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European Reinsurers Post Strong Performances but Growth Limited

The major European reinsurers have posted very strong full-year results for 2014 and continue to be well capitalised, with underwriting results that have been profitable owing to the absence of sizeable natural catastrophes and ongoing reserve releases. The reinsurers also show a continued focus on capital management, resulting in share buy-backs and increased dividend payments, as well as repurchasing and replacing existing hybrid debt.

In a new Best’s Special Report, titled, "European Reinsurers Post Strong Performances but Growth Limited," A.M. Best analyses the full-year financials for Lloyd’s and the four largest European reinsurers – Munich Re, Swiss Re, Hannover Re and SCOR SE. The report also identifies trends among the six listed (re)insurers operating at Lloyd’s – Amlin, Beazley, Brit, Catlin, Hiscox and Novae.

The report notes that the quest for yield is leading to an adjustment in investment portfolios, although London Market companies remain more conservative. "The largest four reinsurers and Lloyd’s have posted good investment results, with returns on investment (ROIs) of between 2% to 4.6% in 2014," said Carlos Wong-Fupuy, senior director, analytics. He added: "These are encouraging given the low interest rate environment; however, A.M. Best observes that returns are being driven partly by historical fixed interest investments, which are still generating relatively high yields, and realised gains on equities and real estate."

The major reinsurers all enjoy strong capitalisation, as measured by A.M. Best’s proprietary capital model, Best’s Capital Adequacy Ratio (BCAR), yet still achieve a strong return on capital and surplus. As yields are at record lows in other economic sectors, investors remain attracted to the reinsurance market.

According to the report, reinsurers face challenges as soft market conditions persist and concerns mount regarding the sustainability of reserve releases. Catherine Thomas, director, analytics, said: “Organic growth is limited, with rates remaining under pressure and certain lines of business underperforming, leading to a need to underwrite risks more selectively. Reinsurers are seeking opportunities for expansion into emerging markets and new lines of business.”

Reinsurance rates and terms and conditions are under competitive pressure from alternative capital, as evidenced by the 1 January renewal period. In A.M. Best’s opinion, further price reductions are likely. Traditional and alternative capacity remains plentiful and a single large catastrophe is not expected to have a significant impact on current market conditions.

Yvette Essen, director, industry research, Europe & emerging markets, noted: "Major losses combined with a sustained recovery in interest rates could reduce the sector’s attractiveness to alternative capital. However, the exceptionally low yield environment is expected to continue with any increases in interest rates likely to be gradual. Furthermore, alternative capital is increasingly provided by pension funds rather than opportunistic investors, which may be less likely to reallocate their investments given that insurance-linked securities represent only a relatively small proportion of their substantial asset portfolios."

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