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Insurer and reinsurer XL Group plc. (XL - Analyst Report) is expected to end the fourth and final quarter of 2011 with estimated losses of $135 million – $185 million owing to the Thai floods. The company also expects to see an uptick of $35 million, relating to cat losses in the first nine months of 2011.
During the third quarter, XL recorded more than $110 million of catastrophe losses caused by Hurricane Irene, Tropical Storm Lee, the September Texas Wildfires and the July Danish Floods. Consequently, XL’s profits fell 45% year over year in the quarter. Given the exceptionally high incidence of natural calamities in 2011, net income for the first nine months totaled $40.8 million, down 10 times compared with the year-ago period.
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.
There were 33 catastrophes in 2010, up from 27 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 become the 5th or 6th most expensive year in terms of insured catastrophe losses in the US.
However, there is a silver lining to the cloud of huge cat losses, a major factor in turning insurance industry cycles. 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. The industry 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 for 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 price stiffing in some lines of business. In some areas where the losses have been significant, a broad-based price hardening is yet to be seen.
However, the management at XL Group has a more optimistic view of the tight insurance rates. According to the management, rates accelerated each month in the third quarter and it believes that the trend will continue into the fourth quarter and 2012. We will get more color on how the company fared in its fourth quarter earnings release, due shortly.
Among other players, Everest Re Group Ltd. (RE - Analyst Report) estimates Thai floods to cause a loss of $100-$125 million to its fourth quarter earnings, Swiss Re sees losses of $600 million, while Munich Re pegs the cost of loss at $370 million.