Lee Coppack looks at the impact of the two end of year European cyclones, Lothar and Martin, on reinsurers and the reinsurance market.
The European windstorms, Lothar and Martin, which so dramatically concluded the twentieth century in France, Switzerland and Germany occurred too late to affect 1 January treaty renewals, but the market hopes that their effect on reinsurers will, at worst, check any further reduction in catastrophe rates, and, at best, add to upward pressures on pricing.
Absent other major catastrophes no one predicts dramatic, post-hurricane Andrew type developments; the market is too well capitalised to turn in that way. Longer term, however, losses from Lothar and Martin could drive further consolidation, particularly among less well capitalised insurance companies in France. Cyclones Lothar and Martin blew through France and much of Europe at windspeeds of up to 200 kilometres per hour on 26 and 27 December 1999 causing devastating damage. In addition to wind, they brought with them flood, avalanche and mud slide. Structural damage of private and public buildings was widespread, and infrastructure was heavily affected, with uninsured losses by the French state owned electricity company, EDF, alone estimated at euros 2.6 billion. Numerous boats were damaged along the French coast and on Lake Leman in Switzerland. There were 140 deaths.
Leading French reinsurer SCOR puts the likely cost of economic damage at euros 11.5 billion, with insured losses of more than euros 5 billion. Two catastrophe modelling companies, RMS and EQECAT, put the figure closer to euros 6 billion, and RMS estimates that the loss across all affected countries could exceed the previous European record set by the 1990 windstorm Daria, an event costing 6 billion Euros (US) $6.1 billion) in 1999 values.
EQECAT also points out that there will be significant indirect losses affecting industry, tourism and agriculture due to a loss of power and the breakdown of transportation and communication systems.
SCOR believes that reinsurers will ultimately bear at least half the cost of the insured losses, and reinsurers in Europe, Bermuda and the United States have announced their initial estimates, but the final costs will not be known for some months. The deadline for reporting insurance claims was extended to 31 January in France, which bore 70% of the losses. France has approximately 1.5 million claimants; so numbers alone will slow the claims process. The extent of business interruption losses will take more time to emerge.
Finally, catastrophes of this size generate their own cost inflation as a result of demand for services and materials and insurers' inability to police the volume of claims they receive; catastrophe specialist RMS is including an inflationary factor of up to 30 % in its models for these storms.
In a special bulletin on the European storms, SCOR says that 1999 will be a year marked in red ink. Obligations would be met - but at a cost to insurers, who have increased their retentions over recent years, and to reinsurers, who are in the midst of increasing losses and a rate war. “The only positive aspect is that the industry now accepts the necessity to increase rates at the dawn of the third millennium, that is in 2001, because it is already too late for 2000.”
More positive is Herbert Haag, the president and ceo of Bermuda's PartnerRe, which is the parent company of Paris based SAFR. Announcing fourth quarter results, he said: “The late December catastrophe events in Europe came too late to have an impact on renewal prices, although the few covers concluded thereafter led to substantially increased rates. As insurance and reinsurance capacity is granted more selectively and prices start to firm, we are confident that improvements will be meaningful throughout 2000.”
Analysts at stockbroker Merrill Lynch reported that the storms came too late to have a material impact on the January renewal season, although smaller French insurers have since extended their coverage. At the same time, they point out that there are many companies that are well capitalised and keen to take the opportunity to grow, which will prevent a build up in momentum behind the positive trends.
Mike Smith, managing director, Bear Sterns in New York, says that most companies believe the April and July renewals will carry a significant effect of the storm losses, thanks also in part to a contraction in retrocession. “For the most part, pre-Lothar/Martin catastrophe activity had already put pressure on the retrocession market that has begun to tighten noticeably.”
Says Gerald Radke, chairman, president and ceo of Bermuda based PXRE: “Given the impact of these losses on the market, we expect that coverage terms will return to more appropriate levels. Already we have seen signs of more demand and better pricing.''
