A benign cat season, strict discipline over pricing and some canny manouevres by underwriting bosses has left the reinsurance industry flying high. David Banks asks why the analysts remain so gloomy.

There’s one thing that is guaranteed to take the gloss off a reinsurance boss’s success: knowing that the competitors have all done equally well.

In February, there seemed to be an endless procession of reinsurers unveiling stellar profits for 2009, not to mention excellent takings in the January renewals. There is so much glee around the reinsurers’ offices that one could be forgiven for thinking the economic crisis of the past two years had never happened.

Several companies actually posted the best sales figures in their history: Montpelier Re, Axis Capital, Allied World, Endurance, Catlin and Platinum Underwriters all announced record results either for the year or the last quarter. Meanwhile, Hannover Re announced its second-best annual results and Munich Re returned record dividends to shareholders.

So what is the reason for such a buoyant market, and will it continue?

The reasons for the great results appear relatively simple. For starters, most reinsurers have said an unusually benign cat season enabled them to take pristine balance sheets into 2010. But that alone does not make for such healthy figures; there have been several years in the past two decades when low cat figures did not correlate with high returns.

The reality is that benign loss figures and low attritional losses were important adjuncts to a background of helpful factors, notably extreme caution in underwriting and pricing discipline on the back of the financial crisis. Economic uncertainty also served as a good reason to raise rates.

Then there was an unexpectedly rapid improvement in capital market conditions, including recoveries in equity market prices. Fitch points out that reductions in corporate bond spreads bolstered reinsurers’ capital positions significantly in 2009, which have now returned to near pre-crisis levels in 2007.

One unusual reason for positive results came from Max Capital’s Marty Becker, who says his failed takeover of IPC could be credited for a boost in market awareness of the Max brand. There’s clearly no such thing as bad publicity.

But it wasn’t all plain sailing, and 2009 called for unique manoeuvres by reinsurance bosses and underwriters. PartnerRe boss Patrick Thiele believes the art of reinsurance management is simply better now than it was 15 years ago. He says managers have a greater focus on cycle management and product diversification, while modelling, risk management and technical pricing have also advanced.

There does appear to have been a common understanding that underwriters had to maintain discipline, as well as prepare for Solvency II and potentially leaner times in 2010.

Despite that, even the best underwriters could only maintain prices in the principal lines and there was generally a modest slip in rates. In cat business, prices went downwards due to low losses and the improved capital resources of primary insurers. The only exceptions to price erosion were in such lines as aviation, space, credit and surety.

Reading the tea leaves

With reinsurers’ capital at near-historic peak levels, it might come as a surprise to know that rating agencies in particular are not joining the celebrations. Fitch expects that the large release of reserves in 2008 and 2009 (on business done in 2002-2006) will not continue in 2010. This, coupled with a soft rate environment, “will reduce earnings in 2010” says a Fitch statement on Bermuda-based carriers.

Moody’s is also less than positive, saying the continued soft market will place additional pressure on reinsurers’ underwriting margins and profitability during 2010. Soft reinsurance pricing, it says, results from both increased capacity and reduced demand. “This soft market could also mean that the credit profile of the reinsurance industry may not be as healthy as current capital levels indicate,” a Moody’s report says.

“Additionally, in the absence of attractive opportunities on the underwriting side, reinsurers may step up share repurchase activity, which could increase their vulnerability to catastrophe losses.”

On the demand side, reduced economic activity and the strained reinsurance budgets of primary carriers have had an adverse impact on reinsurance purchases, says Moody’s. It voices concerns about excess capacity and slack demand.

Moody’s, which has maintained a negative outlook on the reinsurance industry since September 2009 despite a rebound in the equity markets, believes such indicators for 2010 could have negative implications for policyholders and creditors of reinsurers.

Even reinsurers themselves are restrained about predictions for the year ahead. Munich Re finance director Joerg Schneider says he would be “very surprised if we can repeat such gains this year”. On the other hand, Hannover Re still expects a 15% return on equity after expanding its portfolio in the last 12 months.

The final note of warning comes from Lloyds TSB Corporate Markets insurance relationship manager Seb Kafetz, who says investment returns are likely to be much lower, as reinsurers have moved out of equities and hedge funds into bonds and government-backed investments. “In addition, recession-related claims in political risk and specialty classes are likely to increase.” GR