For corporate insurance buyers, however, the key underlying message seems to be that 2011 was after all an ‘earnings event’ that should not raise undue fears over solvency and credit ratings and that, while the companies are talking manfully about improving market conditions, there is little evidence that a serious market hardening is underway.

The rating environment seems as patchy as it has been for the last few years as healthy capital levels ensure healthy competition and thus a need for reinsurers to recognise good risk management among the insurers when it’s due or risk losing this profitable business.

And, apart from potentially significant changes to the level of capacity offered for supply chain exposures, notably contingent business interruption in catastrophe prone areas such as Asia, there is little evidence of a wholesale tightening in capacity on offer.

Experience would suggest that the low investment returns on offer for the foreseeable future is forcing the reinsurers to perhaps compete more fiercely for premiums to ensure that volumes are maintained.

Reserves continue to be released to bolster combined ratios and profits but surely the pot must be close to running dry and, in the absence of a sudden recovery in investment income, one has to presume that a ‘proper’ hardening will come in 2013, undoubtedly aided by some more catastrophes this year.   

Munich Re has reported year-end figures and a renewals analysis and so provides a decent benchmark.

It reported sharply reduced profit of €700m for 2011 against a whopping great profit of €2.43bn for 2010. Gross written premiums were up by 9% to €49.6bn but the non-life reinsurance combined ratio was 113.6% against 100.5% in 2010.

This was boosted by what the group termed a ‘good’ €600m from the reduction of claims provisions, or reserve releases, mainly for fire, credit and engineering business underwritten in the years 2007–2009. Last year’s combined ratio contained 28.8% for natural catastrophes against 11% the year before.

Investment income plummeted 22% down from €8.6bn to €6.8bn. Munich Re estimated that its claims costs from the earthquakes in Japan and New Zealand were about €1.5bn for each event.

The worsening of the sovereign debt crisis appeared to hit the Munich-based reinsurance group more than most as it reported an increase of €1.2bn to €1.6bn in the negative balance from write-ups and write-downs.

The group said that expenses for write-downs of Greek government securities alone totalled €1.2bn (€200m of this in the fourth quarter) and this impacted the consolidated result by €200m. Net gains on the disposal of investments were also high at €1.3bn.

And the result was boosted by an extraordinary tax gain of €550m against tax expenditure of €690m in 2010. This was mainly because of the tax deductibility of the severe natural catastrophe losses in 2011 and the relief effect of earlier losses in the US, explained the reinsurance group.

CFO Jörg Schneider summed up the provisional figures as he said: “We have never experienced a year like 2011 before—extreme burdens from natural catastrophes combined with the financial crisis, which flared up again after the slight recovery in 2009 and 2010. Given the huge strains these placed on results, it is a notable achievement that we still posted a profit of €0.71bn.”

As with the Bermudians Mr Schneider was keen to point out that, despite the strain on earnings, the capital of the group remains robust and so it would continue to pay dividends. “Our solid capital situation enables us to again pay out a total of €1.1bn to our shareholders,” he said. There have not been any cuts in Munich Re’s dividend since 1969, added the group in a statement.

Munich Re’s reinsurance numbers were boosted by the group’s main primary business, ERGO Insurance Group, which delivered a solid profit of €350m based on preliminary figures, slightly less than in 2010.

The combined ratio for property-casualty primary insurance was 97.8%, up slightly from 96.8% in 2010, and was still at a ‘good level’ of 93.1% in 2011 against 89.8% for German business.

The international business reported an improved combined ratio figure of 105% against 107.8% in 2010 which the group said is ‘still too high’.

Munich Re reckons that 2011 was the highest year for insured natural catastrophe losses on record at some $105bn. Despite this, its reinsurance segment contributed €770m to the consolidated result against €2.1bn in 2010.

The biggest loss in the fourth quarter for Munich Re 2011 was the flooding in Thailand, which delivered claims costs of around €500m.

Torsten Jeworrek, member of the Board of Management and Munich Re’s Reinsurance CEO, once again took the opportunity to remind customers of the need for improved transparency and risk management of supply chains.

“The consequences of these floods again demonstrate the vulnerability of the globalised economy. When catastrophes of this magnitude hit key industries, there are global effects on supply chains. And the risk of companies suffering financial losses due to disrupted supply chains has grown strongly in recent years. Much greater transparency of supply chains is essential both for companies’ risk management and for their insurers,” said Mr Jeworrek.

