By James Eck, Vice President,Senior Credit Officer, Moody's Investors Service
Moody's Weekly Credit Outlook, February 14, 2011
Earnings reports from global reinsurance firms over the past two weeks shed light on losses arising from the December and January catastrophic floods in Queensland, Australia. While insured loss estimates are preliminary, we believe they will impact reinsurers' earnings, not their capital. Nonetheless, the floods cap a higher-than-average year for catastrophe losses and will result in significant early catastrophe losses for 2011, which is credit negative for the global reinsurance sector.
Current estimates of insured losses for the Australian floods are in the range of $4-$6 billion. Additionally, Cyclone Yasi, which struck the region on 2 February, may add an additional $1.5 billion of insured losses. Because Australian primary insurers have heavily reinsured their risks, and the floods and Cyclone Yasi constitute as many as five separate loss events within their reinsurance treaties, global reinsurers are likely to bear a significant proportion of the overall insured losses.
Only a portion of reinsurers' estimated losses will be recorded in their 2010 financial statements because the events straddled two fiscal years. Since both the floods impacting the more densely populated Queensland capital city of Brisbane and the cyclone occurred in first-quarter 2011, we believe the majority of losses arising from these events have yet to be recognized. We also note that at least two reinsurers have reported that the number of meaningful catastrophe loss events in Australia and New Zealand during 2010 (including two severe hailstorms in Australia and the New Zealand earthquake) has triggered aggregate reinsurance covers, resulting in additional losses.
…[S]ome of the largest loss estimates to date from the Australian floods have been posted by large, globally diversified reinsurers including Munich Re (financial strength Aa3 stable), Hannover Re (unrated), XL Group (financial strength A2 stable), Partner Re (financial strength Aa3 stable), and Transatlantic Holdings (financial strength A1 stable). Relative to equity capital, estimated losses from these events are in the low-single-digit percentage range.
For 2010 as a whole, Munich Re now estimates that total insured catastrophe losses approximated $37 billion, placing 2010 among the six most loss-intensive years since 1980. Despite the above-average catastrophe losses, most reinsurers have reported relatively solid 2010 net income results as favorable loss reserve development on prior years offset some of the losses.
Looking ahead, we continue to believe that reinsurance pricing will remain under pressure in the aggregate, as the catastrophe loss events of 2010 have not significantly altered the supply and demand balance of available reinsurance capacity. While the catastrophe events in Australia and New Zealand will likely drive regional pricing higher during the 1 July renewal period, such localized pockets of strength will not be enough to offset the pricing declines experienced in other peak catastrophe risk zones, such as US areas vulnerable to hurricanes and California earthquake, as well as in most casualty reinsurance lines.