U.S. Re Sector's Key Benchmarks Decline

"There are a few outliers in there. I am sure GE Insurance Solutions, which had a significant reserve development in 2004, had a big effect on RAA numbers, and also Converium, for example, which has put its U.S. operations in runoff. These outliers might be skewing RAA results a little," said Fitch Senior Director Mark Rouck.

Even with such considerations, however, the numbers arent very encouraging.

The RAA data showed that the 26 major U.S. reinsurers averaged a 106.2 combined ratio last year, with a 79.8 loss ratioweakening from a 101.2 combined ratio and 74 loss ratio reported by a similar group of 29 reinsurers in the previous year.

Out of 26 reinsurers in 2004, only eight posted a combined ratio below 100, indicating an underwriting profit.

The reinsurer with the lowest combined ratio was National Indemnity Company, with a 64.3 ratio, while the worst was from Converium Reinsurance North America, which had a 174.6 ratio.

In 2003, 16 out of 29 reinsurers had a sub-100 combined ratio. National Indemnity Company also had the lowest combined ratio that year at 52.9 percent, while 2003s worst combined ratio, at 180.7, came from AXA Corporate Solutions Reinsurance Company, which has since gone into runoff.

As combined ratios suggest, the overall U.S. reinsurance sector continued to suffer net underwriting losses, and the problem worsened last year as the industry's underwriting loss more than doubled compared to the previous yearfrom $560 million to $1.8 billion.

In 2004, only nine of 26 companies had an underwriting profit, compared with 14 of 29 the previous year.

National Indemnity Company had the largest underwriting profit in the group in both 2003 and 2004but the profit dropped from $1.356 billion to $949.4 million.

Among the four largest U.S. reinsurersMunich Re's unit American Re, Berkshire Hathaway's General Re, Swiss Reinsurance America and GE Insurance Solutionsthree reported weaker underwriting results while one is still mired in an underwriting loss.

American Re saw its underwriting loss mushroom from $55.0 million to $437.1 million. General Re's underwriting profit fell from $67.2 million to $11.1 million, and GE Insurance Solutions' $522.8 million underwriting loss grew to $1.217 billion. Swiss Reinsurance America's $755 underwriting loss in 2003 was lowered last year, but it still had a loss of $356.5 million.

Commenting on the RAA data, the group's spokesman, Scott Williamson, said one factor that hurt reinsurer underwriting was exposures to catastrophes and hurricane events that took place last year.

Another problem was the continuing adverse reserve developments for some reinsurers. "We saw some of that in the third and fourth quarter. The combined ratio is emblematic of the underwriting loss that has grown," Mr. Williamson said.

The 2004 data also showed a decline in overall net written premiums to $28.78 billiondown 6.1 percent from $30.63 billion in 2003. Mr. Williamson said some of the decline could be attributed to runoff reinsurers like PMA Capital Insurance that are no longer included in the list, as well as other reinsurers' efforts to tighten their underwriting.

"Reinsurers are trying to write under better terms, so they may not be writing as much business, and that could explain some of the decreases as well," he said.

The group's investment income also felldown to $4.76 billion for 2004 from $5.62 billion in 2003.

Mr. Williamson noted that the 2004 list was missing three reinsurers from the previous yearAXA Corporate Solutions Reinsurance and PMA Capital Insurance (both of which have gone into runoff) and Radian Reinsurance Inc. (which merged with Radian Asset Assurance, and was taken off the list).

Additionally, Employers Reinsurance Corp. Group has been renamed GE Insurance Solutions, while some of its former business unitsMedical Protective, First Specialty and Westport Insuranceare no longer counted in statutory results, thus impacting the companys RAA data.

In all, the number of companies counted in RAA fell from 29 to 26.

On a brighter note, these 26 reinsurers still managed to post a slightly larger annual net income of $3.14 billion, compared with $3.07 billion reported by 29 reinsurers in 2003. But these companies in 2004 saw big benefits, especially from the total net realized capital gain of $1.8 billionup $1 billion from $873 million posted during 2003.

Among the 26 reinsurers, some of the biggest net income gainers in statutory results included XL Reinsurance America (which went from a $103.0 million net loss to $134.9 million in net income) and Berkley Insurance Company (whose profit rose from $74.8 million to $154.8 million).

GE Insurance Solutions, while still in the red, drastically cut its net losses from $740.7 million to $220.0 million.

SCOR U.S. Group also lowered net losses from $273.2 million to $35.7 million, while Swiss Reinsurance America's losses were reduced from $385.0 million to $100.3 million.

Another big gainer was Partner Re U.S., which saw its net result swing from a $33.5 million loss to a $13.9 million profit.

On the other side, the reinsurer with the biggest loss was Converium Reinsurance North America, which went from a $92.9 million net profit to a $355.7 loss.

Another encouraging change in the sector was the overall increase in policyholder surplus, which jumped 9.5 percentfrom $55.9 billion to $61.2 billionbut most of that increase can be attributed to the boost at National Indemnity Company.

According to Fitch Ratings, which held a conference call discussing its review of the January reinsurance renewal season last week, U.S. reinsurance prices are still "technically adequate" to make an underwriting profit on an accident-year basis, which doesnt consider adverse reserve developments for prior accident years.

Further, Fitch predicted that the next soft market phase will be "shorter and less severe" than the one during the mid-to-late 1990s.

Reinsurers during the 1990s soft market period used income from the bullish investment market to bankroll inadequate premium rates, noted Fitch Senior Director Chris Waterman. However, he added, this time around, "we certainly don't expect the investment market and the reinsurance premium-rate cycles to coincide again in the same way."

Fitch found that European casualty rates were flat to up 5 percent, while U.S. casualty rates dropped 5-to-15 percent. On property reinsurance, European property rates fell 5-to-15 percent, while U.S. property rates without Florida exposures were flat to down 10 percent. U.S. property rates with Florida exposures were up 10-to 20 percent.

Reproduced from National Underwriter Edition, March 25, 2005. Copyright 2005 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.