Global reinsurance industry continues to deliver solid results despite challenges: A.M. Best

The global reinsurance industry managed to deliver solid results in 2014, with most companies reporting strong combined ratios and profitable returns, despite increased challenges in terms of price declines, increased commissions and tougher terms and conditions, A.M. Best Company said in a special report released on Tuesday.

In the report, titled Appearances Can Be Deceiving, the ratings firm said that “the benign level of cats and the never-ending favourable reserve releases was once again the determining factor for such strong performance.” Still, the industry “continues to face serious challenges in terms of overflow of capital, softening premium rates, low interest rates and the possibility of lax underwriting by some in order to maintain business.”

That view prompted A.M. Best to revise its industry outlook from stable to negative last August. By January, renewals reported a decline in reinsurance prices between 5% to 15%, depending on risk and loss experience.

Related: Ratings outlook for global reinsurance sector remains negative: A.M. Best

Mergers and acquisitions also took centre stage in Q4 2014 and the first part of 2015, with major significant merger deals announced, A.M. Best said. XL Group signed a definitive agreement to buy Catlin, RenRe to buy Platinum Underwriters and Partner Re and Axis signed an agreement to combine into a single company through a merger of equals. Most recently, Endurance Specialty Holdings Ltd. has signed to acquire Montpelier Re Holdings Ltd. [click image below to enlarge]

Financial performance was driven by another benign cat year. “The analysis of A.M. Best’s global reinsurer composite clearly illustrates underwriting profitability in 2014 and improvement in overall earnings as the sector benefited from another year of record low catastrophe losses,” the report said. “The composite produced a calendar year combined ratio of 89.5% as compared to 88.6% in 2013 and 92.0% in 2012.”

According to Munich Re, insured catastrophe losses for the entire year totalled only $31 billion, same as in 2013, as compared with the 10-year average of $58 billion. The largest loss came from snow storms in Japan which reported overall losses of $5.9 billion and insured losses of $3.1 billion. U.S. winter storms led to insured losses of $2.3 billion (total losses of $4 billion) and UK floods led to $1.1 billion of insured losses (total losses of $1.5 billion) during 2014.

Related: Insured losses from disasters below average in 2014 despite record number of natural catastrophe events: Swiss Re sigma study

But given that overall cat losses remained below average in 2014, results for the global reinsurance market remained strong. Since 2007, the global reinsurance sector has benefitted from $56 billion in favorable reserve development, the report added.

And underwriting profits along with investment income and realized capital gains produced another solid year for the global reinsurers. The U.S. and Bermuda market appeared to have outperformed from an underwriting perspective, producing a combined ratio of 87.5%, marginally better than Lloyds’ 88.1% result. “This years’ slight deterioration in combined ratios from Lloyds could be attributable in part to the recent aviation tragedies around the world,” the report suggested. [click image below to enlarge]

The European “Big Four” (Munich, Swiss, Hannover and SCOR) produced a “very acceptable” 92.4% combined ratio, reflective of their broader portfolio diversification and less dependence on U.S. property catastrophe business. On a five-year basis, the U.S. & Bermuda market produced an average combined ratio of 93.1% as compared to a 93.6% for Lloyds and 96.5% for European reinsurers. “These five year averages for the global reinsurance market includes the significant losses from the CAT events of 2011 (Japan, Australia, New Zealand, Thailand, U.S. tornadoes) and Superstorm Sandy in 2012,” the report said.

Overall, A.M. Best maintained its outlook for the reinsurance sector at negative, citing the significant ongoing market challenges that will hinder the potential for positive rating actions over time and may translate into negative rating pressures.

“While A.M. Best does not anticipate a significant number of negative outlooks or downgrades over the very near term, the market headwinds at this point present significant longer-term challenges for the industry,” the report said. “Declining rates, broader terms and conditions, unsustainable flow of net favorable reserve development, low investment yields and continued pressure from alternative capital coming into the market are all negative factors that we expect will adversely affect risk-adjusted returns over the longer term.”

The ratings firm is forecasting underwriting performance to produce an average combined ratio of 94.8%. “A possible change in the ratings outlook back to stable would be based on A. M. Best’s view of future earnings capability and risk-adjusted returns on capital,” the report concluded. “If the reinsurance market turns, rates start to increase and operating fundamentals start to improve, A.M. Best will consider a revision of its current ratings outlook.”