Reinsurance Fallout from Q1 Catastrophes Continues
By Marius | Published May 09, 2011
The unprecedented first quarter of 2011, with a prevalence of severe natural catastrophes hitting the Asia Pacific region, has impacted the global reinsurance industry substantially. More established players in the reinsurance market are set to release their quarterly accounts and reassess their capacity to now meet annual growth targets.
The world’s biggest reinsurance group, Munich Re, is soon expected to post negative results for the first quarter. The company has committed to an estimated €2.7 billion (US$3.9 billion) in natural catastrophe insurance claims resulting from recent natural disasters including the two earthquakes in Japan and New Zealand as well as the severe flooding in Australia. In lieu of extensive disaster claims, Munich Re has already abandoned its full-year €2.4 billion (US$3.45 billion) net profit targets.
These results will follow Munich Re’s big 39 percent decline in profits in the fourth quarter of 2010 due to the large claims for major floods in Australia and the September 2010 earthquake in New Zealand.
Last month, Nikolaus von Bomhard, chief executive of Munich Re, addressed company loss concerns in a statement: “The losses from natural catastrophes mean that the result for the first quarter will be clearly negative,” he said.
Industry analysts predict Munich Re will report a US$1.5 billion first quarter net loss. This would be the German reinsurer’s first net loss since the third quarter of 2008, when the company posted a €3 million (US$4.3 million) net loss in the middle of the global financial crisis. Industry forecasts further show Munich Re making a €1.2 billion (US$1.72 billion) operating loss, which would be the first operating loss reported since fourth quarter 2002, when the company was hurt by the crash of the technology bubble in the stock market.
Munich Re is not the only multinational reinsurer to feel the financial burden of large catastrophe payouts. Other major reinsurance companies have posted mixed results for the first quarter of 2011.
Swiss Re Group, the world’s second largest reinsurer, last week posted a US$665 million quarterly loss, which was ultimately less than the US$1 billion analysts had anticipated.
Hannover Re meanwhile, managed to turn a surprise first quarter profit largely on the back of a tax rebate, increases in investment returns and the freeing up of reserves once used to cover past claims. Despite remaining cost-effective so far, Hannover Re declared that it too would cut its net profit forecast from €650 million (US$912 million) down to €500 million (US$702 million) for the year. The German reinsurer confirmed that the previous profit targets would be no longer attainable because the full-year budget for major claims had already been exceeded due to first quarter catastrophe costs.
American International Group Inc. (AIG) suffered an 85 percent decrease in first-quarter profits primarily due to costs tied to claims from the earthquakes in Japan and New Zealand and to restructuring its bailout from the US government. Since receiving the government bailout, AIG has been restructuring its global operations, selling off international insurance subsidiaries to generate sufficient capital to repay the US taxpayer. AIG’s general insurance business subsidiary, Chartis International, notably incurred an operating loss of US$463 million compared to an operating income of US$879 million in the first quarter the previous year. The loss is attributed to large claims from the Japanese earthquake and 2011’s cumulative catastrophe losses of US$1.7 billion compared to US$0.5 billion during the same period a year ago.
AIG president and CEO Robert H. Benmosche remained positive despite Chartis’ quarterly results: “At Chartis, our worldwide property-casualty business, first quarter results were affected by significant catastrophe losses related to the Japan earthquake and subsequent tsunami, while overall net premiums increased, customer retention remained strong, pricing was stable, performing better than industry averages, and our reserve positions tracked our expectations,” he said in a statement.
The heavy catastrophe claims from the Asia Pacific region also impacted profits at Warren Buffett’s conglomerate Berkshire Hathaway Inc, which is also a major reinsurance player. Net earnings for the first quarter are estimated to be US$1.5 billion, down from the US$3.6 billion earned for the first quarter of 2010.
The frequency of natural disasters early this year has hurt global reinsurance companies’ ability to adequately provide a financial backstop to insurance companies facing heavy claims. Industry analysts have begun to speculate how much worse 2011 could become.
Reinsurance companies typically face their biggest catastrophe damage claims in the second half of the year, when the North Atlantic hurricane season is in full effect. 2010 was a relatively quiet year on the US coastlines; hurricanes remained largely offshore, sparing US coastal properties and captive insurers. This year could be different. Weather Service International forecasters have predicted an active 2011 Atlantic hurricane, with 15 named storms, eight of which are expected to become hurricanes.
The current tumultuous environment however is not entirely bad news for reinsurers and their insurance company clients. Big damage payouts combined with low interest rates and other factors enable reinsurance companies to justify and exact higher cover rates in areas where risk will remain high
Munich Re noted that the adjustments made since the Japan earthquake and tsunami may not be reflected in the annual reinsurance contracts renewed from April 1, but price increases should filter through in the rest of the year. Munich Re Chief Executive Nikolaus von Bomhard noted: “At any rate, we expect general price increases in the current financial year.”
Swiss Re confirmed that the pricing environment was now predicted to harden and turn to the reinsurance companies’ market advantage. “We expect the market hardening that we previously forecast for 2012-2013 to take place much sooner,” Swiss Re Chief Financial Officer George Quinn added in a statement.
The global reinsurance industry has faced a tumultuous year thus far. Many companies have had their annual claims budgets overwhelmed by the cost of a series of unprecedented natural disasters in the Asia Pacific region. The disaster in Japan alone is one of the costliest natural disasters in the history of the global insurance industry, having caused estimated insured losses of between US$12 billion and US$25 billion, according to catastrophe risk modeling firm Eqecat. In the aftermath of these disasters, reinsurance will continue to be in demand services to help minimize potential losses for companies operating in all regions across the globe.
Insurance Companies Mentioned
The American International Group is a leading international insurance organization with operations in more than 130 countries and jurisdictions globally.
Berkshire Hathaway is a conglomerate holding company that oversees and manages a number of subsidiary companies worldwide. Its core insurance subsidiaries include GEICO, National Indemnity, and reinsurance giant General Re. Berkshire Hathaway was founded in 1955 and is headquartered in Omaha, Nebraska, United States.
Chartis has over 45 million policyholders in 160 countries worldwide. With more than 90 years experience in the insurance industry, and a range of progressive products, Chartis aims to help clients comprehensively manage risk
Hannover Re is the third-largest reinsurer in the world, with a gross premium of around EUR 10 billion. It transacts all lines of non-life and life and health reinsurance and maintains business relations with more than 5,000 insurance companies in about 150 countries. Its worldwide network consists of more than 100 subsidiaries, branch and representative offices on all five continents with a total staff of roughly 2,100.
Munich Re focuses on providing financial stability, and consistent risk management based on its extensive solution-based expertise. It operates in all lines of insurance, with around 47,000 employees throughout the world. Especially when clients require solutions for complex risks, Munich Re is a much sought-after risk carrier. The primary insurance operations are mainly concentrated in the ERGO Insurance Group. In international healthcare business, Munich Re pools its insurance and reinsurance operations, as well as related services, under the Munich Health brand.
Swiss Reinsurance Company Ltd was established in 1863 and is present in more than 20 countries. Swiss Re provides reinsurance products and financial service solutions. It offers various reinsurance products covering property, casualty, life, health and special lines – such as agricultural, aviation, space, engineering, HMO reinsurance, marine, nuclear energy, and special risks.