August 26, 2013 by Canadian Underwriter
Reinsurance firms are “capable of absorbing significant losses from a combination of events” but are also facing pricing pressure because of investments from third-party capital, a new report from A.M. Best Company suggests.
Though global reinsurers are “well capitalized,” Oldwick, N.J.-based A.M. Best “remains concerned that reinsurance pricing, terms and conditions may come under increased pressure as excess capacity continues to build and the convergence between capital market capacity and traditional reinsurance capacity evolves.”
In its report released Friday, titled “The Capital Challenge: Reinsurance Capacity Overshadows Market,” the ratings firm noted “various reinsurance brokers reported” that “as much as” $45 billion of “additional capacity entered the market in recent years.” All figures are in U.S. currency. Sources of this money included hedge funds, pension funds, endowments and trusts.
“A few hedge funds have chosen to enter the reinsurance market directly by forming new reinsurance companies, which has certainly drawn attention,” A.M. Best noted in the report, adding traditional reinsurance firms have formed new “sidecars” over the past year. NASDAQ defines a sidecar as a way for investors to participate in the risk and return of a specific group of insurance policies but the investors’ risk is limited to the funds of the sidecar.
A.M. Best stated it’s more likely that pension funds, rather than hedge funds, are the “biggest influence” on the reinsurance market.
In a graph published with the report, A.M. Best reported that in 2012, $6.3 billion worth of cat bonds and $1.7 billion in sidecars were issued in the global reinsurance market. To date in 2013, $5.3 billion in cat bonds and $800 million in sidecars have been issued in the global reinsurance market.
“Such investments in 2013 are on track to beat 2012 figures,” A.M. Best stated of cat bonds and sidecars.
A.M. Best ranked the top 50 global reinsurance groups, by gross written premiums, in 2012. The top four this year were Munich Reinsurance Co., Swiss Reinsurance Co. Ltd., Hannover Rueckversicherung AG and Lloyd’s with $37.251 billion, $31.723 billion, $18.208 billion and $15.785 billion respectively in life and non-life GWP.
The fifth-largest was Omaha, Neb.-based Berkshire Hathaway Inc., whose holdings include General Re Corp. and Berkshire Hathaway Reinsurance Group. Berkshire Hathaway, which is led by chairman and CEO Warren Buffet, had GWP in reinsurance of $15.059 billion.
Munich Re and Zurich-based Swiss Re were also the top two when measured by non-life net premiums, of $22.038 billion and $15.117 billion respectively. A.M. Best used net premiums written for most of the Top 50 but substituted net premiums earned in the case of Swiss Re and Hannover Re. Lloyd’s was Number 3 in NWP, with $11.358 billion, in 2012.
“Despite a number of loss events in 2012, (including Superstorm Sandy, U.S. tornadoes, wildfires and severe droughts), most reinsurers delivered underwriting profits and solid earnings,” according to the report. “Combined ratios were below 100, driven in part by continued reserve releases and well-diversified books of business.”
Of the top 5 reinsurers, Munich Re, Swiss R, Hannover Re, Lloyd’s and Berkshire Hathaway had combined ratios in non-life of 91.2%, 83.1%, 96.0%, 91.0% and 99.9% respectively.
Ten reinsurers had combined ratios exceeding 100%. They were Beijing-based China Reinsurance Group Corp. (100.4%), Mumbai-based General Insurance Corporation of India (GIC Re, 104.8%), Tokyo-based The Toa Reinsurance Co. Ltd. (108%), Rio de Janeiro-based IRB-Brasil Resseguros SA (112%), Duesseldorf-based Deutsche Rueckversicherung AG (100.6%), Bermuda-based Maiden Holdings Ltd. (102.5%), Singapore-based ACR Capital Holdings Pte Ltd. (102.7%), Istanbul-based Milli Reasurans Turk Anonim Sirketi (107.2%), Greenwich, Conn.-based W.R. Berkley Corp. (100.5%) and Taipei, Taiwan-based Central Reinsurance Corp. (107.3%).