Posted on May 04, 2011 by Sergio Ulloa
Several multinational property and casualty insurance companies have had their first-quarter earnings significantly impacted by the catastrophic losses due to earthquakes in Japan and New Zealand and the severe floods in Australia.
The frequency of large natural disasters has been the predominant news item for reinsurers in 2011. On March 11th a massive tsunami hit the coast of northeast Japan, causing thousands of casualties and wiping out scores of buildings in the region. The tsunami was caused by a 9.0 scale earthquake approximately 80 miles offshore and around 230 miles to the northeast of Tokyo. The earthquake was the strongest ever to hit Japan
, a country well versed in seismic activity. Two nuclear reactors in the neighboring Fukujima region were damaged by the quake and extensive repair efforts to contain the potential fallout are still ongoing. These events followed a large 6.3 magnitude earthquake on February 22nd that struck Christchurch, the second largest city in New Zealand, and devastating floods as well as Cyclone Yasi which hit Australia earlier in the year.
Global catastrophe costs are trending upwards.
According to Swiss Re's latest sigma study in March, economic losses from both natural and man-made disasters were US$218 billion in 2010, more than triple the total 2009 figure of US$68 billion. These catastrophes cost the global insurance industry over US$43 billion, a 60 percent increase over 2009's figures, with earthquakes accounting for almost a third of these losses. Swiss Re's study concludes that the population growth and rising net wealth in seismically active areas results in earthquakes that are both more deadly and costly when they occur, irregardless of any evidence pointing to an increase in earthquake activity.
Analysts say that it will take considerable time to further determine and approximate the overall economic losses and the amounts payable by individual reinsurance companies for the recent natural disasters in the Asia Pacific region. Swiss Re has estimated that the insurance industry face cumulative losses of up to US$12 billion for the earthquakes alone this year. Swiss Re's individual earnings have not yet been announced but industry analysts have forecast a substantial quarterly loss of around US$1 billion for the company.
XL Group PLC, a large Bermuda-based reinsurer, reported greater than predicted natural catastrophe losses of US$387.4 million, net of reinstatement premiums, doubling the company's 2009 losses of US$181.1 million in its property and casualty insurance business. Net investment income fell from US$308.3 million to US$280.3 million during the first quarter of 2010.
Other Bermuda-based reinsurance companies to report first quarter losses include Endurance, which incurred losses of US$87.4 million during the three month period, and White Mountains, which posted a net loss of US$28.2 million. Axis Capital reported first quarter losses of US$384 million, compared with a net profit of US$112 million for the same period in 2010.
PartnerRe also reported losses that exceeded industry expectations. The insurer's first quarter results presented a net loss of US$807 million, in comparison to a profit of US$79.7 million earned for the same period in 2010.
PartnerRe President & CEO Costas Miranthis commented in a statement that the large losses were caused primarily by the frequency and severity of natural disasters during the first few months of 2011. "During the first quarter, we witnessed an exceptional frequency of catastrophic events in international markets. As PartnerRe underwrites a globally diversified portfolio, the losses in Japan, New Zealand and Australia together led to catastrophe losses significantly in excess of our quarterly expectations."
Despite PartnerRe's heavy net losses, Mr. Miranthis said: "The strength of our balance sheet has enabled us to absorb these losses and maintain a strong capital position." The President added that the growing frequency of catastrophe loss, in addition to recent industry revisions to modeling tools, is driving many buyers to re-evaluate risk in certain markets. "While the pricing reaction in loss-affected areas is predictable, the broader re-evaluation of catastrophe risk is beginning to change the pricing dynamics in all property catastrophe markets," he said.
Even reinsurance companies that better weathered the storm are reviewing their investment strategy. Industry giant Hannover Re remained cost-effective during the first quarter of 2011, largely on the back of its improved investment returns. The world's third biggest reinsurer announced a first quarter profit of €52.3 million (US$77.7 million), down 65 percent on 2010's €151 million (US$224.4 million) returns.
As a result of heavy claims linked to the Japan and New Zealand earthquakes, Hannover Re declared that the company would cut its net profit forecast from €650 million (US$912 million) down to €500 million (US$702 million) for the year, providing losses from the upcoming American hurricane season remain below €410 million (US$575 million). The reinsurer confirmed that the previous profit targets were no longer attainable because the full-year budget of €530 million (US$ 788 million) for major claims was already exceeded due to catastrophe costs in the first quarter, totaling over €572 million (US$802 million) already.
In a conference call with journalists and shareholders, Hannover Re chief executive Ulrich Wallin lamented that the beginning of 2011 has posed excessive problems for the reinsurance sector: "This could be the worst ever quarter for losses in the reinsurance industry. With this in mind, it will not come as a surprise that our results have fallen short of expectations."
Another major reinsurer that will re-evaluate its likely profitability in 2011 despite remaining profitable for the first quarter is US-based Berkshire Hathaway. The company predicts roughly US$1.7 billion in catastrophe losses for the first quarter of 2011, including a US$1 billion hit from the Japanese quake, US$412 million from the New Zealand quake and a further US$195 million from losses in Australia. Around US$700 million of the Japanese loss will come out of Berkshire's 20% quota share of Swiss Re's reinsurance business.
Berkshire Hathaway's 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. In lieu of these figures, Chief executive Warren Buffett now believes it is unlikely his company can deliver an underwriting profit this year.
"We had some major catastrophes in the Pacific Asian areas, and that hit the reinsurance industry particularly hard," Mr. Buffett said today at Berkshire Hathaway's annual meeting in Omaha, Nebraska.
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. One mitigating factor that should placate investors in the industry is that the current turbulent climate will enable reinsurers to exact higher rates in areas where claims will remain high
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.
Hannover ReHannover 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.
PartnerRe Ltd., through its subsidiaries, provides global reinsurance services. The company offers reinsurance coverage for all manners of property, assets and businesses worldwide. PartnerRe Ltd. was founded in 1993 and is based in Pembroke, Bermuda.
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.
XL Group plc, through its subsidiaries, provides insurance and reinsurance coverage to industrial and commercial firms, insurance providers, and other institutions worldwide. The XL Group operates in three market segments - Insurance, Reinsurance and Life Operations.