“The reinsurance markets remain keenly competitive. In this situation, active cycle and portfolio management are of crucial importance. The economic environment prohibits the provision of reinsurance cover at inadequate rates,” he added.

Munich Re opted to use the adjective ‘heterogeneous’ to describe the year-end renewals experience. In underwriting cycle terminology this presumably means a mixed bag in which segments hit by catastrophes suffered rate hikes and all others experienced only mild increases or flat terms.

A good half of Munich Re’s total non-life reinsurance business was up for renewal at year end, which corresponds to a premium volume of around €8.5bn. Of this business, 91.3% (equivalent to a premium volume of approximately €7.8bn) was renewed, while 8.7% (approximately €740m) was not.

New business with a volume of about €370m was written. Compared with last year, the premium volume rose by 2.6% (around €230m), which the group said was particularly as a result of organic growth in renewed business. The price level rose by around 2% year on year, said Munich Re.

“We can be satisfied with these renewals in this difficult economic environment. The prolonged low interest rate phase needs to be factored into pricing. This is an opinion shared by our clients with a sustainable business approach. We offer these clients specially tailored reinsurance programmes in which we support them with our considerable financial strength in the current challenging environment,” said Mr Jeworrek.

The company said that it expanded its profitable business with strategic partners, particularly in UK motor business. For US natural catastrophe covers, it gained price increases in the low double-digit percentage range, and ‘appreciably higher’ ones in Australia and Asia.

Munich Re said that it selectively shed some of its European property business, traditional marine business and selected portfolios in non-proportional liability business, as the treaties no longer met its profitability requirements.

The coming April 1 (mainly Japan and Korea) and July 1 (especially parts of the US market, Australia and Latin America) renewals will contain a greater proportion of natural catastrophe business than the January renewals.

“Munich Re projects further price increases here, particularly in loss-affected regions. For other property business and in the casualty classes, Munich Re is proceeding on the assumption that prices will stabilise with a trend towards slight increases,” forecast the group.

Swiss Re joined the rest of the international reinsurance market by significantly boosting its 2011 results through the release of further reserves that helped it cope with the heavy catastrophe losses experienced last year. The group released $1.3bn of reserves from prior underwriting years.

At Swiss Re, a decent asset management performance, flat investment income and big unrealised gains on falling interest rates on government bonds also helped boost the profits and capital position as shareholders’ equity rose by almost a fifth.

The result was also helped by a reduction in the effective tax rate from 20.2% in 2010 to only 2.7% last year.

The group reported a 20% increase in non-life reinsurance premiums as a result of the year-end renewals, an overall price increase of 4%, higher than peers, and 108% ‘premium quality’ on a risk-adjusted basis.

The group hopes to report a 94% combined ratio for 2012 if this is a ‘normal’ catastrophe year against 101.6% in 2011 and said it seeks growth especially in Asia and Latin America this year.

Total premiums earned were up 8% from $19.65bn in 2010 up to $21.3bn last year. Non-life reinsurance premiums were up from $10.87bn to $12.05bn.

The group suffered high catastrophe claims as did all its competitors and these losses added 29.6% to the combined ratio.

But, largely because of the reserves releases, Swiss Re still managed a combined ratio well below the market average of 101.6% against 93.6% in 2010.

The group’s asset management business delivered a decent operating income of $5bn against $4.5bn in 2010 and a return on investments of 5.1% against 3.5%.

This was driven by realised gains, primarily on government bonds, higher net investment income from net purchases, and lower impairments during the year.

The total return on investments, including unrealised gains and losses, rose to 9.7% last year against 6.5% in 2010.

Swiss Re said that despite recent improvements in market sentiment, the euro sovereign debt crisis continues to create market uncertainty. It added that its ‘prudent’ investment stance has paid off under these difficult circumstances.

The group’s exposure to sovereign debt issued by peripheral eurozone countries was further reduced to $59m at year-end against $74m at the end of September 2011.

Exposure to Greek sovereign debt was nil over the entire year, reported the group. The net profit was therefore a creditable $2.63bn for 2011 against $863m in 2011.

