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New capacity, low yields pressuring Bermuda reinsurance market: KBW

New capacity, low yields pressuring Bermuda reinsurance market: KBW

Low investment yields and new capacity are putting pressure on the Bermuda reinsurance market, according to analysis released by New York-based Keefe, Bruyette & Woods Inc. on Thursday.

According to “Bermuda: A Glass Three-Quarters Full,” the influx of new capacity into the Bermuda reinsurance market is largely attributable to non-traditional sources. “Non-traditional capacity, whether it be cat bonds, sidecars or other collateralized entities, are now a meaningful part of the business and influential in pricing,” the report states. “One CEO estimated that nontraditional capacity is now 10% of the market. With investors attracted to liquidity and direct access to business, these non-traditional vehicles appear likely to grow.”

The impact of this new capacity was apparent during renewals, KBW says. “The midyear reinsurance renewals, dominated by Florida property, appear to have been up in the 0%-5% range,” the report states. “All were disappointed, as new capacity in the market largely offset a rise in demand. However, we would stress that U.S. Southeast property risks appear to be priced for double-digit returns. In other geographies and lines, rates are up significantly in the 2011 loss event areas but otherwise generally flat.”

To the contrary, the weak investment yields plaguing the market are more universal.

“The Bermuda market, like much of the financial world, is facing challenges,” the report states. “Nonetheless, Bermuda is doing OK. Bearing in mind the intrinsic volatility of the business, the Bermudians appear to be reasonably well positioned to produce attractive returns, in our view.”

The report is based on interviews KBW conducted with nine Bermuda-based reinsurers.

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