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Reinsurers Battled Headwinds of Softening Market in 2009, A.M. Best

Posted on 13 Apr 2010

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An A.M. Best special report says capacity returned in force to the global reinsurance market in 2009, as solid earnings helped to propel capital upward by 24% from the previous year, despite a softening market. Recovering from harsh blows delivered by the global financial crisis and catastrophe losses, earnings turned around sharply in 2009. Modest catastrophe losses, favorable loss-reserve development and a significant rise in asset values helped in the remarkable recovery.

-- U.S. reinsurance and Bermuda market companies reported a solid combined ratio of 85.8 in 2009, which is an improvement over the 2008 result of 93.6.

-- The European "Big Four"— Munich Re, Swiss Re, Hannover Re and SCOR—all reported stabilized results for their property/casualty reinsurance segments in 2009

-- The financial market's recovery helped propel investment returns and security valuations, which further bolstered the global reinsurance segment's total return measures for the year.

-- January 1, 2010 renewals were mostly orderly, as the perception of excess reinsurance capacity limited opportunities for rate increases to just a few loss-exposed lines.

-- Factors that call for reinsurers to push for rate increases include low interest rates and concerns over the outlook for inflation.

-- Active capital management strategies were necessary in 2009, including refinancing debt, buying back shares, distributing dividends and, to a lesser extent, pursuing mergers and acquisitions.

-- Despite solid earnings and ample capacity compared with 2008, current market conditions for most lines of business have left the global reinsurance segment struggling to maintain its top line against falling premium volume in the primary market.

-- Cedants have responded to the economic pressures by continuing to increase retentions as exposures decline, while reinsurers thus far have maintained pricing discipline.

-- Underwriting margins are being compressed by deteriorating rates and increasing loss costs for business.

-- A.M. Best Co. believes reserves are adequate for the majority of companies, but future inflation in claims costs, combined with pricing pressures, ultimately could leave reserves deficient.

-- Potential U.S. tax legislation and other policy initiatives are compounding the uncertainty for non-U.S. domiciled (re)insurance companies that want to conduct business in the United States.