Study: Bermuda Firms “Treading Water”
Bermuda-based reinsurers who broadened their business mix and remained well capitalised in 2010 are “still treading (clear blue) water” going into the New Year — with emphasis on the word “treading”, the industry journal “Risk & Insurance” reports today (Dec. 20).
Citing a new study by consultancy firm Keefe, Bruyette & Woods (KBW), “Risk & Insurance” said with reinsurance pricing set to plunge in 2011 there could be a spate of mergers and acquisitions (M&As) among Bermuda’s global reinsurance giants.
“Pricing in 2011 is expected to fall, possibly reaching double digits next year, barring any major catastrophe,” said the respected industry journal. “Like their primary insurance counterparts, Bermuda reinsurers face dwindling reserve cushions and softer demand as primary carriers retain more risk, as well as deterioration in terms and conditions, the KBW analysts said.
“Typical growth blueprints include the addition of new business lines, hiring underwriters or teams, and potentially adding books of business. Almost every Bermuda market player is a potential buyer or seller.”
The likeliest Bermuda target companies for take-overs include Everest Reinsurance Holdings, Flagstone Reinsurance Ltd., Maiden Holdings, Montpelier Re Holdings Ltd., Platinum Underwriters Holdings, Transatlantic Holdings Inc., and XL Capital Ltd., according to the KBW analysts.
The guarded KBW report, titled 2011: Stop Waiting For The Sky To Fall, was summarised by “Risk & Insurance” managing editor Cyril Tuchy as: “Analysts peer into the heart of darkness of a weak economy, an insurance market that never seriously hardens and dwindling reserves, and foresee property/casualty rates dropping as much as 5 percent overall in 2011.”
“Bermudian reinsurer results for 2010 were somewhat disappointing, hurt by a spate of mid-sized catastrophes …,” said the KBW report. “Despite the sub-optimal year, stocks performed well during 2010, up 16.0% on average through December 9th
“This performance was driven in part by substantial capital management, and by year-end we estimate that Bermudians will have repurchased more than $7 billion in stock this year. While we continue to expect active capital management in 2011, and view the buybacks as a positive (as they are accretive to both earnings and book value given the group’s valuation), this is one of the few positives for the group at present.”
The KBW study said pricing is down in the mid-single digits and falling in the Bermuda reinsurance sector, current accident year results are near breakeven and deteriorating, and the Bermuda group’s reserve cushion is dwindling.
“M&A remains a possibility, but we expect most deals to be done at or near book value and see little value creation,” said the KBW analysts. “The group is currently trading at 83% of book value, basically where it was a year ago, and we expect this discounted valuation is likely to continue for the foreseeable future. Given our pessimistic valuation outlook, we prefer higher quality Bermudian reinsurance names that we view as having a well diversified business mix and a solid balance sheet and are well positioned to weather the softening market and opportunistically respond when conditions begin to improve.”
