2010 Market Report and 1st Quarter 2011
2011 was the warmest year observed since 1880, when temperature records were first kept. Major earthquakes in Haiti, Chile and Indonesia caused thousands of fatalities and widespread damage, although insured losses from these events were only significant in Chile. . Both my wife and myself where caught in Santiago during the earth quake and felt a major earthquake first hand in the 8 plus Rictar scale area and I must say, the modern hotels and office building built on earthquake suspension designs, held up remarkably well , which bodes well for the tall buildings in San Francisco which are constructed in a similar vein.
Flooding persisted for many months across portions of Asia. Severe weather out breaks in the US and Australia spawned tornados, damaging winds and destructive hail. At least four strong tropical systems made landfall in Asia.
Perhaps the most remarkable facet of 2010’s insured losses from catastrophes is that neither of the two most expensive events took place in North America. The earthquakes that devastated parts of Chili and New Zealand were the largest source of losses in 2010, costing the reinsurance industry more then $8 billion and $4 billion respectively.
The 20 largest insured losses in 2010, including nine US storms. That is not entirely unusual, although none of the storms reached hurricane force, which is most unusual. Traditionally, large insured losses in the US caused by wind are the result of hurricane –force storms.
Of the eight catastrophes that individually caused insured losses of more than $1 billion in 2010, five were related to severe weather and storms in the US, Australia and Europe.
Swiss Re estimated that insured losses from natural catastrophes and man-made disasters totaled $43 billion on a global basis in 2010, more than 60 percent higher that was the case in 2009. North America had the highest level of insured losses on a regional basis at $15 billion, Swiss Re said.
Those 2010 losses were largely driven by extreme weather events, including three that ranked among the top 10 insured catastrophe losses on a worldwide basis. The costliest North American storm, Swiss Re said, was driven by thunderstorms , tornadoes, hail and flooding on October 4th 2010 , an event that cost insurers $2.17 billion-making it the fourth costliest global event in 2010.
Extreme weather events that occurred separately in the United States on March 13 and May 12th, both marked in the fourth costliest global event in 2010. Extreme weather events occurred separately in the United States on March 13th and May 12th, both marked by winds in excess of 74 mph resulted in combined damage of $3.2 billion.
Its not just the big events that matters said Swiss Re’s Thomas Holzheu, a senior vice president with Swiss Re’s economic research and consulting team. “Its winter storms and tornadoes that are showing up in these tallies more and more. The insured values and the insurance density are major drivers when you have severe weather events. The US is showing up so frequently because of the high accumulation of property values and the high insurance density of that.”
AM Best reported that “ The above –normal frequency took a toll on property insurers , as the majority of these small-scale , weather related losses fell short of reinsurance triggers.” Best further noted that the US Federal Emergency Mangemnt Agency declared 81 disasters in 2010, up from 59 a year earlier.
The global total for insured losses, as usual, marked a fraction of the $218 billion in estimated economic losses experienced on a worldwide basis, which was more than triple the amount of economic losses reported in 2009.
Insured losses were not up significantly from prior years, but 2009 “was an unusually benign year in terms of global levels of catastrophe losses,” Holzheu said . He added that 2010 was pretty much in line with the 10 year average for insured losses. “It was not that unusual” he said, “ but what was unusual was that a large part of these losses were due to earthquake and we didn’t have any landfall of a hurricane in the US”.
Guy Carpenter reported that this was the case despite 2010 being one of the most active Atlantic seasons on record, producing 19 named storms.
Insured losses in the US generally matched those of 2009, adding up to an estimated $11.2 billion in the first nine months of 2010. By comparison, US claims in 2008 cost the reinsurance industry $25.2 billion, due mostly to losses from Hurricane Gustav and Ike.
For the second consecutive year , tropical cyclones did not incur significant insured losses in 2010.Typoon development in the West Pacific was at a record low in 2010, in part driven by the development of a moderate La Nina event and very warm tropical Atlantic seas surface temperatures.
Floods accounted for significant insured losses of $955 million in France and Central and Eastern Europe. Pakistan and China also endured divesting monsoonal flooding, but the impact on the reinsurance industry was limited but low insurance penetration levels in both countries.
David Flandro, head of Global business intelligence at Guy Carpenter, said “Large Losses in the first half of the year, coupled with low interest rates and depressed valuations, created a challenging environment for carriers in 2010. Moreover, the active nature of this year’s hurricane season reinforces the fact that catastrophe risk remained elevated as the reinsurance sector prepared for 2011 renewals.
Aon Benfield reported that the global natural catastrophe activity was far higher than in the previous three years, with 314 separate events recorded in 2010. Catastrophes caused $252 billion in total economic losses and $38 billion in insured losses in 2010, Aon Benfield said. In 2009,222 events resulted in a $58 billion economic loss and a $20 billion insured loss.
So what about the 1st quarter 2011, Swiss Reinsurance Co., the world’s second-biggest reinsurer, posted a second consecutive quarterly loss after claims from earthquakes in New Zealand and Japan.
The net loss of $665 million compares with a year-earlier profit of $158 million.
Swiss Re, which is bidding to regain the AA credit rating that Standard & Poor’s cut in 2009, expects major first-quarter natural catastrophe pretax losses to be about $2.3 billion after the temblors in Japan and New Zealand. That may erode the company’s capital, which exceeded S&P’s AA requirements by more than $10 billion at the end of last year.
