Jan. 1 Catastrophe Rates To Soar; Bermuda Executives At Odds On Florida, New Zealand Opportunities

The following article was published in Property Casualty 360º on August 12, 2011:

 

Jan. 1 Cat Rates to Soar: Bermuda Execs at Odds on Fla., New Zealand Opportunities

By Susanne Sclafane

Even as Bermuda executives chatted up the Jan. 1, 2012 reinsurance pricing upside of catastrophe events and model changes recently, midyear 2011 renewal strategies varied widely along with opinions about where to bet reinsurance capital.

According to the cover feature of National Underwriter’s Aug. 8 print magazine, executives like Chris O’Kane, CEO of Aspen Insurance Holdings, predict a $20-$60 billion surge in catastrophe reinsurance demand at Jan. 1, fueled by changes in RMS’s catastrophe model—even if reinsurers experience no major U.S. hurricane losses this year.

Still, nearly all of the executives of publicly trading Bermuda reinsurers that discussed first-half results during earnings conference calls last month described moves to protect their balance sheets by purchasing more retrocessional cover. Beyond simply retaining less cat business—allowing room to grow when the harder Jan. 1 opportunities surface—several say they had nonrenewed chunks of business in certain geographies, offering divergent views on current ranges of pricing opportunities.

Lancashire Insurance CEO Richard Brindle, for example, says his company nonrenewed its entire book of Florida-domiciled cedents, reporting that Lancashire saw no signs of double-digit rate increases being touted by others. “None of the submissions we were shown when properly adjusted for RMS 11 were anywhere near that. Indeed, in many cases they were substantial reductions,” Brindle says during a recent earnings conference.

Executives at Everest Re and RenaissanceRe reported Florida renewal prices in the 10-15 percent range, while Validus CEO Ed Noonan says his company scored hikes around 25 percent on shortfall covers for Florida placements.

Noonan explains to PC360 that with reinsurers, cedents and brokers in varying stages of understanding the impact of model changes during midyear renewals, “you ended up with brokers and reinsurers having a very wide spread as to what they thought the right price should be. In that circumstance, the broker’s job is to do the best for their clients, so they come into the market with a price that in many cases was too low to complete the placement.”

“The brokers sometimes like to play chicken with the market, and they wait as long as they can, thinking that the reinsurers will cave and agree to [lower] prices,” he says. However, in the last days of May for the June 1 renewals, the brokers suddenly realized that wasn’t happening, and they were left with incomplete placements for clients that still needed capacity.

“At that point, the price of capacity for Florida had gone up just because of supply and demand,” Noonan says, explaining how Validus was able to get as much as 25 percent higher on the shortfall cover than the original placement.

Across Validus’ entire U.S. property cat reinsurance book, Noonan says, risk-adjusted pricing was up nearly 12 percent.

Meanwhile, Platinum Underwriters’ CEO Michael Price views the North American cat market as Brindle sees Florida. After adjusting for exposure growth, midyear prices were up low-single digits at best—2-3 percent, Price says.

“We saw instances where it looks like rates increased double-digits on a nominal basis, [but] that same client may have had increased exposure,” he says. “Price improvement is there, but it is muted…in light of changes in models that [indicate] more exposure and [in light of] the excessive actual loss experience of the last 18 months.”

In fact, Price remarks during Platinum’s earning call that the market’s reaction has “taken the fun out of” taking these cat risks on from a reinsurers perspective.

“The nature of the cat market is different today than it was 10 years ago,” he says, explaining the absence of any steep price run-ups. “Perhaps you have such widespread use of modeling that it puts somewhat of a soft floor on pricing.”

He adds that a rapid rush of competitors vying to take advantage of post-event price hikes also results in a less cyclical cat market than the ones that existed prior to the last decade.

But North America isn’t where the cat action is this year, an analyst counters, suggesting that reinsurers should now be seeing post-Katrina-like price hikes in Japan, Australia and New Zealand.

Indeed, on a separate earnings call, Aspen’s O’Kane cites average boosts of 89 percent in Australia and 49 percent in Japan—far higher than the average rate hikes of 13 percent for the United States at midyear.

And at Lancashire, Brindle says his company doubled its Japan premium this year—where renewal pricing jumped 160-180 percent—and started writing in Australia and New Zealand. “We’ve always been vastly skeptical of Australasia business,” says Brindle. “We do not worship at the altar of diversification,” he adds, referring to a strategy that put competitors in Australia and New Zealand when catastrophe events hit those areas.

Following the cat events, he reports 400-500 percent price changes for Australasia. “As you would expect us to do, we’ve taken advantage of that.”

In contrast, Platinum’s Price says there’s no clear sign of a hard market in Australia, and reports that Platinum nonrenewed its entire New Zealand book.

“It’s not obvious to me—in light of increasing exposures—that we actually have substantially better net pricing than prior to the events. So it isn’t clear that you have a truly hard market in Australasia,” he says, citing specific scientific reports of heightened seismic risk in New Zealand—one indicating that the probability of a greater than magnitude 6 quake in the next six months is 30 percent in the Canterbury region.

“Rates on line are nowhere near that level in New Zealand,” he says, referring to premium-to-limit ratios.

“You’re getting more money for the contract, yes, but you also have a substantially elevated risk level. Is that a hard market for cat? Not by my definition,” Price concludes.

Brindle scoffs at such logic. He reports that Lancashire is writing in high enough layers that it won’t get tagged for losses unless a there’s a major quake in one of New Zealand’s biggest cities.

“Without getting into names, it’s pretty strange when you see companies publicly announcing they’re pulling out of Australasia when the rating is certainly the highest level any of us can remember. That seems to be a very odd move,” Brindle says.

Noonan tells PC360 that Validus has seen rate hikes in the 50-80 percent range in New Zealand and Japan, following massive cat losses in those areas. For the rest of Asia, it was 5 percent.

At those prices, Validus is not willing to fully commit a lot more capital to the Asian market, says Noonan, the former CEO of American Re-Insurance (owned by Munich Re). He says that European reinsurers are keeping a lid on pricing, suggesting that the market is underpricing extreme event risk by 50 percent.

“When you’ve got capacity that is that big, why do you deploy it in ways that bring market pricing down, instead of pushing market pricing up?” he asks, wondering out loud about actions he attributes to European reinsurers. “We see this time and again. After the Chilean earthquake…rates were about to go up 100 percent, and they came in with their capacity and rates only went up 50 percent.”

“We saw it in Australia this year, at the recent renewals. Ceding company retentions in Australia are just plainly too low, [but] the big Europeans came in and agreed to lower retention deals at rates below market consensus,” he complains.

 “I wonder to myself, do they have enough price discovery about the rest of the market to understand the impact that their capacity has? With that capacity, they could generate far better returns by deploying it in a way that was more profit driven,” he says, stressing that this is not a criticism, but rather an observation about a different business model.

“I’m not commenting on the companies themselves—just on their practices and how it affects the market,” Noonan concludes.

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