Monday, 12 March 2012
A brave face in Bermuda
The Bermudians did not enjoy a great 2011 by any stretch of the imagination.
Many of the leading companies reported losses, negative returns on equity and book value, combined ratios well in excess of 100% even after enjoying continued significant boosts from further reserve releases.
Interestingly, however, they all posted healthy premium volume increases despite not benefiting from a significant hardening in rates last year.
And capital bases were not hit by the dodgy year.
The companies entered 2012 with their egos perhaps a little bruised but capital intact and talk of being in a fit state to take advantage of the upturn in underwriting conditions that they said was spotted at year end and they hope will continue and accelerate in 2012.
The talk of rate increases from the Bermuda reinsurers was perhaps more evident than from their still more diversified European competitors.
This was because, despite recent efforts by most to build decent insurance books to complement the reinsurance business and provide more balance, they are still more cat prone. But the talk was far from frenzied and still laced with a decent portion of hope.
AXIS, as with most of the reinsurers, posted good news on premium volumes as it reported a 12% increase in net premiums written overall last year up to $3.3bn.
But the good news stopped there. The group recorded a combined ratio for the year of 112.3% against only 88.7% in 2010.
Somewhat surprisingly AXIS, as with many of its peers, continued to boost results with reserve releases. For the last quarter it posted a prior year reserve development of $78m that boosted the combined ratio by 9.2 points. Investment income was down 5% in the fourth quarter.
Commenting on the 2011 financial results, John Charman, Chief Executive Officer and President of AXIS Capital, said: “An extraordinary series of costly natural disasters, which are estimated to have cost our industry over $100bn, took centre stage in 2011. These occurred against the backdrop of a prolonged soft market at perhaps the weakest phase in its business cycle, when adequate pricing remained extremely difficult to obtain. Further, on the asset side, we experienced the persistence of abnormally low interest rates, which made low-risk investment income difficult to achieve.”
Mr Charman said that the ‘eagerly awaited cyclical upturn’ will not occur ‘all at once’, as it has so often in the past and as many underwriters would like to see. “It is a cycle change, not an event change. Some business areas will continue to remain under pressure. I estimate the firming process, which has already started in some products, will be gradual, gaining ground risk by risk, product by product, geography by geography, and year by year. The current market turn may require a few years to regain the pricing eroded over the last five or six,” he added.
AXIS’s strategy will therefore be to proceed with ‘steadfast caution’, said Mr Charman in a typically forthright and honest statement of the facts.
Renaissance Re is the classic Bermuda catastrophe reinsurer and as such over the years has offered investors something of a rollercoaster ride as it delivers great profits for many years interspersed with the occasional dramatic loss.
It also reported strongly higher premiums up 23.1% to $1.435bn and an equally nasty uptick in the combined ratio for the year from 45.1% in 2010 to 118.6% last year.
The combined ratio and overall result was again boosted by more reserve releases. In the fourth quarter the group’s reinsurance segment benefited from $32m of favourable development on prior year reserves, compared to $65.7m for the fourth quarter of 2010. For the full year favourable development on prior accident years was $132m, compared to $302.1m in 2010.
All the experts are agreed that the reserves releases are running dry overall and these figures perhaps confirm this as they are sharply lower. But many in the market will be surprised to see such comparatively high releases still available at this stage.
Less surprisingly Renaissance Re reported investment income well down from $320.9m in 2010 to $180.1m last year to help deliver a loss of $92.2m last year against a profit of $702.6m in 2010.
Neil Currie, CEO, put on a brave face as he reminded investors that book value had still grown in the fourth quarter despite the ravages of the catastrophes. “I am pleased to report growth in tangible book value per share plus dividends of over 3% in the fourth quarter, despite losses from the floods in Thailand. For the full year, we experienced a modest 1.8% decrease in tangible book value per share plus dividends in one of the most costly years in history for insured catastrophes,” he said.
Mr Currie also stressed the positive for clients, reminding investors that it is the job of reinsurers to actually pay valid claims quickly when they fall due. “During the year, we supported our clients by paying valid claims with industry-leading speed and providing much needed capacity,” he said.
Mr Currie said that, despite the tough year, Renaissance Re had entered the January 1 renewal season with a ‘strong balance sheet, industry-leading ratings and an experienced and disciplined underwriting team’. Armed with these tools the company was able to ‘assemble’ a high quality portfolio of risks and one that reflects ‘firmer pricing’ for property catastrophe reinsurance. “We believe we are well positioned to grow in 2012,” said Mr Currie.
