipline and prudent catastrophe risk management will be crucial if market participants are to maintain capital strength,” concluded the rating agency.