The underlying operating profit, however, reflected the underwriting conditions more accurately as the Swiss reinsurer reported profit of $1.29bn against $2.48bn the year before, a fall of 48.1%.

After a tricky 2010 for Swiss Re the group managed to boost returns on equity from only 3.6% up to a solid 9.6% considering the overall trading and investment conditions. Shareholders’ equity rose by $4.3bn up to $29.6bn. This included a $3.2bn increase in unrealised gains, mostly driven by declining interest rates on government bonds.

Michel M. Liès, who recently took over from Stefan Lippe as Swiss Re’s Group Chief Executive Officer, said: “With a successful year behind us and a modest but broad market turn underway, Swiss Re is well positioned to perform and grow in a low yield environment.”

Swiss Re’s Board of Directors said that it is pleased to propose to shareholders a dividend for 2011 of CHF 3.00.

It added that after paying the dividend the company’s priority will be to deploy capital to those lines of business where expected returns are strong.

If conditions do not offer an attractive enough return it stressed that it has the option to pay special dividends to shareholders this year and beyond.

Swiss Re’s P&C treaty renewals, however, suggest that investors should not get too excited about receiving a bonus dividend this year.

The group reported strong premium growth of 20% across all regions. Swiss Re said that, thanks to its strong capital position, it was able to respond to increased client demand for natural catastrophe cover and for capital relief transactions, where prices were above the thresholds it set.

The average price increase for the renewed book was 4% and risk-adjusted price quality improved slightly to 108%, added the group.

Swiss Re also said that it intends to ‘capture fully’ business opportunities offered in its core reinsurance and insurance activities, including a 25% growth opportunity offered by the expiry of its quota share agreement with Berkshire Hathaway at the end of this year.

“While Swiss Re’s focus will remain resolutely on traditional markets, the company will also seek to capitalise on the potential for re/insurance solutions in emerging and fast-growing markets in Asia and South America,” said the group.

SCOR has not yet reported its 2011 results but did record what it termed a ‘very satisfactory’ increase in its business in 2011 with gross written premiums up by 8.8% to €3.98bn at current exchange rates.

The Paris-based group said that January 1 renewals confirmed the trend observed in 2011 towards the ‘recovery’ of the insurance and reinsurance markets. SCOR said that, in this environment, it had managed to strengthen its positions by demonstrating a ‘strict’ underwriting policy and ‘prudent’ pricing.

SCOR said that the weighted average pricing level was up by 2.2%, ‘all else being equal’.

The reinsurance group said that price levels for P&C treaties, weighted by variations in exposures and economic parameters, were up 2.9%.

Specialty treaty price levels only increased by 0.6% under the combined impact of fierce competition in certain specialty lines and what it described as a prudent assessment of pricing developments in the business lines most exposed to the hazards of the economic situation.

These it identified as credit, construction all risks/erection all risks and marine.

The natural catastrophes of last year certainly had a regional effect on pricing according to SCOR as it reported Asia-Pacific prices up by 29.9% and American prices up by 13.2%.

SCOR said that terms and conditions remain largely unchanged, except for contracts and regions impacted by the natural catastrophes.

“There is a higher level of differentiation between cedants within a given market, and the markets themselves remain fragmented, in accordance with the scenario that SCOR has been putting forward for several years,” added the group, which will presumably come as welcome news to professional reinsurance and insurance buyers.

SCOR said that the conditions had helped it expand its corporate insurance operation—Business Solutions—and enjoyed a 27% increase in premium income and a rise in prices of around 2.8% in this sector.

The group has also continued to re-balance its natural catastrophe portfolio by increasing its exposure to natural catastrophes in the US, a market that it said has benefitted from a relatively more favourable pricing dynamic of around plus 13.2%, compared to an increase of only 4.6% in Europe.

Victor Peignet, CEO of SCOR Global P&C, commented: “We are satisfied with this renewal season. In highly competitive and increasingly fragmented markets, the multi-domestic approach and diversification strategy followed by the group over the past few years are bearing fruit. We are already actively preparing the renewals still to come throughout the rest of the year, which should confirm the already observed trend of improvement in our technical profitability.”

Hannover Re reports its annual results on March 8 but has issued some preliminary figures that suggest that it will generate group net profit of about €600m for last year compared with €748.9m in 2010 and above its 2011 profit target of at least €500m.

Bucking the trend, Hannover’s result will be boosted by investment income, it forecast.

