Bloomberg News

Greek Debt, Storms May Roil Reinsurers as Capital Dwindles

June 28, 2011

(Updates with comment from Catlin Re in 12th paragraph.)

June 28 (Bloomberg) -- A Greek default and potential losses from the Atlantic hurricane season could lead to consolidation among reinsurers after catastrophes in Japan and the U.S. hurt excess capital, reinsurers say.

“Many reinsurers are watchful of the hurricane season and a threat of another financial crisis,” Jacopo D’Antonio, the chief underwriting officer of Aspen Re’s European unit, said in an interview from Zurich. “The events of the first and the second quarter have started to erode many reinsurers’ excess capital and flexibility is declining.”

June marked the beginning of the Atlantic hurricane season, which runs through November. Hurricanes caused $152.4 billion in insured losses in the U.S. from 1990 to 2009 and accounted for 45 percent of the country’s catastrophic losses in the period, according to the Insurance Information Institute in New York.

This year the industry may be under greater strain because of the claims already amassed from tornadoes in the U.S. in April and May, as well as the earthquakes in Japan and New Zealand, and floods in Australia. Forecasts call for the Atlantic to be more active than in an average year, which produces 11 named storms. The Atlantic has a 65 percent chance of producing 12 to 18 storms, with six to 10 of them becoming hurricanes, according to the U.S. Climate Prediction Center.

Reinsurers including Aspen Re, Scor, Catlin Re and Willis Re meet in Zurich today to discuss pressure from new regulation and the effects from natural catastrophe losses, reinsurance rates and the current debt crisis.

Profit Squeezed

“The catastrophes we’ve had in the first quarter are equivalent to the total of catastrophes we’ve had in 2010, so yes, it will impact on the profitability of businesses going forward,” Richard Ward, chief executive officer of Lloyd’s of London, said in an interview with Bloomberg Television’s “InBusiness with Margaret Brennan” on June 24.

Meanwhile, it is becoming harder for reinsurers to make an underwriting profit as the economic environment has depressed investment income while reinsurance prices have declined.

“Rates have been pushed down significantly over recent years to close to unprofitable levels and they now need to recover,” Ward said.

If another financial crisis occurs because of a sudden Greek default and reinsurance rates don’t go up, this could lead to consolidation among reinsurers, according to D’Antonio.

Reinsurance Deals

“Companies that are not diversified and focus on one single product, for instance writing mostly property-catastrophe business, are more vulnerable and might go through a process of consolidation in case of further natural-catastrophe activity,” he said.

Transatlantic Holdings Inc. agreed to merge with Allied World Assurance Co. Holdings AG, based in Zug, Switzerland, on June 12 in a $3.2 billion deal, and Bermuda-based Alterra Capital Holdings Ltd. was formed last year by the merger of Max Capital Ltd. and Harbor Point Ltd. as clients and investors prefer carriers with larger capital bases.

The European debt crisis “is one of many potential risks which is calling for more diversification,” Peter Schmidt, CEO of Catlin Re Switzerland, said in Zurich today. “Insurers and reinsurers should diversify their investments more and primary insurers should buy reinsurance from a broad group of companies and not just from a few providers.”

While losses from direct holdings in Greek government bonds wouldn’t be devastating, the greater risk would be a contagion that spreads to bigger economies in Europe, said Christian Muschick, a Frankfurt-based analyst with Silvia Quandt Research.

“Only if a Greek default causes Italy and perhaps Spain to default could this be life-threatening to some companies,” Muschick said.

Fitch Ratings said on June 27 that European insurers’ holdings in Greek, Italian and Portuguese sovereign bonds are “manageable,” adding that companies could be downgraded if the risks of contagion “lead to a protracted period of severe and broad impact across the European markets, with significant credit spread widening and sharp falls in market values.”

--Editor: Steve Bailey, Frank Connelly

To contact the reporter on this story: Carolyn Bandel in Zurich at cbandel@bloomberg.net.

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net.


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