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years boosted combined ratios by an average of eight percentage points. The overall five-year average return on revenues (ROR) was 16% and the five-year average return on equity (ROE) was 12%.


Capital levels vary by region There has been a persistent transatlantic divide: On average, reinsurers in North America tend to operate with a higher level of excess capital (that is, stronger capital adequacy) than their European or London market peers (see Chart 4). We attribute this partly to the concentration of some of the Bermudians on severity lines. The large European reinsurers, on the other hand, tend to have more-diversified product portfolios. In addition, some of the London market players use letters of credit (LOCs) to fund their capital requirements at Lloyd’s. We do not give credit for this form of capital when calculating our risk-based capital metrics, as the beneficiary of the LOC is the Society of Lloyd’s, and not the company.


Assessment Of Risk Position Is Key To The Financial Risk Profile


Our ratings on global reinsurers are sensitive to changes in our assessment of their risk position. An improved risk position could, in some cases, trigger a positive rating action, while a deterioration in our assessment of risk position could trigger negative rating actions for many reinsurers. That said, we believe that the current scores adequately reflect the industry’s risk, and are unlikely to deteriorate.


On average, global reinsurers have moderately strong financial risk profiles, supported by very strong capital and earnings and adequate financial flexibility and constrained by high risk positions (see Charts 5 to 7). In our assessment of a reinsurer’s risk position, we capture the severity risk from its products, which are likely to include property catastrophe and terrorism exposures. We consider that this severity risk is inherent in the reinsurers operating in the sector, and thus view the sector as more risky than primary insurance. The two companies that have a very high risk position—Lancashire and Montpelier— are exposed to high limits in various severity products. By contrast, we see the reinsurers that have moderate risk as benefitting from large balance sheets and diversified product offerings, with an earnings base that provides a substantial cushion to potential large losses. Our assessment of each reinsurer’s risk


Global Reinsurance Highlights 2014


Chart 6: Capital And Earnings (No. of companies)


10 12


0 2 4 6 8


Weak Less than adequate


© Standard & Poor's 2014. Data as at July 21, 2014


Chart 7: Risk Position VHR


MR HR


LR IR


LR = Low Risk, IR = Intermediate Risk, MR = Moderate Risk, HR = High Risk, VHR = Very High Risk Risk position


Peer average


Lower adequate


Upper adequate


Moderately strong


Strong


Very strong


Extremely strong


© Standard & Poor's 2014. Data as at July 21, 2014


Chart 8: Relative Ranking Of Reinsurers' Catastrophe Exposure*


*Based on five metrics that assess the relative exposure to catastrophe risk, reinsurers are ranked against each other. The cumulative ranking index is defined as the weighted sum of the relative position on each of the five individual exposure metrics.


© Standard & Poor's 2014.


65


Allied


Alterra


Amlin Arch Aspen AXIS Endurance Catlin Everest Hannover Hiscox Lancashire Lloyds Montpelier Maiden Munich Montpelier RenaissanceRe Amlin Lancashire Aspen Validus EverestRe Endurance Catlin Transatlantic AXIS Allied PartnerRe Platinum Lloyds SwissRe SCOR HannoverRe Arch MunichRe PartnerRe RenaissanceRe Platinum SCOR Transatlantic Swiss Validus


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