The weighted average of the combined ratio of the Guy Carpenter Global Reinsurance Composite increased from 92.1 percent at end of year 2009 to 102.5 percent at first half 2010, the highest combined ratio since 2005, the year of the Katrina/Rita/Wilma Hurricanes.

Source: Guy Carpenter & Company, LLC

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Peter Zaffino, President & CEO
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While hurricanes spun through the Gulf of Mexico last month, a larger catastrophe ripped through New York, London, Shanghai, and every other major financial center in the world. Tropical Storm Credit Crisis (which started as Tropical Depression Subprime) intensified quickly and became a Financial Catastrophe that destroyed vast amounts of shareholder wealth.

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Christopher Klein, Global Head of Business Intelligence
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The ongoing financial catastrophe is already shaping the market’s perception of the next reinsurance renewal. A unique confluence of factors has complicated the annual ritual of anticipating the direction of reinsurance rates. Though a number of factors have coalesced to prevent the continued rapid decline in risk-transfer pricing that characterized 2008, pricing on average at January 1, 2009 renewals is likely to remain within a narrow range of expiring rates. Nonetheless, the global credit crisis is far from over. Conditions are changing daily. New financial developments—or a mega-catastrophe—could change market conditions substantially and with little lead time.

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Reinsurer profitability, as measured by the pre-tax ROE for the Guy Carpenter Global Reinsurance Composite, peaked at 21.9 percent in 2006 and declined slightly to 19 percent in 2007. In the first quarter of 2008, the Guy Carpenter Global Reinsurance Composite ROE dropped to 12.5 percent. The industry is still in a strong profit position, though, as the combined ratio in the first quarter was still below 100.

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Christopher Klein, Global Head of Business Intelligence
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Asset-driven losses have put pressure on earnings. Investment gains comprise an important part of carriers’ long-term profits, and financial markets have shown just how volatile this source can be. With net income off 60 percent from the first half of 2007 to the first half of 2008, carrier profitability will become increasingly reliant on technical earnings.

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A study of several prominent risk-bearers suggests that investment gains are down profoundly across the (re)insurance industry significant. Investment gains for this group reached an aggregate USD98 million for the first half of 2007. For the same period in 2008, though, the group showed an aggregate investment loss of USD566.2 million, and the majority has been realized. Net income is down 60 percent year-over-year.

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From Bag Profits Early: Investment Gains Under Pressure >>

Cedents took advantage of a buyer’s market. Many 2008 renewals closed late as cedents held out for lower rates in the continuing soft market. Reinsurers were rewarded not only with lower rates, but often smaller lines. The absence of large catastrophe losses was a key factor in the softening of reinsurance markets. Barring large catastrophe losses in 2008, the downward drift in rates is expected to continue through 2008 and into 2009.

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