Re Results Improve, But Not Enough

"I dont think the market has been at that kind of ratio for quite some time," said Jim Auden, a senior director for Fitch Ratings in New York.

The survey also shows that these reinsurers swung to overall net profit of $3.3 billion for the first nine months of 2003, reversing a net loss of $85.2 million posted by a similar group of U.S. reinsurers one year ago.

Some reinsurers with improved results include Greenwich, Conn.-based Berkley Insurance Co. and Folksamerica Reinsurance Co. in New York, said Damien Magarelli, analyst at Standard & Poor's Ratings Services in New York. "Standard & Poor's expected these companies to take advantage of the hard market, and in these cases they realized stronger earnings as a result," Mr. Magarelli said. (Berkleys combined ratio improved 0.7 points to 94.6 and Folksamerica, 3.7 points to 95.1.)

But S&P is still maintaining a "negative" outlook on the reinsurance industrypartly because many U.S. reinsurers are still struggling to get their combined ratios below the breakeven 100 point, according to Laline Carvalho, a director at S&P. Even though the industry-wide combined ratio has improved over the past year, "the fact is that when you take into account the low-interest-rate environment, companies need to operate [at] low 90s [combined ratios] or better to achieve adequate returns on revenue and equity," she said.

At the moment, she added, even some larger companies are still struggling to get their combined ratios down. For instance, Employers Re, part of Overland Park, Kan.-based GE ERC, reported a 105.6 combined ratio for the 2003 nine-month period, while Stamford, Conn.-based General Res ratio was just below 100.

"If you go down the list of companies in the RAA report, you realize there are many companies with combined ratios significantly above 100," Ms. Carvalho observed. "Larger carriers, who have posted huge reserve additions in 2002 and prior, are still struggling this year to get their profitability to come through."

And there is still some more cleaning up to do regarding balance-sheet problems. "In that regard, the 2003 third-quarter highlight belongs to PMA Capital, whose reinsurance business went into runoff following substantial losses," she said. Another major player, SCOR U.S. Group/SCOR Reinsurance Company, part of Paris-based SCOR, also reported substantial reserve charges recentlythe company had reported a 191.2 combined ratio for its 2003 nine-month period.

"Also, a lot of people have been talking about XL Reinsurance America, which also put up reserves this past quarter," Ms. Carvalho noted. XL Reinsurance, part of Bermuda-based XL Capital, has a 108.3 combined ratio, and "its still going through the process of analyzing their loss reserves, with their ongoing reserve studies."

Generally, "there remains a question mark on whether there could be more reserve additions to come by reinsurers, which have not been recognized yet."

The issue with the U.S. p-c reinsurance sector is that despite significant reserve additions on the primary p-c side, their reinsurers have not boosted their reserves as a response to these actions taken by primary companies, particularly during the 2002 fourth quarter and throughout the first three quarters of 2003.

"Most reinsurers you speak with will say that in their previous reserving actions during 2002 or prior, they had already accounted for deficiencies on the primary side. But I think there is still a question mark," according to Ms. Carvalho. And the billion-dollar question is whether there is a "lagging effect" at work here and whether reinsurers might eventually need to recognize for their losses.

Another problem that industry analysts pointed out to National Underwriter was the lackluster growth in net premiums written during the past year.

In the RAA survey, the 29 U.S. reinsurers reported $23.46 billion in net premiums written for the first nine months of 2003only marginally higher than the $22.49 billion posted one year ago.

"There really has not been any growth in the industry," Ms. Carvalho said.

This sluggish increase, according to Mr. Auden, is a sign that rate hikes in p-c reinsurance are "really moderating, with property-lines rates being essentially flat and declining." Additionally, Ms. Carvalho also remarked that this lackluster growth reflects the dynamics of shifting business in the U.S. reinsurance sector.

Some business "is shifting out of the countrysome of it is shifting among the U.S. players themselves. You have to understand that there have been many U.S. players that have just disappeared and have gone into runoff in last few years."

One main contributing factor in the business shifting is the fact that some large U.S. players have retrenched during the past 18 months, after having suffered significant losses. During this time, these U.S. reinsurers focused on "cleaning the house"making changes they felt were needed, such as withdrawing from unprofitable lines and refocusing on core businesses.

"But through this effort, businesses have gone elsewhere," Ms. Carvalho observed. "So despite very significant rate increases, these U.S. companies havent grown as much as we thought they could have."

Some of the shifting businesses have gone to start-up companies and subsidiaries in Bermuda, as well as some other markets, she said. "There is a real flight to quality. Primary companies are very concerned about the reinsurance security and who they are placing their business with. We forecast there is going to be more shift in where the business goes to."

But even in this challenging environment, some U.S. reinsurers have fared better than others. "Some opportunistic players in the United States, such as Transatlantic/Putnam Reinsurance and Everest Reinsurance, managed to avoid significant losses from the last few years," Ms. Carvalho observed.

Looking into her crystal ball, Ms. Carvalho forecast that going into 2004, property reinsurance rates will continue to decline while remaining at a very healthy level. "On the casualty side, because there have been so many losses from the casualty lines of business, there is still more room next year for further rate increases, but not at the same level that we saw in 03, 02 and 01," she said. And there is still much more room for higher rates among certain lines, such as workers compensation and directors and officers liability.

"Overall, we see 2004 as the peak year in terms of rate increases and improvements in terms and conditions. After 2004, its going to flatten out," she said.

"We think the profitability will be at its peak in 2005 because thats when rates from 2004 will be earned. The question mark is whats going to happen after that."

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 5, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.