PartnerRe experienced a similarly rocky year as net written premiums fell by 5% to $4.5bn, investment income fell to $629m and the combined ratio rocketed up to 125.4%. This all helped deliver a loss of $520.3m for 2011 against a profit of $852.6m in 2010.
PartnerRe President & Chief Executive Officer Costas Miranthis said 2011 was a ‘very challenging’ year. But he also said that the group had emerged from the catastrophes with in excess of $7bn of capital and so is ‘well-positioned to benefit from opportunities as the reinsurance market improves’.
Mr Miranthis said that during the January 1 renewals it had seen ‘encouraging signs’ in most of its business lines. “Chronic premium rate erosion appears to have been halted nearly everywhere, and risk-adjusted premium rates increased in several areas—some significantly and some more modestly. In this environment, we are pleased with the outcome of the January renewal. We achieved a better balanced risk profile to optimise risk adjusted returns and we added a number of new client relationships.”
Alterra reported net profit of $65.3m compared to $302.3m in 2010.
Property and casualty gross premiums written reached $1.9bn which represented an increase of $494.9m, or 35.2%. The combined ratio on property and casualty business was a healthy 98.2% compared to 85.7% in 2010 and the rest of the sector. Though it must be noted that the comparison is not really valid in this case because of the merger with Harbor Point in 2010.
The combined ratio was hit by property catastrophe event and significant per-risk net losses of $253.4m, net of reinstatement premiums, compared to $54.9m in 2010. The hits were mainly felt by Alterra’s reinsurance and Lloyd’s operations.
Alterra was another Bermudian to assuage the losses by reporting net favourable development on prior years’ loss reserves. It reported releases of $153.3m, equivalent to 10.8% reduction in the combined ratio. This compared with the lower number of $105.5m, equivalent to 9 combined ratio points, in 2010.
Alterra bucked the investment trend with a net investment income result of $234.8m compared to $222.5m in 2010, an increase of 5.6%.
Marty Becker, President and Chief Executive Officer of Alterra, said that the company is ready to take advantage of an industry on the ‘cusp of change’. “With the industry apparently on the cusp of change, we believe Alterra is particularly well positioned to take advantage of the expected improvement in prices,” he commented.
Endurance Specialty reported a net loss of $93.7m for 2011 versus net profit of $364.7m in 2010.
Again volumes were up impressively as net premiums written were reported as $1.98bn, an increase of 12.3% over 2010.
But the combined ratio was 112.9% and, as elsewhere, still included 9.3 percentage points of favourable prior year loss reserve development. Catastrophe losses accounted for 24.5 percentage points.
Net investment income was down to $147m, a decrease of $53.3m over the same period in 2010. As with most of the Bermudians, book value of $50.56 per diluted common share was down 4.1% from December 31, 2010.
David Cash, Chief Executive Officer, joined his fellow CEOs and adopted a stoically brave face and looked to the future. “While 2011 was a challenging year with global industry catastrophe losses in excess of $100 billion, Endurance is well positioned to benefit from the improving underwriting conditions we are beginning to see in many of our businesses. I am pleased with the improved pricing we were able to achieve in our reinsurance portfolio at January 1, particularly in our catastrophe lines, and our insurance business is also starting to see positive pricing momentum in a number of places.”
Allied World Assurance Company Holdings (AWAC) is actually based in Zug nowadays so really a European company but is included in this section of the review as it still reports in US dollars.
It reported net income for the year of $274.5m compared to net profit of $665m for 2010.
The company reported gross premiums written of $1.94bn for 2011, a 10.3% increase compared to $1.76bn in 2010.
The combined ratio was 95.9% last year compared to 84.9% for 2010. This was boosted by net favourable reserve development on prior loss years of $253.5m, a benefit of 17.4 percentage points to the loss and loss expense ratio.
In 2010, the company recorded net favourable reserve development on prior loss years of $313.3m, a benefit of 23.1 percentage points to the loss and loss expense ratio.
The 2011 loss and loss expense ratio was impacted by $292.2m of net losses, or 20.1 percentage points, from global catastrophes that occurred during 2011. This compares to $164.6m of net losses, or 12.1 percentage points, from major loss events in 2010.
President and Chief Executive Officer Scott Carmilani commented: “In the face of a number of challenges that confronted our company and the insurance industry globally, Allied World continues to generate solid profitability and growth in book value. Our three operating segments all contributed, with each experiencing premium growth in 2011. We again benefited from focusing our efforts on targeted lines and select geographies throughout the world. Collectively, our gross production was up by 10% for the year with our new business initiatives driving the increase.”