The first-quarter as well as last year’s natural catastrophes are expected to “accelerate price improvements,” Swiss Re said, adding that the April renewals of reinsurance treaties in Japan saw approximately 20 percent to 50 percent price increases for earthquake coverage and as much as 10 percent higher rates for non-earthquake exposed property policies.
Aon Benfield, an arm of the world’s largest insurance broker, expects total losses for insurers and reinsurers to top $52.6 billion in the first quarter compared with $40.6 billion for the whole of 2010. The disaster in Japan may cost insurers and reinsurers $21 billion to $34 billion, according to catastrophe modeler Risk Management Solutions.
Munich Re said on April 20 it will report a “clearly negative” first-quarter result. The Munich-based company in March scrapped its 2.4 billion-euro ($3.6 billion) profit target for this year as it estimated about 1.5 billion euros in claims from Japan.
Most reinsurers have posted significant losses for the earthquakes in New Zealand and Japan and the majorities have been pretty consistent. The only reinsurer to be significantly out of step has been Flagstone Re (FSR) . The company has published several press releases that have contributed to a very large sell-off in the stock:
February 28, 2011. $60-$80 million in loss events due to flooding and storms in Australia. Plus, there was the 6.3 magnitude earthquake in Christchurch, New Zealand, for which the company has not yet provided loss estimates.
March 15, 2011. The company reports preliminary loss estimates related to the New Zealand earthquake to be between $60-$90 million.
March 21, 2011. FSR reports that Moody’s has placed the ratings of the company under review.
So prior to the Japan earthquake, FSR was set for losses of $120-$170 million. Now, the market appears to be worried whether Flagstone will need to strengthen reserves after the Japan earthquake. In FSR’s 10-k, the company said it does “a significant amount of catastrophe business in Japan.”
There is general market consensus that the company is struggling with its internal risk control and monitoring of catastrophe aggregates. Comp Capital can only speculate, but the company has been trading below book since its IPO some four years ago. Their was an expenses row which led to Mark Byrne, Flagstone co-founder and former executive chairman, to be enticed to retire as a member of the company’s board of directors.
Management of any reinsurance company can set reserves to really anything they want, whether its prudent or not, so when investing in the reinsurance arena intelligence of a company expense ratio’s and reserving adequacy along with its catastrophe aggregates control, is vital in installing confidence in the market place, Flagstone has yet to do that and will continue to trade below book until they can prove they know what they are doing. The Reinsurance arena by its very nature is slightly opaque in comparison to the Insurance sector; you have to assure yourself that management is trustworthy and as conservative about underwriting and reserving as they claim to be.
But with FSR trading at half its book value, it seems that the market is overreacting (once again). Even if it turns out FSR management was not so good, the stock price will likely rebound after all this bad news fades away and the company starts to book new business at more favorable rates, however this is unlikely to happen until 2012 in our view after the 2011 windstorm season has concluded . It matter of fingers crossed for Flagstone the US hurricane season does not see them in further jeopardy , which would mean raising more replacement capital could be difficult .
XL in our view has been one of the best come back stories for 2010 /11 XL sank $1.89 to $3.90 in New York Stock Exchange composite trading during the 2008 financial crisis coming back to around $24.00 for the 1st quarter 2011 .
Chief Executive Officer Michael McGavick 50, pledged an end to “big mistakes” when he succeeded Brian O’Hara in May. McGavick has been forced to issue more than $2.8 billion of new XL shares and rescue the insurance operations of Syncora Holdings Ltd., a bond insurer created by XL and formerly known as Security Capital Assurance Ltd. Syncora faced a wave of claims after collateralized debt obligations it insured declined in value.
XL had $292.9 million in investment losses in the third quarter, took a $1.4 billion charge tied to Syncora and said unrealized losses widened to $2.59 billion.
Those losses followed a series of unanticipated expenses related to the 1999 purchase of NAC Re Corp., legal cost tied to the 2001 deal to buy Winterthur International and higher-than- expected claims from Katrina and other hurricanes that struck during the record 2005 storm season.
“XL has gone from debacle to debacle to debacle,” said HYPERLINK “http://search.bloomberg.com/search?q=David+Havens&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1″David Havens, a credit desk analyst at UBS AG in Stamford, Connecticut. “This company has incurred several hundred million dollars worth of self-inflicted wounds.”
XL and HYPERLINK “/apps/quote?ticker=ACE:US”Ace were both founded in Bermuda in the 1980’s by a group of the world’s largest companies to provide coverage, then in short supply, of corporate liability risks of as much as $100 million. They helped establish Bermuda as the world’s insurance capital. Ace moved its corporate headquarters to Zurich earlier this year.
XL’s “primary problem is that their investment portfolio is aggressively invested in credit-sensitive securities, so the problems in the mortgage-backed and subprime world have hit them harder than other insurers,” said HYPERLINK “http://search.bloomberg.com/search?q=Paul+Newsome&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1″Paul Newsome, a Chicago-based analyst at Sandler O’Neill & Partners.
Its our view that XL have now put their problems behind them and will go from strength to strength with a first class brand.
Arch Bermuda, Partner Re and Ace continue to go from strength to strength and there is little pointing out any thing in particular, all three have scale and diversification and hence they continue to out perform the market place for their shareholders. Axis and Renaissance follow slightly behind in our view, but both are high quality operations .