NU Online News Service, March 18, 12:30 p.m. EDT
A new wave of capital into the market, similar to what happened after Hurricane Katrina, is unlikely to occur after the magnitude 9.0 earthquake in Japan, as post-Katrina investment returns have not had the desired results, according to analyst firm Keefe, Bruyette & Woods.
In a "Property and Casualty Industry Update," KBW called post-Katrina investment returns "marginal." KBW added that "the world, particularly financial markets, has undergone a lot of change since 2005. There simply isn't that excess capital available in the world."
Regarding the impact of the quake on the insurance industry, KBW said it is sticking to its prior comments that a global hardening across all sectors is unlikely, as the "industry remains capital rich." But KBW said it has revised prior expectations of 5-10 percent rate declines for U.S. property and catastrophe reinsurance to flat to up slightly. For non-U.S. catastrophe, KBW said it expects higher rate increases.
KBW also said mounting losses from Japan, Australian floods and Cyclone Yasi, the September 2010 and February 2011 New Zealand earthquakes, and the February 2010 earthquake in Chile have absorbed a "significant portion" of excess capital. "While we still view that excess capital is abundant, we are obviously closer to the tipping point."
Although these losses may not lead to rating downgrades, KBW said smaller reinsurers may find themselves at a competitive disadvantage for July renewals. "Hand in hand with the weakened position of smaller players, we see potential for more [mergers & acquisition] activity."
KBW said it expects "great fluctuations" in the stocks of exposed companies as they report loss estimates. The firm recommended that investors should take advantage of the dips "to buy quality companies such as" ACE Limited, Arch Capital Group, Allied World Assurance Company and PartnerRe.
"In our view, even if one of these companies takes a large loss, we are confident in their ratings, financial position and market positioning in the aftermath."
Earlier this week, catastrophe modeling firm AIR Worldwide said industry losses could be between $15 billion and $35 billion. KBW noted that many unknowns still exist, and added that the wide range in the expected loss estimate reflects those unknowns.
"We are reminded of the aftermath of Katrina when initial estimates were proven far from accurate," KBW said.
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