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Strong H1 challenges reinsurers’ case for 2013 rate rises

The gentle year-to-date for industry catastrophe losses has left the reinsurance sector in rude financial health during the long lead-up to the key 1 January 2013 renewals.

Despite paltry investment returns squeezed by the sustained low interest rate environment and Eurozone uncertainty, reinsurer capital bases continued to strengthen in the first half of 2012 following the battering from record cats in the prior-year period.

As we report in our lead article, the sector's balance sheet strength and surplus capital has put mounting pressure on rates, most notably stifling momentum in US and international property catastrophe pricing that picked up after the H1 2011 loss events.

And analysis from The Insurance Insider's Data Room reveals the extent that shareholders' funds - a proxy for the availability of capacity - have increased for Bermudian, continental European and Lloyd's reinsurers in our universe of companies.

Leading the way, unsurprisingly, are property catastrophe specialist players RenaissanceRe and Validus (see graph).

The Bermudian duo reported sector-beating combined ratios of 31.1 percent and 58.8 percent respectively for a first half of the year that included just $12bn of insured catastrophe losses.

This compared to the record $82bn recorded in the prior-year period, according to Munich Re data.

Both experienced growth of over 12.5 percent in their capital base over the six-month period to 30 June.

Their compatriot Arch headed a group of nine reinsurers - including continental giants Munich Re and Hannover Re - that grew shareholders' funds by over 6 percent in a period where, for many, increases from retained earnings were partially offset by share buybacks.

At the other end of the spectrum, White Mountains actually saw a significant drop-off in shareholders' equity, which was down 7.14 percent to $4.33bn. The decrease was driven by $419mn of share repurchases that included $409mn as part of a tender offer.

But although capital management through buying back shares was widespread during the first half, overall buybacks were relatively muted.

Analysis by ratings agency Fitch of a group of 19 reinsurers found that total buybacks were $2.1bn in H1 2012, down from $2.2bn in the prior-year period, and well under half the $4.6bn recorded in H1 2010.

Fitch noted that, despite strong levels of industry capital, reinsurers are being more selective and cautious in choosing where to deploy financial resources to support their businesses and provide underwriting capacity. The firm suggested that in addition to a more cautious approach to capital allocation, "the recent trend may be reflective of reinsurers looking to retain the option to increase capacity if pricing conditions improve".

Nevertheless, evidence of increasing industry capital levels is clear, with the Data Room's universe of reinsurers aggregating to a 5.8 percent rise to $179.3bn as at 30 June 2012 (see below).

The key driver in the increase was a dramatic swing in industry common net income from a loss of $1.03bn in H1 2011 to a net profit of $10.08bn in the same period of this year.

Two of the biggest turnarounds came at Munich Re and PartnerRe. Both reinsurers experienced heavy catastrophe losses that drove them down into the red in the first half of 2011, only to recover strongly with profits in the same period of this year.

The German giant, for example, saw a $301.4mn net loss turn to a $2.01bn net profit, while PartnerRe's hefty $700.1mn earthquake-driven H1 2011 loss was reversed into a $505.5mn net profit.

Lloyd's reinsurers Hiscox and Catlin also recorded big swings, as did Platinum Underwriters.

Meanwhile, there was a strong recovery at Montpelier Re as it turned a $139.2mn loss into a $195.4mn profit, which helped the Bermudian property cat specialist reap a sector-beating H1 annualised return on equity (RoE) for the period.

As the graph (see below) demonstrates, the company just topped Lloyd's blue chip carrier Amlin with an annualised RoE of 23.55 percent (Amlin generated 23.23 percent at the halfway stage).

No fewer than 11 of the Data Room's reinsurer universe achieved RoEs of over 15 percent on an annualised basis in the first half of 2012 - putting them ahead of the level that had been considered the industry standard before the recent run of return-sapping investment conditions.

A further 10 companies are in the double-digit range of RoEs on an annualised basis for the first half of the year.

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