Reinsurers Refuel After Tough Year

Despite the drubbing they took on their investments in 2008, reinsurers survived the financial crisis better than many others in the financial sector and their capital positions have improved significantly during the past few months, observers say.

But while the improved investment environment has boosted balance sheets, reinsurers are not yet home free, experts say.

With three months of the Atlantic hurricane season left, a major catastrophe, or string of events, still could imperil many companies’ financial stability.

The hurricane season started in earnest this month with Hurricane Bill, which attained major status before weakening and skimming the eastern coast of Canada.

If a major hurricane strikes North America in 2009, however, many observers believe reinsurers would have an easier time “reloading” their capital than they would have a few months ago. But none expect a quick return to the financial environment of 2001 and 2004, when capital flowed freely into the reinsurance markets after bad loss seasons.

In general, reinsurers weathered the financial crisis better than many other companies in the financial sector, said Byron G. Ehrhart, chairman of Investment Banking Group and chief executive officer of Aon Benfield Analytics at Aon Benfield in Chicago.

Reinsurers “greatly outperformed other institutions” during the economic crisis, managed their capital conservatively, and were able to provide renewal capacity without the need for any assistance from the government, private equity funds or hedge funds. “They really had to rely on their own capital,” he said.

Greg Coda, president of national/broker clients at Munich Reinsurance America Inc. in Princeton, N.J., said, “We feel the capital position we have is currently very strong.” We are “very comfortable with our capital position right now,” he said.

Reinsurers have significantly improved their capital position this year, according to Chris Klein, head of the business intelligence group at Guy Carpenter L.L.C. in London. Sixteen major reinsurers surveyed by Guy Carpenter, which collectively reported a $3.5 billion loss for 2008’s first half, posted $4.6 billion in net income for this year’s first half, in large part because of a reduction in unrealized investment losses.

Reinsurers “managed to claw back as much as half or even more than half of the capital they lost last year,” he said. “Clearly, they’re in a greater position to absorb losses.”

In addition to a modest recovery in financial markets, “from a purely underwriting perspective” the first six months have been fairly strong, said Laline Carvalho, a credit analyst with Standard & Poor’s Corp. in New York.

“We see reinsurers entering the hurricane season, which peaks in September, in a relatively strong position,” said William H. Eyre Jr., Philadelphia-based managing director of Towers Perrin’s reinsurance brokerage business.

“Some reinsurers have not utilized all of their cat capacity due to lower demand from the P/C carriers,” he said.

The story for 2009 “has been preservation of capital,” said Paddy Jago, New York-based chief executive officer of Willis Re U.S. Inc.

That trend has been apparent in reinsurers’ appetite for catastrophe business, said Steven K. Bolland, president of New York-based intermediary Gill & Roeser Inc.

In the past, reinsurers may have been willing to risk 30% of their capital, but now it may only be 25%, “so you could make the argument that perhaps even a major cat this year will have less of an impact on their capital and surplus” than it might have had in prior years, Mr. Bolland said.

“The financial crisis created a heightened realization of how dear capital is, especially in the current economic environment,” said William Jewett, president and CEO of reinsurance operations at Bermuda-based Endurance Specialty holdings Ltd. Reinsurers “are being especially careful today, taking a harder look at the consequences of losing significant capital and the challenges and difficulties of replenishing it. Underwriting decisions are being made with that in mind.”

Still, cedents are concerned about reinsurers’ capital position and are looking to diversify their programs, said Hugo Crawley, chairman of London-based BMS Group.

That is “why we’ve seen clients syndicating their risks wider in the reinsurance market,” he said. It also has “driven some markets to drum up a bit more capital now,” he said.

Any need to recapitalize will depend on the size of a catastrophe, said Kevin Lee, vp at Moody’s Investors Service in New York. “If it’s a fairly modest hurricane, on the size of a Hurricane Ike, for example, then we wouldn’t expect a broad need for reinsurers to recapitalize.”

If there was a major hurricane, “some reinsurers would be able to recapitalize, but some would not. I think at this point market confidence is still a little bit shaky” and the market “is going to be more discriminating” than it has been in the past, said Mr. Lee.

Because of reinsurers’ improved situation “a loss would have to be in excess of $25 billion to $30 billion to impair the reinsurance market to some extent,” said Mr. Jago.

“Good organizations could attract investors in the event of a very large catastrophe, but it will not be the situation it was post-Katrina,” said Devin Inskeep, senior financial analyst with Oldwick, N.J.-based A.M. Best Co. Inc. “I would not expect there’ll be a class of 2010,” he added, referring to the creation of several new reinsurers.