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Q1 underwriting performances deteriorate…

Despite another benign period for catastrophe losses, underwriting performance actually deteriorated across our universe of listed P&C (re)insurers during the first quarter of 2014 as other headwinds grew stronger.

This trend was most pronounced for short-tail specialists, where a 42 percent decline in first quarter reserve releases was largely responsible for the significant 6.3 percentage point rise in the peer group's Q1 combined ratio to 60.2 percent.

Lower favourable prior-year development also dented the underwriting performance of global reinsurers, as did a slight rise in expenses.

While nat cat losses were relatively low at just 0.7 percentage points on the combined ratio, the composite suffered from a rise in claims related to man-made events such as the Malaysian Airlines MH370 disaster and Australian surety losses.

As a result of all these factors, the combined ratio for our Global Re peer group climbed by 2 percentage points to 85 percent.

Meanwhile, Bermudian carriers remained the worst performers in our universe, with a group-wide Q1 2014 combined ratio of 88.3 percent - a 1.3 percentage point increase from the prior-year period.

This was driven by a couple of isolated cases of much higher attritional losses from Axis and XL, which dragged the composite down and outweighed any improvements made by other members of the peer group.

Key points:

Light catastrophe experience in the quarter offset by:

• Lesser benefit from reserve releases on combined ratios across our universe, especially for short-tail specialists and global reinsurers

• A few instances of higher attritional losses in Bermuda, greater man-made losses for European reinsurers, as well as isolated cases of reserve strengthening

• A slight increase in underwriting expenses across the board

Returns compressed...

Pressure mounted on margins during the first quarter of 2014, as returns on equity (RoE) shrank for three of the composites in our universe, although they remained comfortably above five-year Q1 averages.

Although they delivered the best overall returns, short-tail carriers' margins were compressed by the greatest extent, characterised by a 5.7 percentage point decline in the composite's annualised RoE to 17.8 percent in Q1 2014, despite a negligible impact from catastrophes.

The significantly weaker yet still robust result, which was broadly in line with Q1 2012, primarily reflected lower aggregate reserve releases, although the first signs of widening core loss ratios were also apparent as rate softening begins to take its toll.

There was an analogous trend for Bermudian carriers, after margins came under pressure for more than half of our Bermuda composite due to varying factors such as heightened operating costs, lower earned premiums and larger losses.

This pushed the peer group's Q1 RoE down 4.0 percentage points to 13 percent year-on-year.

In contrast, the aggregated RoE for global reinsurers moved down by just 10 basis points to 15.5 percent in Q1 2014 from the same quarter of last year, although it should be noted these returns encompass the entirety of each company and hence includes life business.

Therefore, on a purely P&C basis, the gap is expected to be wider due to softening pressures.

Key points:

• Returns squeezed in the first quarter, particularly for Bermudian (re)insurers and short-tail specialists

• However, still well above five-year averages

• Driven by a variety of factors including lower favourable prior-year reserve development, lesser premium income and higher operating expenses

• Pressures from the softening rating environment began to emerge as underlying loss ratios crept slowly upward

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