The cost of large natural disasters that occurred in Japan, Australia, and New Zealand of the Asia-Pacific region have hit first quarter profit at global insurers. Losses from non-life businesses (property & casualty, and reinsurance) in the first three months of 2011 have experienced the highest-ever catastrophe claims in the industry.
Australia Queensland & Victorian floods and Cyclone Yasi:
Beginning in December 2010 and continuing into 2011, a series of major floods from heavy rainfalls had hit Queensland state, Australia. The flood damaged towns & villages, including Australia’s third largest city, Brisbane. High intensity rainfall in January 2011 also caused major flooding across the state of Victoria. On 2/3/2011, Tropical Cyclone Yasi made landfall in northern Queensland. The cyclone was a to a Category 5 system.
New Zealand earthquake:
On 2/11/2011, a 6.3-magnitude earthquake struck Christchurch, New Zealand’s second-largest city. It was the country’s deadliest earthquake in eight decades.
Japan Earthquake & Tsunami:
The 2011 Tohoku earthquake (Great East Japan Earthquake) which struck on 3/11/2011 was a magnitude 9.0. It occurred off the east coast of Japan triggering a tsunami. Multiple aftershocks greater than magnitude 6.0 also followed. The tsunami caused a number of nuclear accidents, specifically serious damage to the Fukushima Nuclear Power Plant, resulting one of the world’s worst nuclear power plant disasters.
2011 Q1 Natural Disasters Impact To Global Insurance Companies
American International Group Inc (Chartis) – $1.7 billion in catastrophe losses:
5/5/2011 – American International Group Inc’s property-casualty business, Chartis, posted $1.7 billion in catastrophe losses from disasters including the March 11 2011 earthquake and tsunami in Japan, the New Zealand earthquake and massive flooding in Australia. AIG reported a Q1 2011 loss of $543 million.
Fairfax Financial Holdings Limited – $401.4 million in catastrophe losses:
4/28/2011 – Underwriting results in the first quarter of 2011 were negatively affected by $401.4 million of pre-tax catastrophe losses (net of reinsurance and reinstatement premiums). This includes the earthquake losses in Japan. The company reported a loss of $240.6 million in Q1 2011, compared to a profit of $418.4 million last year.
Berkshire Hathaway Inc – $1.673 billion estimated catastrophe losses:
5/6/2011 – Berkshire which operates some of the largest reinsurance businesses in the world, estimated losses of $1.673 billion from Australian ($195 million), New Zealand ($412 million), and Japan ($1.066 billion) disasters. Of the $1.673 billion, $700 million comes from their 20% quota share of Swiss Re’s business. Berkshire estimated it will report an $821 million underwriting loss for the quarter because of the catastrophes. That compares with a $226 million underwriting gain in last year’s first quarter. The company reported a Q1 2011 net profit of $1.5 billion, down from $3.6 billion the year before.
Manulife Financial Corp – $151 million estimated in claims:
5/5/2011 – Manulife Financial Corp, North America’s largest life insurer, estimated reinsurance claims related to the earthquake in Japan to be around C$151 million. Q1 2011 net income declined to C$985 million from C$1.2 billion in Q1 2010.
Great-West Lifeco Inc – C$75 million in catastrophe losses:
5/5/2011 – Great-West Life, Canada’s No. 2 insurer, said provisions relating to the earthquakes in Japan and New Zealand, negatively impacted earnings by C$75 million. Q1 profit in 2011 declined to C$415 million ($428 million) compared to C$428 million a year earlier.
Swiss Re – $2.3 billion expected in catastrophe losses:
5/5/2011 – Swiss Re expects natural catastrophe pretax losses to be about $2.3 billion, after the disasters in Japan and New Zealand. The Q1 profit of 2011 was net loss of $665 million, compared to a $158 million profit a year ago.
