Despite Bermuda executives' repeated assertions that a hard property-catastrophe reinsurance market has officially arrived, diversified companies reporting first-quarter results last week showed uninspiring premium growth and revealed a handful of income surprises.

“The record number of hurricanes and typhoons in 2004, together with the K-R-W [Katrina, Rita and Wilma] losses from last year are finally giving rise to the first signs since 1993 of a hard market,” said Jim Bryce, chief executive officer of IPC Re, during a conference call. Mr. Bryce defined a “hard market” as one in which “there is a lack of capacity to complete placements, regardless of price.”

IPC Re, the lone monoline property cat writer to report first-quarter earnings last week, was also the only one of seven publicly traded Bermuda companies to show double-digit premium growth. But many executives suggested Jan. 1 renewals were a bit of a bust, with some markets hardening, but not fast enough.

“Overall, the competitive environment… is not bad, although not as robust as we had contemplated,” said Evan Greenberg, CEO of ACE Limited, a diversified insurer and reinsurer. “It may be a matter of velocity, not direction,” he said, noting that rates are generally increasing for short-tailed classes of business.

ACE and several other Bermuda companies, including PartnerRe and XL Capital, said some portions of reported declines in first-quarter premiums were misleading, attributing them to foreign exchange adjustments, late-reporting adjustments and other unusual items. (The unusual item in ACE's case was a prior-year premium adjustment on a crop insurance book.)

For others, like Aspen Holdings, Everest Re Group, Platinum Underwriters Holdings, Ltd and XL again, the bulk of their premium declines resulted from changes in appetite for certain business segments.

Chris O'Kane, Aspen's CEO, said his company was “extremely active in refocusing…catastrophe exposures,” adding that this meant “a meaningful reduction” in premium, which plunged nearly 29 percent.

He also said Jan. 1 pricing on cat risk was disappointing, but that the market has hardened considerably in the last six weeks, bringing with it the promise, in the second quarter, of being able to write business rejected earlier in the year as underpriced.

Michael Price, Platinum's CEO, attributed much of his company's 41 percent reported decline in net premiums to a 158 percent drop for the finite risk segment, “and to a lesser extent in our traditional segments, reflecting our strategy of underwriting for profitability, not market share.”

Premium declines weren't the only lowlights of early reports from Bermuda, with two unexpected multimillion-dollar charges dimming an otherwise bright income picture painted by stellar combined ratios and good investment results.

At Everest Re, previously undisclosed additional losses from last year's hurricanes totaling $50 million hit the books in the quarter, while ACE reported an $80 million pretax settlement with attorneys general in three states and the New York state insurance department, relating to ACE's participation in finite deals with insufficient risk transfer and to past involvement in broker bid-rigging activities. (See related story, page 7.)

Additional details of some of the individual earnings reports follow.

IPC Holdings, Ltd, reported first-quarter net income of $62.6 million, a jump of 43 percent over last year. IPC also reported the biggest premium jump (15 percent) and the most improved combined ratio, with those results reflecting the company's focus on property cat business.

“Property cat is the sweet spot of the reinsurance marketplace,” Mr. Bryce stated. He said that hard market conditions are “starting to reach crisis proportions” on U.S. national accounts, retrocessional business, coastal risks and any Florida-specific business.” But “the property cat dislocations are not taking place across the board on pro-rata, per-risk excess, or facultative” deals, he said, explaining less bullish growth reports from “generalist reinsurers.”

For property cat, “pricing has not peaked. It is going up daily,” he said, adding that reinsurers are benefiting from higher cedent retentions and higher deductibles and reduced aggregate limits on underlying business written by primary insurers.

He noted, however, that non-U.S. business “is disappointing,” with rate hikes lagging those from U.S. business. In the United States, loss-impacted programs saw rate jumps of 50-to-100 percent at Jan. 1 and non-loss impacted programs, 15-to-20 percent.

PartnerRe reported the largest growth in net income–at 73 percent–attributing the jump to the absence of large losses which dampened first-quarter results in 2005 and to strong investment performance. Net income and the combined ratio for first-quarter 2005 included the impacts of $63 million in losses from winter storm Erwin as well as a large energy loss in Canada.

Partner Re CEO Patrick Thiele, commenting on market conditions, described “a mixed reinsurance market with a wide variation in expected returns.” Like Mr. Bryce, he said, “It reminds me much more of a post-[Hurricane] Andrew pricing cycle in 1993, 1994, than the 2001-2003 market,” with pricing and profitability gains primarily in the property market.

Supply is struggling to cope with demand, he said. “Given the current level of that imbalance, we expect the market to remain at an attractive level of profitability through the Jan 1, 2007 renewal season,” he said, adding that PartnerRe is allocating more capital to the coverage of U.S. wind risk in response to the needs of its reinsurance clients and the improved economics of the business.

ACE, in spite of its settlement charge which amounted to $66 million after taxes, reported a 12 percent jump in first-quarter income. While ACE reported that net property-casualty written premiums rose only 2 percent to $3.4 billion in the quarter, the first-quarter combined ratio came in 10 points under break-even, at 90.2.

ACE said that insurance premiums in North America rose only 2 percent, while global reinsurance showed the biggest jump–at 14 percent.

Mr. Greenberg noted, “It is a hard market for large-account property business” in the United States and London, where rates continue to rise month-by-month and terms continue to tighten. On the other hand, he said that ACE was forced to shed volume for small and midsized U.S. non-cat property business, where the market is softening.

He added that rates for U.S. casualty insurance for most classes are stable to slightly down.

Globally, Mr. Greenberg said there is a lack of new business in many classes. “When it is available,” he said, new business competition, “particularly on large accounts,…is ferocious.”

Turning to reinsurance, he said there is a “similar story,” characterizing U.S. cat reinsurance as the hardest market, while noting that international cat business is tightening, but not enough.

Although Mr. Greenberg was generally optimistic about improving market conditions, at one point during the conference call he suggested that ACE had faced a pushback on rate increases earlier in the year. “We came out of the box in January, pretty aggressive about rate movement. We really tried to push the market pretty hard, and we got bloodied a little bit as a result.

“We adjusted and we are writing business [at a level] where we think the price justifies the risk and return,” he said.

Everest Re reported a slight income boost over last year's first quarter in spite of increased loss estimates for last year's hurricanes.

Stephen Limauro, Everest's chief financial officer, said loss additions were principally for Wilma and Rita, and that there was some development on marine and energy business, where Everest saw some losses begin to invade high layers. There was some movement in losses from Mexico, “where the loss adjustment process was…overwhelmed by Wilma,” he added.

Although Everest reported a combined ratio more than 5 points less than break-even at 94.5 (with 6.9 points related to the hurricane development), analysts who zeroed in on the top line were disappointed.

Asked whether a prediction for double-digit growth in 2006, made earlier this year when Everest reported fourth-quarter 2005 results, would still hold, Everest's CEO, Joseph Taranto, said, “Probably not.”

“Two items that affected us in the first quarter will impact the second quarter in our insurance operations,” he said, referring to declines in workers' compensation and premiums related to a credit program.

Those dips pushed gross premiums for Everest's U.S. insurance segment down 21 percent, while premiums grew 8 percent for worldwide reinsurance, helping to bring total gross premiums for the group up 1 percent to roughly $1.1 billion.

Mr. Taranto said, “I'm still bullish on the second half of the year,” pointing to several new programs that should “propel growth.”

In particular, he said Everest will be the beneficiary of the rift between American International Group and a specialty agency of C.V. Starr (headed by former AIG Chair Maurice Greenberg), with Everest signing on to accept roughly $250 million in contractors liability and public entity liability business in California.

And in June, Everest will start writing small commercial property risks on an excess and surplus lines basis, where “brokers have a crying need for someone to come into the vacuum that's been created,” said Mr. Taranto.

During the call, Mr. Limauro noted that Everest is remixing its business on the property side. If a replay of the 2005 loss events occurred in 2006, he said Everest's losses “would be down appreciably–on the order of half what they were” last year.

XL Capital is determined not to replay last year, according to CEO Brian O'Hara, who noted that lower premiums in the first quarter reflected “previously announced corporatewide risk management initiatives.”

In particular, net premiums written for reinsurance operations were down more than 18 percent as a result of such initiatives and selective treaty cancellations.

In a written statement, Mr. O'Hara also said that a concentration of European renewals, impacted by lower property rates and foreign exchange movements, contributed to a declining top line that saw net premiums fall nearly 12 percent overall.

Higher-than-expected investment income drove a nearly 5 percent increase in XL's first-quarter profits to $458.5 million.

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Multimillion-Dollar Charges, Premium Dips Dampen Early Bermuda Returns

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