Aspen Re’s CEO Brian Boornazian today (January 3, 2012) took part in a reinsurance renewal conference call hosted by Evercore. The script for the call was as follows.
These comments reflect the market as a whole, not Aspen’s bound reinsurance business during the current renewal season.
HEADLINES
- Record, or near record, natural catastrophe losses in 2011, amounting to more than US$100 billion
- Industry faces record low investment yields and RMS Version 11 adds to capital strain
- Reinsurance market is hardening in certain lines, but not a ‘classic’ hard market: only cat-exposed and loss-affected contracts are seeing major rate improvements; pricing at or below 1999 levels in many areas; more change needed to reach adequate rate levels
- Property Catastrophe excess of loss: US price rises, Europe flat, Asia will take time to correct and stabilize
- Mixed fortunes for Property per risk
- Property fac: hardening on lower-attaching, cat-exposed business, and stabilizing – with some small rate increases – on excess fire business; but rate erosion is a concern for international fac reinsurance
- Improvement in Casualty reinsurance rates remains generally elusive, but some evidence of minor rate increases in US; terms and conditions overall stable
- Mixed results for Specialty reinsurance: moderate corrections in rate or program structure in some markets, resulting from losses in 2010/2011; but other markets see a deterioration in price, terms and conditions due to continued abundance of capacity
- Compared with previous turns, market appears positioned for a less dramatic, more prolonged, hardening (assuming no further major natural catastrophes) but the degree of turn has yet to match the need for improved rates
INTRODUCTION
This morning I will be providing a general market view of the January 1 reinsurance renewals. My comments today reflect the market as a whole and are not specific to Aspen’s bound reinsurance business during this renewal period.
The January 1, 2012 renewal season was preceded by a rather remarkable 2011. From a catastrophe loss standpoint, the year will rank as either the first or second largest in history, with global insured losses to the industry of more than US$100 billion.
This strain on capital has been made more acute by the release of RMS Version 11, which has dramatically increased PMLs for US wind. Added to that, our industry is facing record low investment yields and pricing levels and, while terms and conditions have remained relatively stable, in many areas pricing levels are at, or below, 1999 levels.
Taking these things together, you have a perfect recipe for what – a reasonable person would assume – should be a hard market. For that matter, even one of these factors alone could be reason enough for a hardening market.
What actually happened on January 1 is that we saw a market hardening in certain lines, but not a ‘classic’ hard market.
The signs all point to an industry awareness that the risk being assumed needs more rate to produce adequate returns. The insurance and reinsurance markets are starting to accept the need for change. But, so far, only cat-exposed and loss-affected contracts are experiencing any significant improvement to rates.
In other words, the market is beginning to adjust to the several ongoing factors that would all, individually, necessitate a market hardening. But we are still only at the beginning. More change is needed to reach rate levels that are adequate for exposures, and the other external factors that affect our industry’s profitability.
I will now give you a more specific view of the market at January 1 by line of business, starting with Property reinsurance.
PROPERTY REINSURANCE
Property Catastrophe XOL reinsurance
First, I will cover Property Catastrophe excess of loss business.
As is the case each year, large peak-zone coastal exposures in the US, where capital constraints are the greatest, achieved the best margins. This business has been very well priced since the events of 2005. But rates have fallen gradually each year since then, except for a small revival after Hurricane Ike in 2008. This renewal season, however, reflected revised US wind science, approximately US$20 billion of tornado losses and around US$80 billion of international natural catastrophe losses. As a result, prices rose.
In the US, for the larger Property insurers and excess and surplus lines writers, rates generally rose by between 7.5% and 15%, and even more on those contracts affected by losses.
Regional US Cat business benefits from diversification credit, and is typically competitively priced. But winter storms and record tornado activity in 2011 caused significant market losses. As a result, prices have adjusted materially on loss-affected contracts, sometimes by 25% or more.
