The first-half experiences of the London market’s top insurers with catastrophe losses may shed some light on the direction of global reinsurance in the six months ahead, as these groups can see trends from the perspectives of both buyer and seller of reinsurance.
The London market players are feeling the pain from an unusual half-year of catastrophes, as their earnings reports show. Among those reports are optimistic comments that as reinsurance buyers, they are still able to get the coverage they needed at reasonable terms. As reinsurers they are hopeful that rates will stiffen sufficiently to keep their capital strength up to fighting weight.
Hiscox Ltd. reported a first-half pretax loss of 85.6 million pounds (US$139.5 million) against a profit of 97.2 million pounds a year earlier. Much of the loss came from the reinsurance side of the group’s London market and Bermuda segments, while its primary insurance businesses helped to soften the blow.
In the London market segment, where reinsurance makes up 42% of the business, Hiscox had fortuitously reduced the catastrophe account by 26% in January due to rate reductions. “The catastrophes reversed the decline with rate increases averaging 10% and substantially higher in affected areas, and in May and June we underwrote 20% more than last year demonstrating the underwriters’ nimble reaction to market conditions,” the group said. “We are well prepared to benefit from changes in other markets.”
The group’s Bermuda property catastrophe account saw gross written premiums fall 9.3% “as we walked away from weaker rates earlier in the year.” Hiscox said the second half is promising as the first-half catastrophes boosted rates amid “signs of capacity constraints in some affected areas.”
Writing in the earnings report, Chairman Robert Hiscox was upbeat: “We need tough times in the catastrophe reinsurance arena to keep the fainthearted at bay and to stop foolish competition from some commodity players. We have preached discipline for years and have proved that discipline by cutting back the reinsurance account recently. Our reinsurance protection is virtually entirely intact, we are now facing much better rates and the underwriters are seizing the opportunities.
Amlin plc, which doesn’t release its interim results until Aug. 22, rattled its investors with an Aug. 2 trading update that announced it will not likely meet its profit expectations for the year. The bad news for Amlin was that in July it received a “material increase” in notified claims from a client related to the February earthquake in New Zealand, pushing its claims reserves for the first half to 314 million pounds.
Higher than normal frequency of large claims in its property and marine accounts are also dampening performance for Amlin.
On the plus side, Amlin said some of the profit shortfall would be offset in the second half by increased catastrophe reinsurance income “which has been written in the second quarter in an improved rating environment, whilst containing exposure to peak catastrophe disaster scenarios to well within normal risk appetite.” Another London market player, Beazley plc, had earlier reported a first-half pretax loss of 24.4 million pounds compared with a year-earlier profit of 115.5 million pounds (BestWire, July 22, 2011). In its interim statement, Beazley noted that as a reinsurance buyer it got “strong” support from its reinsurers and its April 1 renewals for catastrophe programs got similar terms to 2010.
As a reinsurer, Beazley said it expects the aggregate effect of first-half catastrophes to be an increase in rates for its property and reinsurance divisions. The group said rates in loss-affected areas hardened by up to 60% in its international reinsurance portfolio, and U.S. reinsurance rates are increasing by 5% to 10%.
“Although market conditions remain generally competitive, the underwriting environment could potentially change quite rapidly, both for short-tail risks where the impact of recent catastrophe losses is already being felt, and for medium tail lines of business such as our specialist professional and management liability lines,” said Beazley. The group said it prepared for such a scenario by extending and increasing an undrawn letter of credit facility from $150 million to $225 million.
(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)
(c) 2011 A.M. Best Company, Inc.