Reinsurers' earnings rebounded during the first half of 2012, a function of relatively low catastrophe losses so far this year and higher rates in the aftermath of the colossal natural-catastrophe losses that pounded the insurance industry in 2011, according to John Welch, president of XL Re America Inc.

But other factors, including potential hurricane and drought-related losses during the remainder of 2012—as well as reduced insurer demand—threaten to take the shine off the year's results to date.

“Over the last six months, the global reinsurance market's earnings have been very strong,” Welch notes. “With limited catastrophe losses, reinsurers have been able to realize some very positive earnings development year over year,” and have also boosted rates, particularly for property exposures.

On the property-reinsurance side, “we are seeing some strong single- and lower double-digit increases” in reaction to 2011's cat losses, he says.

“Casualty rates are up, too—in the low single digits,” Welch adds. That rate reaction, he explains, “is more in recognition that investment income is down and the loss trend is ticking up.”

But not all is rosy for reinsurers, says Welch: “There are a couple of potential exposures that we see on the horizon that could have some impact down the road.”

For example, he notes, “we are entering peak wind season—most immediately with Hurricane Isaac currently churning on.”

In addition, through their participation in the Federal Crop Insurance Program, reinsurers are exposed to losses stemming from the Midwest drought, he adds.

LOTS OF CAPACITY + REDUCED DEMAND = FIERCE COMPETITION

And even the good news for reinsurers so far this year is something of a double-edged sword. The improved loss experience during 2012's first half, combined with the higher rates that reinsurers are commanding, have led to excess capital in the reinsurance marketplace. This, in turn, “is creating some very challenging market conditions,” says Welch.

The big issue is increasing competition among reinsurers. At the same time as the market's capital has been growing, opportunities to deploy it have been fewer as primary carriers look to retain more risk.

“With some large, well-capitalized customers buying in a different way or buying less, there is definitely some contraction” in reinsurance-market demand, he says.

The result is that “reinsurance companies are becoming increasingly competitive—and some are aggressive,” sometimes to their detriment.

In other words, while reinsurance rates this year as a general trend have been rising to varying degrees, depending on the type of business, the intense competition for business is suppressing what might have been even greater gains—and may affect the size of any increases down the road.

It is also contributing to some concessions in terms and conditions for ceding companies with profitable track records, Welch says.

“Most of the players in our market are working very hard to keep their renewal book of business,” he continues. “With very little new-business opportunities coming into the market, we've witnessed a tendency for more competitiveness and less underwriting discipline over the last several months.”

XL's risk appetite has not changed, he adds. Still, “like many of our competitors, we're reluctant to give up the business that we've supported over the years and are focused on supporting our long-term clients. We're all very protective of our existing portfolios.”

CAT BONDS & CAPITAL MARKETS

On the retrocessional front, “more reinsurers are turning to the capital markets and cat bonds for property-cat retrocessional protection, in particular,” notes Charles Cooper, president of XL Re Bermuda Inc.

Several factors are driving that trend, according to Cooper. “Lower transactional costs, decreasing bond yields in general and higher retrocessional costs have made the cat-bond market a competitive option for reinsurers,” he explains.

Special Reports /

XL: Rates Up, But Competition Is Fierce as Challenges Both Wet & Dry Await

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