The German reinsurance group said that the balance of realised gains and losses improved further in the fourth quarter as it continued to use the low interest rate level to generate disposal gains on high-quality government bonds.

The funds that were released were reinvested primarily in corporate bonds. The reinsurer said that unrealised reserves in the investment portfolio nevertheless continued to rise. But it added that net unrealised gains and losses remained ‘in negative territory’ for the full financial year, though developing favourably in the fourth quarter.

The better than expected result will help alleviate the impact of the net burden of losses from the flooding in Thailand estimated at a cost of €196m, said Hannover Re.

In January the reinsurer expressed ‘satisfaction’ with the outcome of the non-life reinsurance treaty renewals on January 1, 2012.

“We achieved better conditions and rates on average than in the previous year. In segments impacted by natural catastrophes the price increases were, as anticipated, particularly marked. Yet it is still too soon to speak of a hard market across the board in non-life reinsurance,” said Chief Executive Officer Ulrich Wallin.

Including increases of €563m from new or modified treaties and thanks to improved prices, the total renewed premium volume reached €3.7bn which is equivalent to growth of 6%.

Hannover Re said that the renewals for German business were better than expected. “Developments in motor insurance were very pleasing; the persistent premium erosion in this area has come to an end. The hail events in August and September 2011 as well as losses from prior years helped to push premiums higher in own damage business. The total premium volume for German business increased by 3%, also thanks to an enlarged customer base,” stated the reinsurance group.

Price increases of up to 30% were attainable for loss-impacted US property programmes. The best that could be said for US casualty business was that the rate erosion of recent times was ‘halted’. Hannover Re said that it was particularly pleased with the situation in Canada, where ‘sizeable’ rate increases were secured.

The reinsurer said that the treaty renewals in marine business were satisfactory and rates remained largely stable. In the offshore energy sector Hannover Re booked rate increases—which it said were considerable for loss-hit programmes.

In aviation reinsurance rate erosion was seen in both primary insurance and reinsurance because of good underwriting results recorded in prior years. Hannover said, however, that the business nevertheless continues to be attractive and persuaded the company to expand its premium volume.

The outcome of the renewals in credit and surety reinsurance—where around 75% of the portfolio was renewed—was ‘satisfactory’ said the group. Rates in these lines fell slightly on the back of the ‘pleasing’ loss ratios seen in recent years, it added.

The global reinsurance picture was a mixed one, according to Hannover. Its total premium volume grew by 8%. In developed markets the portfolio remained broadly stable, while in Asia and the Middle East further decent growth was booked, it said.

“The most marked changes were observed in property catastrophe business. In light of the substantial loss expenditure from natural catastrophes in the previous year, prices for reinsurance covers improved significantly. In Australia, for example, prices soared by 60% on average; the increase in the United States was in the lower double digits. Hannover Re is looking to further sizeable rate increases for the 1 April, 2012 renewal date in Japan and in the New Zealand renewals,” said the reinsurance group.

“We also expect to see further rate increases in the treaty renewals during 2012, when a good third of our non-life reinsurance portfolio is renegotiated. All in all, we should enjoy continued profitable growth,” Mr Wallin forecast.

Lancashire Holdings is not really in the same league as Munich Re, Swiss Re, SCOR and Hannover Re yet but it is based in London now after relocating from Bermuda and delivered an interesting set of results so is worth including here.

It announced a surprisingly healthy set of 2011 results, said that it is ‘cautiously optimistic’ about the insurance pricing environment for 2012 overall and has secured additional capital from its existing Accordion sidecar investors to deploy for the April 1 Japanese market renewals.

The group said that the Thai flood losses are actually more significant for the Japanese non-life market than the Tohoku earthquake and tsunami, and that the April renewal will therefore be challenging for Japanese reinsurance buyers. It is ready to offer new solutions, said the group.

Lancashire’s ability to take advantage of the hardening conditions in Japan and worldwide is based on a decent set of results for 2011 that appeared to be better than the average year-end figures posted by competitors in Europe and Bermuda.

Lancashire posted an excellent combined ratio of 63.7% for 2011 against 54.4% in 2010. Gross premiums were down to $632.3m against $689.1m in 2010 while most rivals reported healthy growth.

Its investment return was more in line with the market as it plummeted to 1.8% from 4.2% the year before.

