It has been the worst quarter for single losses since 9/11, but property rates are still in the doldrums. Andrew Wragg reports.

Following two years of relatively healthy loss experience, the property industry seems to have encountered a spell of bad luck in 2008. According to Lloyd’s insurer Advent Capital, the first quarter of this year dealt the industry the worst single risk property loss since the third quarter of 2001 – a period which was dominated by the 11 September terrorist attacks.

“Others in the industry are saying that this has been the worst start to a year in 20 years,” says Michael Papworth, team leader at broker Benfield’s facultative solutions division.

Analysts have suggested that the first quarter property losses could be as high as $6bn (£3.1bn), and while one might expect such a figure to have a market-altering effect, this seems not to be the case.

“Other than mining there is no change to the softening market, due to the massive oversupply of capacity,” adds Papworth.

Charles Coyne, an analyst at investment bank KBC Peel Hunt, agrees that capital is easy to come by.

“There’s plenty of capacity out there, especially in the US,” he says, predicting that, despite the events of the first quarter, the broad trend of the US and international property and catastrophe cycle is still set to be down until well into 2010 in the absence of any major events.

Coyne’s sentiments are echoed by Al Tobin, managing director and leader of broker Aon’s property practice, who believes that rates could be on the slide for the next 18 months. In Tobin’s opinion, it would take a claim of more than $10bn to turn the market. Some of his peers have suggested that figure may be nearer $20bn. Tobin says: “Insurers warn of hurricanes hitting the east coast of the US and there is the ongoing threat of earthquakes, but if there are no single events above $10bn, the market will continue to be in the clients’ interest for the rest of the year; $10bn is the minimum.”

According to Property Claim Services (PCS) data, US property and casualty insurers will pay out an estimated $3.35bn in first-quarter property losses, resulting from nine catastrophes, their largest first quarter pay-out for a decade (see box).

The wave of setbacks in early 2008 does not appear to have dented the market as a whole – capacity is still rife, thanks to the stellar returns of the past two benign US hurricane seasons. However, perhaps not all players are willing to digest the possible extent of their first quarter losses.

“There is somewhat a ‘head in the sand’ mentality,” says Papworth. “Results take a while to come through. By 2009 there will be an impact, which will be shown in the way reinsurance is purchased.”

Business interruption

While the market globally saw rate reductions in property lines of up to 20% over the past year, the high profile and highly expensive floods in Australia in January have managed to slow the speed of decline in the domestic market. Looking at the official figures, it is easy to see why the flooding was, and still is, a business interruption nightmare. According to the Queensland Resources Council (QRC), most of the 33 coal mines in the Bowen Basin – where 40% of the world’s steel-making coal originates – lost production as a result of the deluge.

The QRC says the export coal industry is worth more than A$18bn a year to the Queensland economy, and is a huge source of income for the regional authorities. In the last financial year, the coal industry paid $1.15bn in royalties to the Queensland government.

Mining giant BHP Billiton is estimated to have suffered a $1.6bn insured loss in the floods, but even a claim of this magnitude has not halted a slide in property insurance rates in the Australian market.

However, Papworth believes that the flooding has at least managed to slow the decline – to around 5%. He points out that there are signs that the sector may now be reaching the bottom of the cycle.

“In Australia, long-term agreements (LTAs) are coming through,” he says. “Insureds are being tied into two to three-year contracts, which tend to happen at the bottom of the market.

“When we begin to see three-year LTAs, it means it is about as cheap as it is going to get.”

Is the trend towards LTAs being seen elsewhere globally?

“These LTAs don’t exist that much in the rest of the world,” Papworth continues. “We have seen them mainly in Australia and Germany. Nothing has appeared in the US yet.”

According to London market brokers, claims arising from the Australian floods have hit most of the global multinational cedants to varying degrees. Papworth believes that both insurers and reinsurers have taken a significant hit.

“A lot of the primary companies buy plenty of facultative cover which will impact the traditional fac reinsurers,” he points out.

After surveying 20 US property and casualty reinsurers, the Reinsurance Association of America (RAA) reported that combined ratios had worsened to 95.2% from 89.8% in the first quarter of 2008 compared to the same period last year.

According to Benfield, the first quarter losses could focus insurers’ attention on the value of fac reinsurance to assuage a series of shock losses.

Meanwhile, Papworth says the Australian flood claims have made mining risks more difficult to place, but outside this particular sector it is still business as usual. But he does add that certain capital-rich players are prepared to seize opportunities in the mining sector, taking advantage of the rates, which are relatively robust compared to the rest of the market.

“Post 9/11, we couldn’t place anything,” he adds. “But at the moment, we can still do something, which is testament to the amount of capacity that is currently out there.”

Aside from the mining claims, Russian steelmaker Severstal came into the spotlight in January following an explosion at its Michigan steel mill, resulting in an estimated $500m insured loss. Just weeks later, the company suffered another setback with an explosion at one of its Russian operations, resulting in an estimated $25m claim. Papworth says these loss estimates could rise still further.

“These claims are ongoing,” he adds. “The physical damage can be resolved quite quickly, but business interruption takes much longer to assess.”

Spiralling commodity prices have added to insurers’ misery in business interruption claims in the energy and manufacturing sectors. So is it time for the industry to rethink the way it structures its policies, or is this variability simply part and parcel of the service it offers?

“The way business interruption is offered is a hot topic right now,” adds Papworth. “Especially when the underlying risk is commodity-based. Aspects of the cover are being reviewed, and I have no doubt that Munich Re and Swiss Re will have a team of business interruption experts working away on this.”

How first quarter 2008 losses hit profits

Hardy Bermuda has borne a portion of both the BHP Billiton and Severstal claims, after providing cover on an excess layer basis. It recently described the first quarter of 2008 as the most significant loss making quarter since the World Trade Center disaster, which involved an unprecedented number of high profile large losses in the direct and facultative property market. Lloyds insurer Advent said major property losses, such as claims connected to BHP Billiton and Severstal, had caused its profits for the quarter to plunge. And Munich Res first quarter profits declined 19% in its reinsurance division due to the spate of major losses hitting the market in the period.