U.K. Floods Not Market-Changing Events: IPC

Property-catastrophe reinsurer IPC Holdings announced that storm losses had pushed down second-quarter net income by 74 percent.

The firm said yesterday it had earnings of 37 cents per share--just below the high end of the range the company had estimated last week.

IPC warned then that catastrophe losses from storms in Australia and floods in the United Kingdom would push earnings down to a fraction of last year's second quarter, estimating that this year's second-quarter result would fall in the range of 20-to-40 cents, compared with $1.50 per share in the same quarter last year.

In dollars, net income for the second quarter was $28 million, compared with $104.4 million in second-quarter 2006.

This year's lower second-quarter figure reflects the impact of $62.6 million of losses incurred for flooding in northern England in June and $50.1 million for a storm and subsequent flooding in New South Wales, Australia in early June.

These losses were partially offset by reductions to reserves for prior events totaling $26 million--the largest component of which was a reduction of $16 million for Hurricane Katrina.

However, with floods continuing this month, Jim Bryce, IPC chief executive officer, speculated during a conference call this morning that July U.K. losses will be at least as high as June.

Net premiums in the quarter declined nearly 10 percent to $102.2 million in the quarter. Mr. Bryce attributed the decline, in part, to increased cedent retentions and nonrenewals. He said rates were generally flat in the United States and down by single digits outside the United States.

"Loss activity in the [third] quarter is likely to lead to rates stabilizing, at a minimum--and more likely increasing on renewals in the U.K., Australia and possibly mainland Europe in 2008," he said.

He added, however, that events of this size will not prompt dramatic market changes because reinsurer appetites for business remain strong.

"The earnings from last year [and] this year are accumulating. Capital management is...really the biggest issue" facing the industry, he said, adding that for adequately priced programs, "there's a lot of capacity out there. And, unfortunately, the reverse is also true," with capacity available for underpriced deals as well.

"The market needs the losses to keep it healthy, but we do not have market-changing events taking place so far," he said.

Responding to questions raised by analysts who noted that IPC estimates of U.K. and Australia catastrophe losses are comparatively higher than other reinsurers, IPC executives noted that their figures are conservative in several respects--intentionally so, they said, given past experiences of underestimating losses related to 2004 hurricanes.

Demonstrating IPC's conservatism, Mr. Bryce said that while only one cedent has actually reported a loss related to the U.K. floods to IPC, the bulk of IPC's loss estimate--95 percent of it--relates to 10 other programs on which the company believe cedents will ultimately report flood losses.

He also said that while U.K. floods in June could be treated as two events (based on hours-clauses in reinsurance contracts that designate each 168-hour, or seven-day period as one event), IPC has treated the floods as a single event in developing its loss estimates. If the floods are actually two or more events, more losses will fall back to ceding companies because their retentions apply separately to each subsequent event.

John Weale, IPC chief financial officer, also questioned loss reports for the Australian event indicating a total industry loss of one billion Australian dollars ($880 million US), noting that two IPC clients have reported losses of 1.6 billion Australian dollars ($1.4 billion US) to the company.