A steady hardening of the global property and casualty reinsurance market has not materialized in June and July renewals as competition and plentiful capital dampen pricing gains.
Capacity remains plentiful and even strengthened through the second quarter, dampening upward pressure on reinsurance pricing, according to reinsurance broker Guy Carpenter & Co. Property rates might have been expected to see strong rises given the catastrophe losses in 2011, but Guy Carpenter said that, coming into 2012, capital was about the same as a year earlier, despite the losses.
Excess capital was evident in both June and July renewals. Florida renewals showed lower price increases than many in the market anticipated, according to Guy Carpenter.
"Catastrophe losses have been relatively limited for the reinsurance sector to date in 2012. As a result, we have seen a continued improvement in the sectors dedicated capital position, which has mitigated price increases," said David Flandro, global head of business intelligence. "As we enter hurricane season, we will continue to track catastrophe activity, reserving and asset-side issues in our analysis of pricing trends for the remainder of the year."
Guy Carpenter estimates that between US$6 billion and $8 billion of outside capital entered the reinsurance market since the catastrophes of 2011.
"In 2011 the industry experienced one of its most challenging years due to the tremendous volume of catastrophe losses across the globe," said Lara Mowery, head of global property specialty for Guy Carpenter. "With light losses to date in 2012, July 1 property renewals are marked by disciplined underwriting amid plentiful capacity. Based on the impact of July increases in 2011 and available capacity, pricing trends have moderated."
Among reinsurers, there is disappointment over the lack of upward price movement. Richard Brindle, chief executive of Lancashire Holdings Ltd., indicated in an earnings conference call that he is skeptical about optimistic pronouncements by others in the market that conditions are hardening. "We have watched with bemusement as company after company has come out with bullish rating commentaries on the [June 1 and July 1] U.S. cat renewals," he said, adding that renewals "were at best flat and probably slightly down in our view."
Brindle said Lancashire viewed the Jan. 1 and April 1 catastrophe and retrocession renewals as the best opportunities for pricing, while viewing midyear renewals "with some caution." Outside catastrophe lines, Brindle said reinsurance markets were "broadly stable" elsewhere.
Chief Underwriting Officer Alex Maloney said Lancashire noted 2011's catastrophe experience showed up in April renewals, when the group's property catastrophe excess of loss line saw premiums rise from US$9.7 million to $41.8 million, "with Japanese cedants accounting for $36.3 million, including Japanese interests abroad covers."
June catastrophe renewals were also up, though Lancashire cut its exposure to Australia, a move partly offset by business from a "major New Zealand client," said Maloney.
Maloney pointed to the difficulty of controlling for "secondary cat peril losses" experienced in 2011, such as U.S. tornadoes, the floods in Thailand and the tsunami in Japan as reasons for Lancashire's decision in June to close out its direct and facultative account and onshore energy businesses. He said these risks and the associated contingent business interruption exposures "are very difficult to model and quantify."
There are "pockets of opportunity" in some reinsurance lines, but Brindle is not convinced the market is turning decisively. "Broadly, we feel that this is a stage of the cycle that calls for patience and discipline," he said. Much may depend on how the windstorm season plays out, but Brindle said Lancashire will focus on "right-sizing out capital position through special dividends."
Guy Carpenter also found some rate gains in casualty lines, but in places such as Australia and New Zealand, reinsurers "were constrained in their efforts to raise rates to offset declines in investment income."
Victor Peignet, chief executive of Scor SE's property and casualty reinsurance segment, said in an earnings conference call that, concerning casualty lines Scor has backed out of, "we do not think the moment has arrived to re-enter those markets." Overall, Peignet said Scor is making good growth progress in "a P&C market that is relatively disciplined, although it is not changing as much as we would like in response to the global environment."
For Scor, June and July renewals saw prices rise an average 3% (Best's News Service, July 24, 2012). Growth in the Latin America-Caribbean market and in specialty lines contributed to a 24% rise in premiums at constant exchange rates.
Scor SE, Lancashire Insurance Co. Ltd. and Lancashire Insurance Co. (UK) Ltd. all currently have a Best's Financial Strength Rating of A (Excellent).