U.S. Re Sector Sees Net Income, Combined Ratio Sharply Higher

The combined ratio remained profitable for the survey group overall, but increased from 89.8 in the first quarter of 2007 to 95.2 in 2008–including a 67.4 loss ratio and a 27.8 expense ratio.

Investment income was reported at $1.5 billion in the first quarter of 2008 compared to $1.6 billion the year before. Net realized capital gains increased to $463.9 million in 2008 compared to $343.2 million in 2007.

Policyholders' surplus increased for the reinsurers surveyed from $73.6 billion in the first quarter of 2007 to $75.3 billion in 2008.

While results were mixed on a year-to-year basis, the 2007 overall results were negatively impacted by a $2.2 billion loss in "other income" by National Indemnity Company (NICO)–the lead insurance entity of the Berkshire Hathaway Reinsurance Group.

This led to a $2.1 billion "other income" loss for the 20 companies combined in the quarter, compared to a $32.9 million loss in the first quarter of 2008 in the category.

According to Berkshire Hathaway's 2007 first-quarter report filed with the U.S. Securities and Exchange Commission, NICO and London-based Equitas–the runoff entity for pre-1993 Lloyd's liabilities–entered into an agreement whereby NICO reinsured all of Equitas' asbestos liabilities and provided up to $7 billion of additional reinsurance. The deal amounted to $2.2 billion for unamortized deferred charges on reinsurance assumed.

For the first quarter of 2008, National Indemnity outpaced the 20 reinsurers listed in the RAA report with net income of $339.7 million. On the other end of the spectrum, Axis Reinsurance Company listed a net loss of $2.1 million for the quarter.

Examining combined ratio, American Agricultural Insurance Company was best in the pack with 86.9, while SCOR US Group/Scor Reinsurance posted the highest figure with 120.5.

Eight of the 20 reinsurers posted combined ratios over 100.

Separately, reinsurance executives assessed 2008 market conditions and prospects for a cycle turn during Standard & Poor's recent annual insurance conference in New York.

Panel moderator Rob Jones, an S&P managing director, also asked the executives whether better risk management practices, capital management disciplines and improved transparency have changed the market for good.

"We have much better tools today, but being a fool with a tool is still a fool," said Wilhelm Zeller, chairman of the executive board of Hannover Re in Germany. "So it remains to be seen."

Two-thirds of the business in the reinsurance industry is written on "a scientific, sophisticated basis," he said. "The balance is more than trial and error," but that remaining portion is also subject to great debates "as to what is the right rate."

"I'm afraid we're going to see competition increased in years to come," he predicted, also reporting that Hannover Re saw rate reductions outpace rate boosts on Jan. 1, 2008 renewals for the first time in eight years on its portfolio.

The compounding effects of prior rate cuts means "we have in most lines achieved a very sound basis from where we can afford to decrease somewhat," he said, going on to highlight U.S. directors and officers liability insurance as one of the exceptions. There, he said, rates have already declined by 85 percent in that time frame.

Mr. Zeller also noted that "the reinsurance market is not one market." There are two highly cyclical markets–in the United States and London–but other markets are much more stable, he said.

Global reinsurers are able to digest changes in the pricing cycle much more easily than a Bermuda monoline property-catastrophe writer, he observed.

Ray Barrette, chairman and chief executive officer of White Mountains Insurance Group, agreed. "It's getting more competitive everywhere, [but] I think the United States moves faster than most countries," he said, adding that outside of catastrophe business, the reinsurance market is "very, very competitive."

Commenting on the idea that reinsurers are more restrained in their competitive behavior than primary carriers, Mr. Barrette said, "It's nice that the buyers of reinsurance think we're disciplined. I don't think we are. We get both their price decreases and then the reinsurance market cuts prices."

"For reinsurance companies, [the amount of discipline] is still inadequate," according to Mr. Barrette.

"I'm not optimistic. The tools are only tools, [and they] have tended to–just like in the banking business–justify greater concentration, greater risk-taking and less capital as opposed to true risk management," he added.

"Often the tools are overused, and good, old-fashioned 'if the business is bad, you just walk away' I think is still the best [strategy], and most [reinsurers] don't have the discipline to walk away from the business," he said.

During the session on global reinsurance, executives were asked how large the next catastrophe would have to be to change pricing from soft to hard.

"I can't answer this question–and I doubt that there is a serious answer," said Mr. Zeller, referencing a broker estimate he'd seen suggesting that a $60 billion catastrophe would turn the market.

"My philosophy is different," he said, explaining that his belief is insurance and reinsurance markets change if there are "a big number of market participants that cannot continue as they did."

"This does not necessarily require a big catastrophe," he noted. While a major disaster loss might help turn the market, "combined ratios north of 110 for two or three years would also accomplish this," he pointed out.

Mr. Barrette observed: "It usually will take a large cat that has unexpected effects."

"If there's a big Florida cat, it's not going to do anything to the market," he said. "It's when it's unexpected–the scope or range of [the catastrophe] is unusual. Then some specific companies get caught in a trap they didn't know they were in. Otherwise, it's just another way to lose money."

Neill Currie, CEO of Bermuda-based RenaissanceRe Holdings, agreed. "A lot of this is based on psychology and fear," he said, noting the difficulties reinsurers faced in the wake of Hurricanes Katrina, Rita and Wilma in 2005 related to the "unexpected attributes" of that trio of storms.

"What is going to cause the fear for people not to step up the next time?" he asked.