At Bermuda catastrophe reinsurer IPC Holdings, president and ceo John Dowling comments: “The storms that occurred in Europe in late December were typical of the series of record- breaking events around the world, which characterised 1999 as a year of catastrophes. It was also a year which clearly demonstrated the inadequacy of catastrophe reinsurance pricing, and the need for higher rates. Unfortunately, the timing of the storms meant that they had little impact on the 1 January renewals, which showed some small signs of pricing improvements. As the full impact of the storms becomes apparent during 2000, we are hopeful that it will be reflected in the pricing of renewals during the rest of the year.”
Guy Hengesbaugh, president and ceo of Bermuda catastrophe reinsurer, LaSalle Re says: “We have already seen the beginning of a recovery in reinsurance market conditions, and these events will certainly add to the momentum of rate increases for catastrophe reinsurance.”
The bulk of the reinsurance claims is shared among companies in Europe and Bermuda. Although the largest French reinsurance company, SCOR's own losses are expected to be a comparatively modest euros 50 million. Swiss Re, with the largest share of the French market, puts its total loss burden at CHF 900 million (euros 561 million). Lothar also clinched the title “storm of the century” in Switzerland, judged by the intensity and damage inflicted on property and forests, says Swiss Re. The company adds that it had practically no exposure to these storms from retrocession. Munich Re group reports that losses from Lothar and Martin would cost insurance and reinsurance companies in the group Euros 500 million.
Axa will have both insurance and reinsurance claims. Its first report states that insurance and reinsurance companies expect gross consolidated claims to amount to around euros 1,000 million, of which around euros 700 million is for companies belonging to the French property/casualty segment. However, after reinsurance and retrocession, the net consolidated cost of claims is expected to reduce to around euros 310 million, of which euros 230 million will be attributable to companies belonging to the French property/casualty segment. The impact on the group as a whole is expected to be around euros 100 million after taking into account equalisation reserves in several of the companies affected by the storms and after tax.
Bermuda's XL Capital reports that its net operating earnings for the fourth quarter of 1999 were reduced by $125 million after tax as a result of the two storms. The group picked up losses on three separate and formerly independent books of business, XL Mid Ocean, NAC Re International and through its recently acquired 49 % shareholding in the French reinsurance company, Le Mans Re.
Hannover Re puts its share of the Lothar and Martin losses substantially in excess of euros 100 million gross and roughly euros 40 million net before taxes and fluctuation reserves. Approximately half of Hannover Re's losses are from France with the remainder largely attributable to Germany and to a lesser extent Switzerland.
PartnerRe reported fourth quarter catastrophe losses of $90 million after tax with a net operating loss for the quarter of $28.0 million, compared to operating earnings of $59.8 million for the fourth quarter of 1998.
LaSalle Re has estimated its losses at $23.5 million for Lothar and a further $5.6 million for Martin, in addition to $7.0 million for major storm Anatol which hit Denmark on 3 December 1999. Its loss for the quarter before minority interest was $19.8 million as against income of $6.9 million for the corresponding quarter of fiscal 1999.
Bermuda's Terra Nova, soon to acquired by US specialty insurer Markel, reported net claims from Lothar and Martin of approximately $30 million. Terra Nova's losses in the fourth quarter is one reason the price being paid by Markel, concluded at about $680 million, is nearly 25% lower than the original offer made in August 1999.
The storms were in a large part responsible for driving PXRE into a net loss for fourth quarter and 1999 fiscal year. Fourth quarter events, including the French and Danish storms as well as Hurricane Lenny, contributed losses of $59.6 million to PXRE's net loss for the quarter of $38.2 compared with a net loss of $3.0 in 1998. Income, however, was boosted by reinstatement premiums.
Catastrophe reinsurer IPC Holdings, which estimates its exposure to the European storms at $35 million, also reported a net loss of $22.7 million or for the quarter ended 31 December, compared to income of $5.7 million for the fourth quarter of 1998.