Allianz SE – €750 million euros expected in catastrophe claims:
5/4/2011 – Allianz SE, Europe’s biggest insurer, expects claims of about €320 million euros from the Japan quake, and total combined costs for natural disasters in the quarter of €750 million. The company’s Q1 profit declined 44% to €900 million from €1.6 billion a year earlier. The insurer forecasts an operating profit of €7.5 billion to €8.5 billion euros in 2011, compared to €8.2 billion euros in 2010.
Munich Re – €2.7 billion euros expected in catastrophe losses:
5/9/2011- Munich Re, the world’s biggest reinsurer, expects €2.7 billion ($3.9 billion) for insurance claims from natural disasters, which includes the New Zealand & Japan earthquakes as well as the floods and cyclone in Australia. The company reported a Q1 2011 net loss of €947 million. Munich Re withdrew its €2.4 billion ($3.6 billion) 2011 profit target for this year Japan.
Aon Benfield – $52.6 billion expected in catastrophe losses:
4/21/2011 – Aon Benfield, the reinsurance broker of Chicago-based Aon Corp. (the world’s largest insurance broker) expects $52.6 billion in total insured losses from the Japan earthquake & tsunami, Australia’s floods & cyclone, and New Zealand’s earthquake. The $52.6 billion in 2011 compares with $40.6 billion for the whole of 2010
Zurich Financial Services AG – $517 million in catastrophe losses:
5/5/2011 – Zurich Financial, Switzerland’s biggest insurer (Europe’s fourth largest), recorded claims of $517 million from all of the natural disasters that hit the Asia-Pacific region. This includes the Australian floods (Brisbane, Victoria), cyclone Yasi, New Zealand earthquake, and Japan earthquake & tsunami. The company reported that Q1 profit in 2011 declined 32% to $637 million from $935 million during the same period last year.
Axa SA – €100 million euros estimated in catastrophe losses:
5/5/2011 – Deputy Chief Executive Denis Duverne of Axa SA, Europe’s second largest insurer, did give any additional figures on the impact of Japan’s earthquakes and nuclear crisis on top of an earlier estimate (March 2011) of at least 100 million euros before taxes.
Sun Life Financial – Not Impacted (Sold Reinsurance Businesses):
5/4/2011- Sun Life Financial was not impacted by the natural disasters from the Asia-Pacific region in the same manner as the other insurance companies mentioned, as it had sold its reinsurance to Berkshire Hathaway in the fourth quarter of 2011 (Q4 2010). Sun Life reported a Q1 2011 profit increase of 5.8% on strong equity market performance to its investments.
Large natural disasters and catastrophic losses are a reality and happen from time to time. Hurricane Katrina in the U.S. is one of those that come to mind to many North Americans as one of the worst in recent years. Investors need to factor such risk into their assessment, as well to determine how adequately the insurance companies under analysis can handle such disasters and the ensuing claims. Question to ask are :
• Does the company have property & casualty, or reinsurance businesses?
• How carefully do they write their contracts?
• How did the business handle past natural disasters?
• Does the company have adequate capital to continue operations if such losses were to be incurred?
• How successful are they at using insurance float?
• How much profit is being generated from investments using insurance float compared to insurance payouts?
Although losses may be large from such catastrophes, they are temporary, and successful insurance businesses should be able to remain profitable over the long term. One successful company that comes to mind is Warren Buffett’s Berkshire Hathaway, which owns several insurance/reinsurance businesses. Reinsurance operations include General Reinsurance AG (General Re), Berkshire Hathaway Reinsurance, Wesco Financial Corporation (Wesco-Financial Insurance, Kansas Bankers Surety), and a stake in Swiss Re, while non-reinsurance operations include GEICO, Medical Protective Corporation (MedPro), National Indemnity Company, U.S. Investment Corporation, Central States Indemnity Company, Applied Underwriters, and BoatUS.
DISCLOSURE: I own shares of Berkshire Hathaway.
Thanks & Happy Investing! — The Investment Blogger © 2011