Turning to Europe, market pricing has been gradually falling since 2001, putting margins under pressure. We had hoped that January 1, 2012 would finally mark the turning point for European Property business. Disappointingly, however, this renewal season resulted in a largely flat market with rate improvements held back by excess capacity to only low single-digit percentage increases.
The Asian market has suffered a traumatic 2011. Major losses in Australia, New Zealand, Japan and recently Thailand have resulted in a Cat XOL loss ratio for the reinsurance market of more than 1,000%.
Real change is needed in many areas. January is not the most significant renewal date for Asian reinsurance, so much of the story is still to unfold. But early signs are that we will see inconsistent corrections. There has been so much loss activity that it will take time for the market to stabilize. Some renewals in January were sensible and reflected appropriate lessons learned. However, others have been very disappointing.
Property per risk reinsurance
Now I will turn to per risk treaty business, which produced two different stories. In general we are seeing per risk treaties written with the larger, national companies, as well as excess and surplus line companies, showing modest rate increases. And loss-affected treaties are showing more significant increases.
But on the smaller, more regional, business the story is less encouraging. While loss-affected treaties are showing some increases, the balance renewed at relatively flat pricing. We believe that this may be being driven by a small number of markets offering their capacity at low rates.
Property facultative reinsurance
Next I will cover the US Property facultative reinsurance market, which is beginning to see some changes. After several years of profitability in the fire peril-driven excess of loss market, this trend reversed in 2011. This was due to the combination of traditional fire losses as well as non-coastal business experiencing natural catastrophe claims, mainly resulting from the severe tornado season.
In the cat-driven fac market, demand is up as buyers adapt to RMS Version 11. The result has been noticeable hardening on lower-attaching, catastrophe-exposed business, and a stabilizing – with some isolated instances of small rate increases on excess fire business.
International excess of loss facultative markets have also been profitable for many years, but we continue to see rate erosion to levels that cause concern. It appears that the cat activity of 2011 has yet to lead to a hardening in international fac business.
This summarizes my remarks on Property lines. I will now discuss our observations on Casualty business.
CASUALTY REINSURANCE
In general, the much-needed improvement in Casualty reinsurance rates remains elusive. While there are several factors preventing improvements to rates, there are also some positive signs on the horizon:
- First, abundant capital within the insurance sector continues to keep pricing from hardening. But there are fewer outlier markets, and we see evidence of responsible carriers being willing to walk away from underpriced business.
- Second, reserve releases have continued to mask true accident year experience. But reserve releases in the market have reduced recently, and we expect this trend to continue.
- Third, lower general inflation, coupled with a slow economic recovery, is keeping future claim and exposure assumptions on the lower side. It should, however, be noted that claims inflation trends often outpace ordinary social inflation.
Despite these positive signals, the net effect of all current factors at play was a renewal season that lacked the increases necessary for long-term health. However, we have seen evidence of some carriers achieving low single-digit rate increases on their original business. Also, despite requests for coverage enhancement, terms and conditions remained generally stable.
US Casualty reinsurance
The US Casualty market saw pockets of rate increase in response to contracts with loss development, and very limited requests for rate decreases. Terms and conditions remained stable and, while many insurers and reinsurers behaved responsibly, the much-needed general rate increases were not achieved.
Medical Malpractice continued to benefit from the hard market years of 2002 to 2005, resulting in flat to slightly reduced rates.
Excess Workers Compensation did not show enough rate improvement to compensate for recent experience trends, and uncertainties around future medical inflation exposures – given the long-tail nature of the product.
Workers Compensation Catastrophe rates were down an additional 2% to 5%, with clients buying less, reflecting reductions in payroll and model indications.
General and Excess Liability, including Umbrella business, were relatively flat with no changes in terms or conditions.
International Casualty reinsurance
Turning now to the International Casualty market, unfortunately this market remained soft, with significant insurance and reinsurance capacity fighting for regional European business. Even with economic uncertainties in many EU countries, we did not see improvements in rates nor terms.
SPECIALITY REINSURANCE
Next, I will focus on what we are observing in the Speciality lines market.