US reinsurer Everest Re established pre-tax reserves of $19.5 million in the fourth quarter to cover its exposures to Lothar and Martin losses. Transatlantic and Bermuda's RenaissanceRe have also been affected but the net effect will be minimal since all three were covered by retrocession, according to Mike Smith. One interesting question is the likely effect of the storms on the catastrophe bond issued on behalf of French reinsurer, Sorema, by Halyard Re, a special purpose vehicle (SPV). RMS, which did the underlying modelling, said in mid-February that it did not expect that the windstorms would trigger the $17 million bond issued on 1 April 1999. It has a retrocessional structure based on designated contracts within the Sorema portfolio in Japan and Europe with an attachment point around euros 80 million.
Comparatively unscathed by Lothar and Martin is the Caisse Central de Réassurance, France's government owned reinsurer of natural catastrophes. The reason is that CCR excludes storm damage, although it will pick up losses from flood and land subsidence and slip. CCR is, however, very exposed to losses as a result of serious flooding in southern France in early December, but the French state acts as ultimate retrocesssionaire.
On the direct side, AGF commented in February that with the deadline for filing claims extended to 31 January 2000, a precise valuation of its claims was still difficult, but it explains: “If damages were to reach euros 4.6 billion, the cost before reinsurance would amount to euros 550 million and, after reinsurance, to euros 120 million (or about euros 75 million euros after taxes). These figures are based on the best information now available from our networks and AGF's market share in various non-life insurance categories. Damages in Benelux and Spain were fairly limited and, therefore, do not change this estimate.”
The UK's Royal & SunAlliance gave an initial loss estimate of £50 million net of reinsurance arising from the severe weather in early December in Denmark and Sweden and in late December in France, Germany, Benelux,Denmark, Italy, Spain and the UK.
Insurers face uncertainty over whether insurers will consider the two storms separately or together, as they occurred within the critical 72-hour period that defines an event in reinsurance contracts, according to RMS. In any case, it may prove impossible to determine whether damage was caused by one storm or the other. Such serial windstorms are not uncommon, as this is the third time in a decade that pairs of damaging European windstorms have occurred within 72 hours, says RMS.
The current level of capital in the reinsurance industry is such that the windstorm losses are unlikely to have a major impact on rates on their own. Swiss Re states: “The equalisation reserves specially set up for such large catastrophes will, however, absorb a major portion of the loss.” At Munich Re, the chairman of the company's board of management Dr Hans-Jürgen Schinzler comments that exceptionally high claims costs during 1999, including the European storms, means group profit will probably be below that of 1998. “Nevertheless, we will still be able to make another appropriate allocation to our reserves and pay an unchanged dividend of DM 1.80,” he adds.
Brian O'Hara of XL Capital says: “These are unusually large losses, by some accounts the worst in France for more than 400 years. However, we are in the business of providing protecting against high severity, low frequency events and the impact on XL is small relative to our capital base and will not adversely affect the company's financial condition.”
According to Herbert Haag of PartnerRe: “Total insured losses for natural catastrophes in 1999 are estimated to exceed $24 billion, the largest loss burden ever faced by the insurance industry. Given its leading position in the catastrophe reinsurance business worldwide, PartnerRe could not escape the effect of these losses on its 1999 annual and fourth quarter results. Our ability to respond to these events without compromising our strong capital base reaffirms the value we bring to the insurance market and allows us to take the initiative to achieve the necessary improvements in the pricing of natural catastrophe risks.”However, Standard & Poor's has warned that it is keeping its ratings on primary French insurers under review, pending loss developments arising from the two wind storms. Similar concern comes from RMS which believes that the losses will exceed the reinsurance programmes of more than 80% of French insurance companies, leaving further losses to be paid from the insurers' own reserves. After 10 years of falling premium income, says RMS, the viability of some small French insurance companies could be threatened, as happened with poorly capitalised US insurers after Hurricane Andrew in 1992 and the Northridge, California earthquake in 1994.
If Lothar and Martin do effect structural changes, they are most likely to be a continuation of the process of consolidation already well underway.
Lee Coppack is editor of Global Reinsurance. E-mail: firstname.lastname@example.org.