Insurance News

Reinsurers should preserve capital amid bigger risks

Posted on: June 5, 2009

NEW YORK (Reuters) – As hurricane season kicks off and the economic recession continues to take a toll on economies worldwide, reinsurers must make sure they are sitting on a bigger capital cushion, said executives at an insurance conference on Tuesday.

“This is the year you don’t bet the bank. You preserve capital,” said John Charman, chief executive of Bermuda-based insurer and reinsurer Axis Capital (AXS.N: Quote, Profile, Research, Stock Buzz).

Marston Becker, chief executive of Max Capital Group (MXGL.O: Quote, Profile, Research, Stock Buzz), in a panel discussion with Charman at Standard & Poor’s annual insurance conference in Brooklyn, added: “We know this is the year to shepherd your resources, and make sure you are there for the next day.”

Max is currently pursuing a tie-up with another Bermuda reinsurer, IPC Holdings (IPCR.O: Quote, Profile, Research, Stock Buzz), that could significantly bolster its capitalization. Shareholders, who are also considering a rival bid, vote on the stock deal June 12.

Charman said it was important to hold on to capital now because aggressive policy pricing may have already left some in the industry exposed to future losses, at the same time earnings prospects had been dampened by poor investment returns.

There is also the hurricane factor, or the threat that a major catastrophe such as 2005’s Hurricane Katrina could once again leave insurance balance sheets with a big dent.

Hurricane season began June 1.

Insurers and reinsurers paid up to $60 billion in claims from 2005 hurricanes, and were hit again last year by another sweep of deadly storms, triggering billions of dollars more in losses. Insurers emerged from the 2008 storms in better shape than three years earlier, largely because they had kept more capital on the sidelines.

RISK-REWARD

Charman said there may well be a reward for those who can resist the urge to be spendthrifts now — a tall order given the temptation to underwrite more business to bring in additional revenue, helping to make up for depressed investment returns.

“A number of us believe that the market will harden significantly going into the next year,” said Charman. That could pay off handsomely for those who have capital to put to work when prices are more robust.

“At Axis we (keep) surplus capital because we like to be opportunistic” and to be able to respond quickly when opportunities are best, he added.

Still, there is a price to pay now to holding more cash. “We are being killed on the yield, but when you are concerned about stability of financial markets, better to be killed on the yield,” he said.

Reinsurers provide a type of insurance to insurers, spreading the risk of losses on commercial, home and auto policies among several carriers.

(Reporting by Lilla Zuill)

© Thomson Reuters 2009. All rights reserved

Advertisements
%d bloggers like this: