NU Online News Service, July 14, 3:48 p.m. EDT

Bermuda reinsurers are expected to have a difficult second quarter, with a challenging near-term outlook, as pricing remains under pressure with no sign of rate increases, and profits hit by recent losses, according to a financial analyst's report.

The Bermuda outlook was contained in a Keefe, Bruyette & Woods (KBW) analysis of property and casualty second quarter earnings that otherwise described activity within the industry as "ho-hum."

For the Bermuda companies, KBW said second quarter catastrophic activity was "mild," but noted that losses from the Deepwater Horizon oil rig explosion and subsequent spill into the Gulf of Mexico are expected to erode current-quarter profitability.

But KBW noted the spill is not expected to result in a capital event for any reinsurer.

"Additionally," KBW said of the Bermuda companies, "we remain concerned about deteriorating underwriting profitability and lower favorable reserve development going forward."

KBW said pricing and investment results remain under pressure for the Bermuda companies, and the firm added that this hurricane season is also expected to be above-average.

"Despite these pressures," KBW said, "we still expect to see full-year [return on equity] near 10 percent, and excluding catastrophes, we project modest premium growth and solid underlying underwriting profitability, leading to low-single-digit sequential book value growth in the second quarter."

For personal lines insurers, KBW said carriers with risks concentrated in the Midwest U.S. are expected to have material weather-related losses due to large thunderstorms, heavy rains and tornadoes throughout the quarter.

Pricing for both homeowners and auto risks continues to gradually move higher, KBW said. Loss frequency for homeowners was up low single digits while severity was up mid-single digits. For auto, loss frequency and severity trends were relatively flat in the quarter.

For the p&c industry as a whole, KBW said, "Life seems a bit ho-hum" as of late, noting that the industry weathered the housing and financial crises well and thus appears to have avoided the brunt of regulatory changes in the financial services industry.

"The second quarter did produce some cuts and bruises," KBW said, "including Gulf oil rig-related losses, some flooding in Europe and several small tornadoes and other spring storms in the U.S., however we view such losses as fairly typical of the business."

KBW said it expects very little premium growth for the quarter due to the pricing environment and weak economy.

For investments, KBW said declines in equity market values will largely be offset by gains in fixed income portfolios.

KBW said it continues to favor insurance companies "with track records of successfully managing difficult markets" and with conservative balance sheets, diversified lines of business and favorable long-term growth prospects.

The firm cited ACE Limited, Arch Capital Group, Allied World Assurance Holdings and Marsh & McLennan Companies as its favorites.

Special Reports /

Bermuda Companies Challenged In 2Q, But P&C Industry Fares Well

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