‘Cautious Optimism’ About Bermuda
Analysts at ratings agency A.M. Best are “cautiously optimistic” about a recovery in the Bermuda re/insurance market in 2012.
In an interview with the company’s news service correspondent John Weber, A.M. Best Co. vice president Robert DeRose and senior financial analyst Greg Reisner discussed their just- released special report “Bermuda Market Faces Persistent Challenges.”
“… We still have some concerns about the marketplace,” said Mr. “[But] I would say that we’re becoming cautiously optimistic and that’s largely a result of a recent uptick in pricing momentum, especially for shorter tail classes of business.
“Reinsurers are starting to gain some momentum with their pricing matrix in property catastrophe, especially in loss-prone areas. What we’ve seen is, as a result of those recent losses, there has been somewhat of a contraction in available capacity to the marketplace and primary companies, I think, have stepped up demand for reinsurance protection.
“There are a number of factors playing into that, the losses, the catastrophe model changes. That’s driving, I would say, positive pricing momentum in the market.”
The A.M. Best Bermuda report is available to subscribers at the international ratings agency’s website.
The full transcript of the interview appears below
Weber: 2011, so far, has turned out to be a resilient year for Bermuda-based insurers and reinsurers as the sector’s performance has helped strengthen the capital position of Bermuda writers. Two years ago, before the Chile earthquake, before Deepwater Horizon, before the Japan earthquake and other major events, A.M. Best was saying that it sees more challenges than opportunities in the Bermuda market. To quote the 2009 report, “A balance sheet represents only a point in time, and A.M. Best reiterates that current fundamentals drive future financial condition.”
Bob, broadly speaking, you were talking about these fundamentals deteriorating: persisting pricing pressures, a lack of sufficient yield on investment portfolios, loss reserve releases that appear to be drying up. Well here we are, two years later, are your concerns in these areas greater, especially considering the heavy catastrophe losses?
DeRose: Well, I think that we still have some concerns about the marketplace. A lot of those fundamentals still remain the same, but I would say that we’re becoming cautiously optimistic and that’s largely a result of a recent uptick in pricing momentum, especially for shorter tail classes of business. Reinsurers are starting to gain some momentum with their pricing matrix in property catastrophe, especially in loss-prone areas. What we’ve seen is, as a result of those recent losses, there has been somewhat of a contraction in available capacity to the marketplace and primary companies, I think, have stepped up demand for reinsurance protection. There are a number of factors playing into that, the losses, the catastrophe model changes. That’s driving, I would say, positive pricing momentum in the market.
Because of that, we feel cautiously optimistic that the market is going in the right direction, even with regard to casualty classes of business. Interest rates have been stubbornly low for a prolonged period of time. We think that the primary market and the reinsurers are recognizing that there needs to be a fundamental change there as well. The market has bottomed out and that, hopefully, will see some positive pricing momentum there as well.
Reisner: To sum it up, I would say that those pressures and challenges still exist in the marketplace. But overall, I think we’re pretty encouraged by the discipline that we’ve seen with the reinsurance sector.
DeRose: And the capacity — reinsurers still remain well capitalized and are certainly, I think, up to the challenges that confront them in the current market.
Weber: Greg, this year’s report says that some companies are taking a second look at their coverages and that the flight to diversification, heavily utilized in 2010, is no longer attractive. Why the turnaround?
Reisner: It’s been a challenging year, challenging environment. I think companies are really looking at their portfolios, their exposures and they’re perhaps seeing where they had some modest profitability or low margin business, maybe too much volatility associated with those lines of business — they’re just looking to retool that.
DeRose: Yes, I think reinsurers, over the past year, have definitely honed their risk portfolio on the underwriting side and have certainly gone for those classes and segments where the margin is more attractive. That’s going to bode well for them over the longer term.
Weber: Now, Bob, what might happen to the market in 2012 if losses are near those of 2011?
DeRose: Well, I would think that, what that hopefully would result in, is a more dramatic shift in the pricing momentum upward and possibly even broader. If we were to have losses of the same magnitude, I would think that the pricing then would become more favorable for reinsurers.
I think that primary companies would probably be under yet more pressure as their capital is consumed. We’ve seen, over the past several years, that ceding companies have been increasing their retentions. As of late, with the model changes, what we understand is that primary companies are buying more at the top rather than reducing their retention, so they’re still exposed, and, if we were to have similar catastrophe losses in 2012, I would imagine that it would definitely drive pricing further along the upward scale.
Weber: Greg, could the sovereign debt crisis in Europe have an impact on the Bermuda market?
Reisner: It could, I would say, indirectly. I think, for the most part, a lot of the Bermuda market companies don’t have a lot of direct holdings in these European sovereigns. But to the extent that there is fallout or there is a spike in rates or a contagion or what have you, the fallout could certainly be dramatic. It’s really unknown, the extent of the fallout. I would also say, at the same time, where there might be grave risk or big risk, there could potentially be some opportunities. It’s hard to say how this all plays out over time.
DeRose: Yes, a contagion, obviously, is a big unknown. But if balance sheets are hit by asset write downs, it’s going to, again, play to the reinsurer’s benefit in that primaries will probably need more reinsurance capacity going forward. Again, that would probably improve the pricing matrix going forward. I think it would definitely result in short-term pain for everybody, but probably a longer term opportunity for the reinsurers.
