The year 2011 will be one of the costliest years ever for global insurers and reinsurers, but the industry got a bit of a break from costly natural disasters in the third quarter and is hoping the fortunes hold up through the end of the year to help meet new, sometimes lowered profit goals.
Still, as the sector scrambles to brace for the direct and indirect impact of the flooding in Thailand, and financial markets are set to remain vulnerable as long as the euro sovereign debt crisis awaits a convincing solution, full-year profit forecasts remain uncertain bets.
Hannover Re AG was one of the first reinsurers to come out with an estimate of the costs the floods have caused. Chief Executive Ulrich Wallin said Wednesday that its bill for the flooding could exceed EUR100 million, though it won't threaten the 2011 profit target of at least EUR500 million that the company is now more confident of reaching after its third-quarter results.
Nonetheless, it's becoming a close call. In the final quarter, the company has budgeted EUR130 million--and an additional buffer of between EUR30 million and EUR40 million--for major claims.
Munich Re AG also said it expects the Thailand floods to result in a "major claim," though adding that it's too early to give an estimate, which was echoed by peer Swiss Re AG.
And the U.S. Atlantic hurricane season, so far relatively mild, and other major disasters could still take their toll just before the close of 2011--a year that began as one of the roughest on record for insurers and reinsurers. So far, the costliest year has been 2005, with Hurricanes Katrina, Rita and Wilma, among others. Katrina alone caused an insured loss of $62.2 billion, according to Munich Re estimates.
This year's biggest event, the quake and tsunami and nuclear disaster in Japan, is estimated to have cost the global insurance sector about $30 billion. Second in line is the February earthquake in New Zealand, the Thailand flooding could rank third.
In the first half of this year, "an exceptional accumulation of very severe natural catastrophes," as Munich Re put it, quickly rendering obsolete the original profit forecasts of most large players like Munich Re, Swiss Re and Hannover Re.
The disasters ranged from a quake and tsunami and subsequent nuclear fallout in Japan, to an earthquake in New Zealand, floods and cyclone in Australia, frost in Mexico, six fires in various places, winter damage in the U.S. and unrest in Tunisia.
The second quarter added more disaster claims such as from tornadoes in the U.S. and another earthquake in New Zealand, albeit on a smaller scale.
For Hannover Re, the bill for major claims was EUR572 million in the first quarter, already topping the annual budget of EUR530 million. The second quarter added some EUR53 million, the third quarter some EUR118 million, such as for storms and fires.
However, the euro area's sovereign debt crisis, turmoil in financial markets and discussions over the haircut applicable to Greek sovereign bond holdings in investment portfolios added to the sector's sorrow this year. While Swiss Re's and Hannover Re's exposure to Greek sovereign debt is nil, Munich Re in the first nine months took a EUR933 million write-down on its entire Greek portfolio, marking it to market value.
So far, the U.S. Atlantic hurricane season, which lasts from June through November and usually is the big year-end gamble for the sector, has been benign and manageable. The biggest event to date, Hurricane Irene--which hit the Caribbean and the U.S. in late August--cost Munich Re EUR195 million and Hannover Re EUR20.2 million. Swiss insurer Zurich Financial Services AG will Thursday report its results, with figures likely to show a hit related to Hurricane Irene.
Munich Re said Tuesday that it aims to reach a profit for 2011, though the net figure of EUR75 million after the first nine months looked bleak compared with EUR1.96 billion in the same period a year ago.
So, for the time being, investors may have to focus on the 2011 dividend payout instead, which Munich Re aims to maintain stable at EUR6.25 a share, while Hannover Re wants to up the payout ratio to above 40% of net profit from the previous range of 35%-40%.