Is Pricing Power Translating Into Robust Profits? Life reinsurers positive profitability trends are being offset by challenges
By Steve Tuckey
With their numbers dwindling, life reinsurers today command unprecedented pricing power. But this has not necessarily led to a golden age of robust profits, according to interviews with National Underwriter.
“The positive profitability trends are to some extent offset by the challenges they are facing in integrating operations,” says Rodney Clark, credit analyst for Standard & Poors Corp., New York.
In addition, more stringent Triple-X reserving requirements from U.S. regulators have made reinsurers explore new solutions in the capital markets to lock in long-term financing. The Valuation of Life Insurance Policies model regulation, known as Triple-X, was passed to ensure proper reserving for level premium life insurance products.
Clark says these alternatives are more costly than traditional methods of collateralizing offshore risk such as letters of credit.
“But they do eliminate the uncertainty of future pricing and capacity,” he adds. “Given the improved pricing environment, reinsurers should generally be able to pass the added costs of solutions to these customers.”
Any look at the giant life reinsurers, according to S&P, will have to start in Europe, headquarters of the Nos. 1, 2 and 5 players in the fieldSwiss Re, Munich Re and Hannover Re.
“Market upheaval has been notable in Europe where consolidation, questionable pricing and poor performance of the non-life business have caused a shake-up of the major players,” Clark says. Both Swiss Re and Munich Re have lost their triple-A ratings and now are rated “AA” and “A+”, respectively.
UBS analyst Ben Cohen sees underwriting profitability for Swiss Re to be “flattish if peaking in 2005 and the group to be delivering double-digit returns through 2006.”
But life and health reinsurance accounts for only an estimated 50% of that equation, according to Cohen. He sees the expected decline in p-c pricing to be somewhat offset by the life and health line, which he predicts will provide a 10% increase in operating profits.
Nonetheless, Cohen says UBS continues to value the life and health division of Swiss Re on a low multiple compared to its peers in Europe. “We struggle with the lack of disclosure in this market, which makes comparisons very difficult along with the lack of organic growth in the main market, the U.S. and an underlying ROE in the 8-11% range” for Swiss Res life and health division, he says.
While S&Ps “AA” rating with a negative outlook may preclude any serious capital-intensive buying spree, Cohen says “we think the group will need to maintain these [L&H acquisitions] to maintain top-line growth in 2006, and these may need to be funded by capital from other parts of the business.”
The No. 3 player in the global life reinsurance sectorEmployers Reinsurance Corp., Overland Park, Kan., of the GE familysaw its outlook downgraded to negative last fall by A.M. Best Co., Oldwick, N.J., and remain unchanged by Moodys Investor Service, New York.
Moodys analyst Jeff Berg says the companys life operations were not a significant driver in the agencys decision. Primarily, the uncertainty surrounding the parent GEs commitment to maintain ownership of its insurance operations is a more significant ratings factor.
Reinsurance Group of America, St. Louis, remains the largest stand-alone writer of life reinsurance (No. 4 globally according to S&P) and therefore would be most vulnerable to the drivers of the sector.
J.P. Morgan analyst Jimmy Bhullar says the companys better than expected third quarter results last year stemmed from favorable U.S. mortality following 4 quarters of adverse figures.