Funny money


Roger Crombie

Despite the impact of international cat events, until the pain is felt in the heartland of the US, little will turn the market, argues Roger Crombie.

Some people, I’m told, read magazines from the front to the back. If you’re one of those people, you will by now have learned of the economic toll that global catastrophes in the first two quarters of 2011 have taken on the major Bermuda re/insurers. Such analysis is spot on. Even the best win some and lose some; this year almost everyone will lose some.

Investors who have traded these companies’ stocks below book value for some time will probably have even less confidence, after the way 2011 is shaping up to be. But the truth is that the first half of the year may prove to have been a much-needed turning point in the companies’ development, if you take the long view.

Let it first be said that the non-financial side of catastrophes is as awful as anything can be. When the wind blows or the earth shakes, lives are forever changed, or even ended. Those of us who follow disasters professionally are never able to react with anything other than despair as Mother Nature reminds us of her awesome powers. No disrespect intended to those affected, however, when I point out that every storm (and every big earth tremor) has a silver lining.

At the close of 2010, the global re/insurance market was overcapitalised, to the tune of $50 billion to $150 billion, depending on whom one listened to. With a consensus emerging that the first half of 2011 will have cost re/insurers more than $50 billion—quite a bit more, possibly, once the bills are all in and demand surge has done its dirty work—the re/insurance market will be that much closer to an all-too-elusive equilibrium of supply and demand.

Only then will re/insurers be able to improve pricing in a manner that allows them to meet appropriate claims and yield the degree ofprofitability necessary if they are to top up their tanks in advance of the next round of cat events.

Although insured losses in the first half of 2011 will match or exceed the cost of Hurricane Katrina, their affect on pricing will be nothing like what happened after New Orleans was thumped in 2005, for several reasons.

First and foremost, at least $50 billion in losses was necessary before the previously overcapitalised market could begin to consider a more aggressive pricing strategy. Companies have been returning capital to shareholders for two or three years, but not at a fast enough rate to dent the excess capital accumulating.

Not even the ‘machine gun’ wave of catastrophes in the first half of 2011 will do the trick. The Gryphon Alpha floating facility coming unmoored; the explosion at the CNRL Horizon mining facility in Alberta; the killer winter storm from Colorado to Maine; Cyclone Yasi; the earthquake in Christchurch; the Tohoku earthquake and tsunami; and the record-breaking US tornado outbreak are already on the books. Only if the forecasters’ usual dire outlook for the Atlantic hurricane season is correct—one of these years, it must be—might the market turn. But a classic hard market this is not, as yet.

Among the reasons is one you don’t see cited anywhere. Pop quiz: what’s the exchange rate for the US dollar against the Australian dollar, the New Zealand dollar or the Japanese yen? Be honest; you don’t have a clue. Nor do I.

And neither, I’m thinking, do the bulk of the executives who buy insurance. Americans, for example, refer en masse to euros, pounds and Thai bahts, and all the other currencies in the world, as ‘funny money’.

Many Americans don’t ‘do’ foreign. I once attended a focus group in New York City on the subject of Australia. About 20 of us were handed a blank outline map of the continent and asked to fill in whatever geographic details we could. I didn’t know much, but was heartened when I looked around the table and saw that I was one of a very small number who had the map the right way up.

The Bermuda companies are run by experienced and sophisticated executives, many of them Americans. Their market is the world, with an emphasis on North America and Europe. They are at home in any number of cultures and understand intimately how to handle the currencies in which their companies are paid.

Many of their ultimate customers—the man on the street in the US—however, lead narrower lives. Unless your average Joe feels the pain of the re/insurers’ losses through nightly news updates, political drama and the endless hoo-hah that goes with a big US cat, premiums won’t rise by three percent, let alone 30.

Re/insurers only ever see the opportunity for meaningful rate increases when the US is hit by a major catastrophe, its losses racked up in greenbacks.

US, reinsurance, rates, Bermuda

Bermuda Re