Broker says $16bn losses makes first quarter "worst ever" for natural peril losses

An unprecedented US $16bn in losses from the Chilean earthquake, the European storm Xynthia and other natural catastrophes have made the first three months of 2010 the worst first quarter on record for such events, according to the latest renewals report from Willis Re, the reinsurance broking arm of Willis.

Willis Re’s 1st View renewals report said that following a year of historically low frequency and severity of losses and resulting excellent financial performance, the first quarter 2010 results of reinsurers will, for the first time in many years, be worse than those of their primary insurance company clients.

The Willis Re report, titled “Calm Amid Calamity”, tracks reinsurance rate movements across numerous territories and product classes. The review said the difficult first quarter does not bode well for reinsurers because their largest losses are coming from smaller markets, where they are less able to generate significant premium volumes to accelerate post-loss payback. At the same time, losses in the first three months of the year leave reinsurers exposed to the historically more loss-prone third and fourth quarters, Willis Re said. Adding to the potential for future market volatility, some forecasters are now predicting a more-active-than-usual North Atlantic hurricane season.

The report highlights two other potential areas of concern in the reinsurance arena: less plentiful reserve releases and excessive exposure to sovereign debt. A close analysis of reinsurers’ 2009 performance found that results are showing some evidence of reserving stress, with fourth quarter 2009 releases not as plentiful as in earlier quarters. In addition, as a result of the financial crisis, many reinsurers have aggressively “de-risked” their investment portfolios by investing in government debt as a seemingly secure alternative. This is starting to raise concerns over excessive exposure to sovereign debt at a time when many governments are under increasing fiscal strain, said Willis Re.

Other renewal trends highlighted in the report are:

  • Despite increasing uncertainty and loss activity, the reinsurance market has yet to react in terms of pricing, conditions and capacity. The April 1, 2010 renewals have seen continuing modest risk-adjusted reductions and hardening only in specific territories and classes with consistently poor results.
  • Capacity in all lines has been ample as the issues of rate exchange volatility affecting capacity no longer have any impact.
  • Merger and acquisition activity has picked up following the Max Capital and Harbor Point deal and Willis Re predicts the pace will quicken over the next six months as financial organisations that received government bailouts seek to divest their insurance assets as part of the recovery process. Willis Capital Markets & Advisory acted as exclusive financial advisor to Harbor Point in its announced merger of equals with Max Capital.

“While one poor quarter, which is an earnings issue for reinsurers, will not be sufficient to trigger a general market turn on its own, it is likely to stiffen reinsurers’ resolve on renewals later in the year as the size of the recent catastrophe losses develop and back-year reserve releases reduce,” said Peter Hearn, chief executive of Willis Re.

“This is balanced by the remaining reinsurance capacity oversupply and the continuing difficulties companies face in achieving any top line growth to offset claims and expense increases. Against this background, absent any other major losses, buyers who will be renewing loss-free programs later in the year can continue to budget for stability or modest reductions in their reinsurance costs.”