While many had predicted that catastrophe losses of $50 billion or more would be enough to turn the market, rates have not hardened despite insured cat losses of $100 billion in 2011, said the top officer of Alterra Capital Holdings Ltd.
"The forecast that prices would climb has not yet materialized," W. Marston Becker, president and chief executive of Alterra, said in his annual letter to shareholders.
Becker issued the letter ahead of the company's scheduled Feb. 8 earnings release. Alterra expects to post net income of $55 million to $70 million for 2011, with a combined ratio for 98 for the year, he said.
The company's cat losses were $250 million for the year, about 8.6% of its operating shareholder equity at Jan. 1, 2011.
"Although these losses consumed a large proportion of our 2011 earnings, the good news is that Alterra expects to be one of the few members of our peer group to have had positive earnings," Becker said in his letter.
While Becker wouldn't describe the market as hard, he said there has been some improvement. Prices are no longer trending downwards materially, and terms and conditions are firming, he said.
"Meaningful price increases, however, have only occurred in the property cat lines of business, with those increases averaging 5% to 15%, except in those non-peak-zone regions that have had material events," he said.
In some of those regions, increases have been significantly greater at 50%, although those increases were on top of very low expiring rates, Becker said.
"Overall, we expect pricing to be up 2% to 5%, but there remains potential for some further softening in certain lines," he said.
The company has shifted its business mix due to market conditions, and now writes more short-tail business than long-tail. About 56% of the company's gross premiums written for 2011 stemmed from short-tail lines versus 44% from long-tail lines. Also, the gross premiums written were divided into 57% reinsurance and 43% insurance.
Becker outlined a number of reasons why pricing in the industry should be improving more — low existing return on equity, high accident year combined ratios, low investment yields, an extraordinary cat year, and the introduction of version 11 of the RMS wind model.
"Probably above all, it is just the right thing to do to ensure the long-term profitability of our industry," Becker said.
But despite of the extraordinarily high cat losses, "capital levels for the industry remain intact, there are no unusual external or rating agency pressures for the industry to change, and we have not had the large 'failure' that has typically accompanied other cycle turns. The bottom line is — while the environment is not terrific, there is not yet enough pain to change behavior," Becker said.
Becker said the company was pleased with its current mix of business, and given market conditions, "we do not expect to vigorously pursue new lines of business or asset classes. Unique opportunities will occasionally present themselves, and we will stay alert," he said.
Alterra, which was formed in May 2010 when Max Capital Group Ltd. merged with Harbor Point Ltd., could be interested in mergers and acquisitions as long as it did not dilute the company's book value, Becker said.
M&A has a role to play "in the present environment, although it is certainly challenging with many insurance company shares trading at significant discount to book value," Becker said. "On the other hand, with our industry generating lower ROE’s, still having excess capital, and having a limited ability to grow organically, M&A activity can change a company’s relative positioning and be rewarding to shareholders."
Such transactions require a joint strategic purpose for both organizations and "a strong belief that you are creating a better organization. Alterra remains quite sensitive to diluting tangible book value, so any opportunities would need to be structured accordingly," he said.
Earlier this year, Alterra said it would be able to expand into new lines of business with the launch of a local reinsurer in Brazil. Adam Mullan, CEO at Alterra at Lloyd's, said the new reinsurance company, Alterra Resseguradora do Brasil S.A., will complement its existing Alterra at Lloyd's office in Rio de Janeiro. The company will now be able to write marine, aviation and surety reinsurance from the new Rio de Janeiro-based reinsurer, he said.