By CYRIL TUOHY, managing editor of Risk & Insurance®
Imagine the disappointment among insurance carriers if the next hard market turns out to be a weakling, a softy--no, worse--a "sissy" market, a market in which rates don't really harden at all, a market that simply doesn't show up, a fickle market that hardens selectively, a market that upends previous notions of market cycles?
Could such a market even be possible? Of course it could. Is it on its way? Some would even argue it's already here.
"What if economic growth does not undergo a strong rebound over the next several years but remains at relatively weak levels?" the analysts at Keefe, Bruyette & Woods wrote in their 2011 insurance outlook, titled "2011 Outlook: Stop Waiting for the Sky to Fall."
"In our view, in such an economy, the traditional cycle will become significantly more muted," the authors wrote.
For insurance carriers, 'tis the season of Bad Santas: a weak economy, soft pricing, lower premiums, lackluster investment portfolios. How are carriers expected to survive? They aren't, unless they are willing to pair up and survive through mergers and acquisitions.
Might, say, ACE take over Chubb? Could Berkshire Hathaway, say, help itself to RLI Corp. on the cheap? Is it conceivable for specialty carrier Markel Corp. to make a play for OneBeacon? That's all in the cards, given the depressed industry valuations, KBW analysts said.
The market, according to the analysts, is one betwixt and between, unsure of whether it wants to turn into granite or hold out a little longer in the relative softness of limestone. Despite a property/casualty industry upgrade earlier this year to "stable" by Fitch Ratings, some carriers are quickly running out of levers for survival.
"Many companies have been utilizing their capital management tools to mitigate the drag of excess capital on return on equity in recent quarters, but that strategy has its limits and doesn't necessarily position a company for improved operational success in the future," KBW analysts wrote.
Commercial and specialty lines, KBW said, are "going nowhere fast," with the greatest rate declines in 2011 in general liability, commercial property, inland marine and commercial auto. Pricing in other commercial lines are staring at flat to low single-digit decreases next year, with the pricing pressure most acute among middle-market and large accounts, KBW said.
One of the few bright spots for carriers is workers' comp, but only in Florida, where the state has approved a 7.8 percent rate increase, and in California, where carriers are filing for low-to-mid single-digit rate increases.
Profiting from difficult economic straits isn't something buyers normally brag about, but for those sitting on the other side of the negotiating table, there's nothing but sunny skies ahead in 2011.
Weak prices mean more power for insurance buyers, and with torrents of capacity flowing every which way, brokers had better come prepared with better prices, or contracts with superlenient terms and conditions.
Bermuda-based reinsurers, who had a good year in 2010, broadened their business mix and remain well capitalized, are "still treading (clear blue) water" going into 2011, KBW analysts said, with emphasis on the verb "treading."
Pricing in 2011 is expected to fall, possibly reaching double digits next year, barring any major catastrophe. 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," KBW analysts said. Almost every Bermuda market player is a "potential buyer or seller."
Likeliest target companies 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.
December 20, 2010
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