KBW: Worst First Quarter For Bermuda Firms
Industry analysts Keefe, Bruyette & Woods say back-to-back floods in Australia and devastation caused by Cyclone Yasi, the New Zealand earthquake and the Japanese quake and tsunami will likely add up to the worst first-quarter of catastrophe losses for Bermuda re/insurers ever.
KBW estimates that catastrophes in the first quarter will cost the Bermuda firms almost $6 billion.
Bermuda re/insurers including Endurance, Partner Re, Alterra, Aspen, XL Group, Omega, Platinum, Allied World, Flagstone, Hiscox, and Montpelier Re have already declared hundreds of millions of dollars in losses for the first quarter of 2011 as a result of their exposure to the Japanese disasters and the Australian and New Zealand events.
And the near-term outlook will likely remain challenging for Bermuda reinsurers, according to KBW.
“Overall, we project a group average combined ratio of 164.7 percent, well above last year’s first quarter (103.6 percent) due to the substantial amount of catastrophic activity,” said the analysts in a first-quarter earnings preview of Bermuda firms. “Excluding catastrophes, we project approximately 1-2 points of underlying loss trend deterioration, and expect reserves to continue to develop favourably, but at a slower pace than previous quarters (we expect 6.3 points of releases versus 11.9 points in the year-ago quarter and 9.5 points in 4Q10).
“We believe expense ratios should again see modest pressure due to pressure on top lines, organic growth, and expansion initiatives.”
Earlier this week an analysis by California modelling firm Risk Management Solutions anticipated losses from the twin Japanese disasters alone would cost re/insurers between $18 and $26 billion, making them among the most expensive catastrophes in history.
The KBW analysts expect low- to mid-single-digit premium declines for the Bermuda group in the quarter because January 1 renewals typically saw an across-the-board decline in rates, some dropping by as much as 10 percent.
KBW added that they believe global hardening of prices across all markets is unlikely — though there will be hardening in loss-hit regions like Australia and Japan as well as for certain global catastrophe risks.
The analysts said a widely anticipated round of mergers and acquisitions (M&A) among Bermuda firms remained a distinct possibility although last month it was reported $1 billion merger talks between Validus and Ariel Re had been called off..
“Although the rumor mill was again active in 1Q11, there was no significant M&A activity to speak of during the quarter,” said KBW. “We continue to expect more M&A in Bermuda in the coming quarters, and believe that as many smaller competitors have experienced a weakened competitive position following recent catastrophic events, there is an increased potential to see smaller players potentially look to partner with larger competitors.”
According to KBW, the expected first-quarter catastrophe losses as a percentage of fourth-quarter 2010 equity vary by company, with the biggest hits being taken by Flagstone Re with a 20.9 percent figure and RenaissanceRe with 17.7 percent.
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