Everest Re Group, Ltd. (RE) has estimated its fourth quarter 2011 cat loss to be approximately $245 million, as a result of the Thai floods and an increase in loss estimates owing to the catastrophic events that occurred earlier during the year. The final estimate of $245 million is more than double the company’s earlier loss projection range of $100 million – $125 million.
The company continues to suffer cat losses over the last few quarters. Total pre-tax catastrophe losses net of reinstatement premiums, were $119.4 million in the third quarter as against $89.4 million in the year-ago quarter.
The year 2011 has been very costly for insurers in terms of catastrophes. According to figures from Munich Re, insured catastrophe losses in the United States totaled $35.9 billion in 2011, well above the 2000 – 2010 average of $23.8 billion. The data provided by Insurance Information Institute shows that catastrophe losses totaled $14.1 billion in 2010 and $10.5 billion in 2009.
U.S.catastrophe losses, mostly due to tornadoes, amounted to an unprecedented $27 billion for the first half of 2011. As per its estimates, 2011 is likely to be the 5th or 6th most expensive year in terms of insured catastrophe losses in the US.
However, there is one redeeming factor when it comes to these huge cat losses. Insurance is a cyclical industry with alternate periods of soft and hard pricing cycles. Simply put, a soft market means low insurance rates since the amount of capital chasing the business is too high. Conversely, a hard market implies higher pricing, resulting from lesser capital chasing a higher amount of business.
Currently the industry is in a soft pricing cycle, which began in 2004. Since then the industry has been plagued with very low insurance rates. It has been witnessing underwriting losses evident from the combined ratio, which is expected to be approximately 108.2% in 2011 up from 100.8% in 2010. Combined ratio is a measure of the amount of money paid out in claims as a percentage of premiums written. A combined ratio of greater than 100 signifies underwriting losses. Underwriting in dollar terms was $34.9 billion through the first nine months of 2011, highest since 2001.
Despite a significant amount of capital being used to cover up for losses during 2011, industry experts believe that the trend needs to continue for some time, for the insurance pricing cycle to take a full turn. The recent losses have led to stiff pricing in some lines of business. In some areas where the losses have been significant, a broad-based price hardening is yet to be seen.
Among other players, XL Group Plc (XL) estimates Thai floods to cause a loss of $100 million – $125 million to its fourth quarter earnings; Swiss Re sees losses of $600 million, and Munich Re pegs the cost of loss at $370 million.
EVEREST RE LTD (RE): Free Stock Analysis Report
XL GROUP PLC (XL): Free Stock Analysis Report
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