The group took its fair share of the unprecedented catastrophe losses last year that raised the loss ratio.

Total estimated net losses, after reinsurance and reinstatement premiums, of $138.5m were booked for the Tohoku and Christchurch Lyttleton earthquakes and $25.1m for the Thai floods.

Lancashire said that it has no direct exposure to the floods in Thailand from Japanese treaty products. But it noted that assessment of exposure to this event is ‘ongoing’ and uncertainty remains on the ultimate loss. “Significant uncertainty continues to exist on the eventual ultimate market loss in relation to these events,” it stated.

But Lancashire’s management felt confident enough to post further significant prior year favourable development for the fourth quarter of $37.3m compared to $21.8m for the fourth quarter of 2010. This reduced the net loss ratio by 27 points for 2011, and 14.6 points for 2010.

For the full year 2011 prior year favourable development was $155.3m compared to $100.1m for 2010, reducing the net loss ratio by 27 points for 2011 and 16.3 points for 2010. So for Lancashire the reserves releases were up on 2010.

Lancashire said that it commissioned an independent external reserve study to incorporate the group’s own loss experience with industry factors previously used. On completion of this exercise, net reserves of $36.9m were released in the first quarter.

“The remaining favourable prior year development in 2011 arose from releases due to fewer than expected reported losses, plus some further information on outstanding case reserves,” explained the group.

As reserves boosted the ratios and overall results the group also actively managed its investment portfolio so that it was more defensively positioned towards the end of the third quarter. It liquidated its equity portfolio and managed a reduction in emerging market debt local currency positions.

Lancashire said that it continues to hold an emerging market debt portfolio because of the future growth expectations for these regions and reported that at December 31, 2011 some 6.3% of the portfolio was allocated to emerging market debt with an overall average credit quality of BBB.

But Lancashire said that it has no exposure to European peripheral sovereign debt and the exposure to European peripheral corporate debt is less than $5m, consisting of Spanish and Italian non-financial corporate debt.

The combination of favourable reserve releases, defensive management of the investment portfolio and an average exposure to the big cats meant that Lancashire was able to report a net profit for last year of $212.2m against $330.8m in 2010 and a return on equity of 13.4%, well above the market average.

This leaves Lancashire with a healthy capital position that it said will enable it to take advantage of the improving market conditions.

Looking forward the group sees good opportunities, which means rising prices for reinsurance buyers and ultimately insurance buyers on the whole.

The new capacity generated by its Accordion sidecar will specifically take advantage of hardening conditions in Japan on the back of last year’s earthquake and tsunami.

Lancashire underwriters have made two recent visits to Japan to talk to ceding companies and brokers about their requirements and have concluded that they will be in need of new solutions and capacity.

“I am cautiously optimistic about the insurance pricing environment for 2012. The outlook is positive in many of our core areas. We saw attractive opportunities in the property retro market in the January 2012 renewal season. Property catastrophe pricing is showing improvement and, while it’s hard to predict how far it will go, we are also seeing improving pricing in our energy and marine books,” said Richard Brindle, the Group CEO of Lancashire.

“The flood losses in Thailand have clearly had a dramatic impact on the Japanese market with net losses in the non-life market much greater than those sustained in the Tohoku earthquake and tsunami loss. We have spent a good deal of time speaking with both insurers and their intermediaries and believe we can offer them intelligent solutions to address their needs for a restructured product.

We appreciate that this is a very difficult renewal for the Japanese cedants, and we are committed to working with them to provide the support that they need. Due to the excellent relationships that we enjoy with our Accordion partners we are able to deploy additional capacity at attractive returns in what we believe will be a challenging market for clients and brokers,” he continued.

Lancashire produces its own Renewal Price Index (RPI), an internal tool that it uses to track trends in premium rates on a portfolio of insurance and reinsurance contracts for major classes of business. This reported an overall price increase of 3% in 2011. Notable changes included a 5% reduction in aviation and terrorism rates, 10% increase in energy offshore worldwide and 8% rise in property retrocession and reinsurance.

So the writing on the wall is clear for reinsurance buyers and ultimately large corporate insurance buyers in Europe. Don’t worry about security because your carriers are not going bust. But if prices are going anywhere it’s up so start softening up the CFO sooner rather than later.

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