Large loss activity in 2011, both catastrophe and man-made, has had a noticeable effect on the profitability of the Specialty reinsurance market this year.
In summary, the Specialty markets at January 1 represent a mixture of results. First, we have those with moderate corrections in rate or program structure, resulting from losses in 2010/2011. Second, we have those that continue to see deterioration in price, and terms and conditions, because supply and resulting reinsurance capacity remains abundant.
Marine, Energy and Terrorism reinsurance
For example, in the offshore Energy market we are seeing rate increases of at least 25% on treaties affected by 2011 loss activity. This is a continuation of the market corrections that began in 2011 following Deep Water Horizon.
There are also some structural changes to these programs, such as increased retentions. But Marine business that has not experienced losses is commonly being renewed at flat rates, or is even seeing low single-digit reductions.
Recent profitability in the reinsurance Terrorism market led to increased competition and broadened coverage to include perils arising from SRCC (strike, riot and civil commotion). This will result in claims from the riots in Thailand and possibly the Middle East, too. While programs that saw losses from the recent civil unrest in Thailand realized some rate increases at renewal, the remainder of the terrorism market has experienced rate reductions of between 5% and 15%.
But reinsurance capacity for Marine, Energy and Terrorism classes remains ample, driven by the continued appetite of specialty markets including the Bermudian class of 2005/2006.
Aviation and Space reinsurance
Now I will look briefly at Aviation and Space.
The rates in the primary airline market remain under pressure this renewal, following a benign loss year. But following the recent Reno, NV air race accident, reinsurers are resisting price reductions, are amending terms and conditions, and are revising treaty structures for US general Aviation business.
The satellite reinsurance market has seen an above-average year in terms of large loss activity. 2011 was impacted by some major claims from three satellite losses (ExpressAM4, Telstar14 and New Dawn). The market also experienced frequent medium-sized losses adding to the total space loss burden for the year.
Unfortunately, these losses are not expected to create a broader market price correction, as the Space market continues to be dominated by Specialty markets that retain an appetite for the class. As such, the Space market was down about 10%.
Trade Credit and International Surety reinsurance
Finally, I will cover Trade Credit and International Surety.
The Trade Credit reinsurance market has enjoyed very pleasing results due to significant improvements in market terms that followed the credit crisis in 2008. 2009 and 2010 are record profit years and 2011 is, so far, performing above expectations.
Despite reinsurers rushing back to the table in 2010 and 2011, original terms and conditions remain attractive, partly as a result of disciplined underwriting due to the ongoing economic crisis in Europe. Reinsurance conditions in the January renewals are stable with the focus on risk management in the original portfolios.
CONCLUSION
In conclusion, we are finally seeing evidence of a market turn. But, unlike previous turns, the market this time appears positioned for a less dramatic, more prolonged, hardening. If the industry experiences a further major cat event, I believe the pace of hardening will increase rapidly.
However, the degree of the turn has yet to match the need for improved rates, which is triggered by a combination of hard-market drivers:
- the current combination of record-breaking cat losses
- historically low investment yields
- rate levels that, in many cases, are far from adequate, and
- the capital strain generated by RMS Version 11.
To repeat what I said in my introduction, more change is needed to reach rate levels that are adequate for the exposures that affect the profitability of this industry.
Ends
About Aspen Insurance Holdings Limited
The Company provides reinsurance and insurance coverage to clients in various domestic and global markets through wholly-owned subsidiaries and offices in Bermuda, France, Germany, Ireland, Singapore, Switzerland, the United Kingdom and the United States. For the twelve months ended December 31, 2010, the Company reported gross written premiums of US$2,076.8 million, net income of US$312.7 million and total assets of US$8.8 billion. Its operating subsidiaries have been assigned a financial strength rating of “A” (“Strong”) by Standard & Poor’s, an “A2 (“Excellent”) by A.M. Best and an “A2” (“Good”) by Moody’s Investors Service.
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