Bermudians grow in Q2, but property cat pressures loom
Top-line growth accelerated for Bermudian carriers during the second quarter, as cheap retrocession and a continued propensity for insurance growth counteracted tough market conditions in reinsurance.
Gross written premiums (GWP) for our Bermuda composite climbed by 9.6 percent to $6.8bn in the second quarter of 2014, faster than the 8.4 percent growth witnessed in Q2 2013.
This was predominantly driven by insurance business, as premiums rose by 10.2 percent to $4.6bn, while reinsurance GWP grew by a lesser 5.4 percent to $2.2bn.
Nevertheless, further deterioration in pricing at the 1 April and mid-year reinsurance renewals continued to place downward pressure on property cat premiums during the period.
Arch was one of a number of companies to take advantage of the soft retro market and purchase cover to arbitrage the fall in reinsurance pricing.
The carrier experienced one of the greatest declines in property cat business in Q2 2014, as net written premiums fell by a considerable 45.9 percent compared to the prior-year period.
"That [arbitrage] approach is not totally foreign to us... We did try to do quite a bit of that," said Arch CEO Constantine Iordanou on the company's Q2 earnings call.
"We maintained bigger gross lines and then we retroceded out because we believe the price on the retrocessions was advantageous to us," he added.
In spite of this, Iordanou said the profitability of property cat business written in Q2 2014 was still lower than last year.
Nevertheless, Arch registered a 9.7 percent increase in gross reinsurance premiums in Q2, which was almost completely attributable to business produced for casualty reinsurer Watford Re.
The carrier's insurance premiums were boosted by 16.6 percent, which largely stemmed from alternative markets, excess and surplus casualty and travel accident lines.
As a result, Arch's top line (excluding mortgage business) expanded by 20.8 percent to $1.3bn.
Property cat premiums also tumbled at Irish-domiciled "Bermudian" XL Group, at down 8.4 percent on a gross level, after the (re)insurer said risk-adjusted pricing was down 15 to 20 percent at the mid-year renewals.
On a net basis however, the decline was much greater at 17.1 percent, as the company explained it had increased its retrocessional spend at mid-year.
XL increased its average capacity on European wind and bought down its retention for US wind and quake to attach at lower industry loss levels.
Nonetheless, the carrier's overall P&C top line breached the $2bn barrier in Q2 2014 as insurance growth outpaced that of reinsurance.
Reinsurance Q2 GWP climbed by 4.5 percent year-on-year, largely reflecting new European aviation business, greater agricultural premiums and the timing of casualty treaty renewals in North America.
XL's insurance premiums, meanwhile, expanded by 9.9 percent in the quarter. This was primarily driven by a combination of new international primary casualty and political risk business, and by higher renewed premiums for international financial lines and North American excess casualty and construction lines.
But XL insurance CEO Greg Hendrick said that deteriorating market conditions - particularly for shorter-tail business - had caused rate increases to slow and even slip below loss cost trends for several lines.
Insurance expands, property pressure
Amid the deteriorating reinsurance environment, certain Bermudians focused on expanding their insurance portfolios during the second quarter.
However, many carriers noted that softening conditions were beginning to leak through to primary business, particularly for property.
Aspen's insurance book saw the greatest growth during the second quarter with a 23.7 percent rise in GWP, largely resulting from the ongoing expansion of the carrier's infant US operation.
This spearheaded an overall 13.4 percent jump in the company's Q2 GWP to $779mn, with GWP remaining flat at Aspen's reinsurance division.
Although premiums increased across all three insurance sub-segments, Aspen CEO Chris O'Kane said that aviation, energy and property insurance rates were experiencing the "most profound" pressure.
Nevertheless, O'Kane expected a significant uptick in aviation war pricing following the Malaysia Airlines losses, but said it was unlikely to spread to the wider aviation market.
"On the primary side, we will be pushing for increases of 100 percent in aviation war and we do expect to receive these increases," said O'Kane, adding that rate rises could be as much as 300 percent on the reinsurance side.
Axis CEO Albert Benchimol made similar observations on the company's Q2 earnings call.
"Aviation and terrorism have been in need of a market correction for quite some time. Recent loss events may provide the required impetus," he remarked.
Axis' overall insurance rates were down 2 percent in Q2 2014, led by pricing declines in property lines. Its insurance book contracted by 3.4 percent in the quarter, as competitive pressures and timing differences triggered a fall in property premiums.
A reshaping of Axis' US directors' and officers' portfolio also caused a decrease in professional lines business. However, this was offset by an 8.8 percent rise in GWP at Axis' reinsurance segment, which was due in part to an 83 percent hike in professional lines premiums and the continued expansion of agriculture business.
This was enough to bring the carrier's overall GWP up by 0.9 percent year-on-year in Q2 2014 to $1.23bn - significantly down from the 20.3 percent growth recorded in the same period of 2013.
Allied World shrinks
Allied World's second quarter top line slid by 0.7 percent year-on-year to $760mn, predominately fuelled by a 19.2 percent drop in reinsurance premiums during the period.
Allied World CEO Scott Carmilani said that four-fifths of the decline in reinsurance GWP was "virtually timing and restructuring of treaties", while the remainder represented an actual reduction in premiums.
Nevertheless, insurance GWP climbed by 9.1 percent during the quarter. This was chiefly due to a rise in US general casualty premiums - an area of business that Carmilani said had continued to fetch attractive rate increases, as opposed to the significant pricing declines for US property.
In contrast, Endurance returned to top-line expansion in Q2 2014, as it continued to rebuild its portfolio as part of the transformation into a specialty-focused franchise under the leadership of John Charman.
The firm's overall Q2 GWP surged by 20.4 percent year-on-year to $689mn - a reverse from the 5.2 percent contraction reported in the same quarter of 2013.
The largest growth came from Endurance's reinsurance segment, where GWP rose by 24.4 percent, driven by increases in professional lines and specialty business.
Professional lines reinsurance business increased six-fold on account of new and extended quota share contracts, while Endurance's investment in new underwriting talent within energy, agriculture and surety businesses paid off as specialty premiums doubled.
The successful leverage of new hires was also reflected in the 16.1 percent increase in GWP at the carrier's insurance division. The rise was generated by growth in casualty and other specialty and professional lines, and was partly offset by commodity price-driven declines in agriculture business.