NU Online News Service, June 13, 1:57 p.m.EDT

While the reinsurance sector contended with one of its biggestloss years ever in 2011, capital levels remain strong, 2012 hasstarted off on a better note than last year, and quoting volatilityfor Florida renewals appears to be moderating compared to 2011'squoting behavior, recent reports say.

A June 5 report by Standard & Poor's states that severecatastrophes have challenged the reinsurance sector for the past 10years, but reinsurers have maintained strong capitalization.S&P says reinsurers' enterprise risk management capabilitieshave provided the foundation for the sector's strong footing.“Careful risk selection has also enabled reinsurers to manage thesoft cycle well, and contain the record catastrophe losses seen inun-modeled areas in 2011.”

A June Guy Carpenter briefing on reinsurance notes that despitethe 2011 losses, the reinsurance sector ended the year with adedicated capital position that was slightly up, at around $178billion.

Due to reinsurers' ERM capabilities and conservative investmentstrategies, S&P says the 2011 losses amounted to an “earningsevent rather than a capital event.”

That earnings event led to a net loss of $100.6 million in2011's first quarter alone for a group of 19 U.S. reinsurers thatcomprise the Reinsurance Association of America. But RAA companieshave, as a whole, reversed their fortunes in 2012's first quarterthanks to fewer catastrophes, according to results released by theassociation. The companies posted a combined net income of $1.5billion for the first three months of this year. The group'scombined ratio dropped from 129.3 in the first three months of 2011to 95.6 this year.

Regarding reinsurance pricing trends, S&P says the sectorhas seen rate increases, but not to the point to declare that ahard market has arrived. S&P says the increases have“disproportionately favored the property segment in general,specifically the regions that experienced severe catastrophe lossesduring 2011.”

S&P says catastrophe-exposed areas that did not see lossesin 2011 have seen rate increases of around 5 percent to 10 percent.But areas that experienced losses have seen “substantially higherrate increases and tighter terms and conditions, although thesevary greatly by region.”

Guy Carpenter, though, notes that although January 2012 renewalsshowed global property-catastrophe rates up by 9.5 percent,reflecting 2011 losses, benign cat activity to start 2012 has ledto an improving capital position that is “likely to contain anyattempt at price increases throughout the year.”

Concentrating on Florida reinsurance renewals for June, GuyCarpenter adds, “The more significant Florida renewal priceincreases indicated by some in the industry earlier this year didnot materialize, although pricing was up slightly onaverage.”

This does not mean that pricing in Florida is inadequate though.Speaking to PC360, Lara Mowery, head of global propertyspecialty for Guy Carpenter, says, “Florida has been wellpriced. You don't see the diversification benefit and the degree ofsoftening in the pricing that you've seen in some other globalcatastrophe zones.”

Furthermore, a Guy Carpenter analysis of quoting behavior for 11reinsurers rated between A- and A+ by A.M. Best shows that quotingvolatility has moderated for the June 2012 renewals compared to2011, indicating a more tailored approach by many reinsurers toeach individual renewal (see chart).

“In 2009 and 2010, variation from the averagequote for Florida renewals was consistently within a range ofdown-3 percent to up-3 percent from the average,” Guy Carpentersays. In 2011, that volatility increased five-fold. Guy Carpentersays the volatility in 2011 was due to reinsurers being forced torespond in a very shortened timeframe to conditions impacting theirview of risk and capacity deployment tolerance.

For the June 2012 renewals, the range in quotes has moderated todown-7 percent to up-6 percent from the average, Guy Carpentersays.

Interestingly, the moderation seen in the Florida renewals hasnot translated to non-florida renewals, where reinsurers' quotesranged from down-8 percent to up-12 percent from the averagerenewal quote (see chart at bottom of page). Guy Carpentersays the volatility in non-Florida renewals likely reflects thedifference in reinsurer appetites across a group of renewalsexposed to a broader geographic base and diverse business focuses.“The change in pricing on these renewals was heavily dependent onthe particular circumstances of the individual account and showed awide degree of variation,” Guy Carpenter notes.

Mowery says the pricing trends for non-Florida renewals are nottoward a hard or soft market, but rather a trend to moreindividualization.

Looking ahead, S&P says it expects some reinsurers to limittheir exposure to regions that experienced heavy losses in 2011,particularly in Asia-Pacific regions where cat models do notadequately reflect exposures.

S&P notes that reinsurers have also shown interest innon-cat-exposed short-tail classes of business, such as accidentand health, crop and surety insurance. “As a result, we could seesome margin compression in those classes of business due toincreasing competition,” the ratings agency says.

Additionally, while the reinsurance sector as a whole remainswell capitalized, S&P says not all reinsurers exhibit the samelevel of surplus capital, and the ratings agency says it expectsthere will be “clear winners and losers from both an earnings andcapital perspective.

Additional reporting by Mark E. Ruquet