?Perfect Storm' Still Raging For Reinsurers

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By Michael Ha

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NU Online News Service, Sept. 24, 3:00 p.m. EDT, NewOrleans?The turbulent global economic climate, which sawan unprecedented collision of financial woes hit the reinsuranceindustry in 2002, continues to rage, an industry expert told aninsurance conference here.

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John Hamblin, underwriter at London-based Cathedral Capital,which manages Lloyd's Syndicate 2010, speaking at the annualNational Association of Mutual Insurance Companies convention, saidthat the roots of the current volatile conditions for reinsurerscan be traced back to the close of the 20th century.

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"Raging bull markets and the dot-com boom caused many to forgetbusiness fundamentals. Greed overcame discretion," said Mr.Hamblin.

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"Like insurers, some reinsurers invest heavily in equitymarkets, and up until the end of 1999, this left many of them withapparently robust balance sheets, which enabled them to offsetgrowing legacy losses from the past: asbestos, pollution and thelike," he said.

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But poor performances by U.S. stock markets following thedot-com bust impacted not just U.S. companies but also othersaround the world, Mr. Hamblin pointed out: "The Dow Jones showed adecline of some 27 percent to the end of 2002. It has been saidthat if Wall Street sneezes, London catches a cold. But in thiscase, Wall Street had the cold and London caught pneumonia."

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He also noted that reinsurers invest heavily in bond markets,but 2002 saw record defaults in bonds with collapses of Enron andWorldCom.

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Furthermore, the Sept. 11 event will continue to hurtreinsurance companies for years to come, Mr. Hamblin predicted.Initially, he said, the part 9/11 played in "the perfect storm" ofconditions that developed "was to suck large amounts of short-tailcash out of the system, forcing some to cash in investments, whichwere already at a low point, to meet their obligations. It testedthe insurance and reinsurance industry to the limit."

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Still, most reinsurers survived--reinsurance rates in most lineswere set to rise sharply in response to a $40 billion CAT loss, hesaid. "Those survivors probably felt pretty good--they felt theyhad survived the unsurvivable, little knowing that the worst wasstill to come."

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In 2002, he noted, the storm continued to strengthen withfalling stocks and bond markets, declining interest rates, andrising legacy losses, as well as 9/11. "Immediately after Sept. 11,rating agencies began to downgrade," Mr. Hamblin noted, adding thatthe pressure gathered on ratings and capital bases resulted insignificant withdrawals from the reinsurance arena.

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"Largely, this withdrawal has come from insurance companies withreinsurance arms, notably AXA Re U.S. branch, Gerling Re andHartford Re," he explained. "The demand on capital, coupled withvolatility of reinsurance results and the fact that often thereinsurance book clashed heavily with the parent company in thesame loss--all this forced companies to return to what they see astheir core."

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Regarding Sept. 11 losses, Mr. Hamblin forecast that oncephysical-damage claims are met, it will be "many, many years"before all the claims are finally resolved: "I suspect this willnot occur in my lifetime. It is worth remembering that the previousterrorist attacks on the Twin Towers in 1993 generated a number ofcasualty claims and lawsuits, not one of which had been settled bySept. 11 of 2001."

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Mr. Hamblin also argued that the light catastrophe-claim figuresfor 2002 were not as good as they first appeared to be. "2002 wasnoteworthy in the U.S. market as being a light year for catastropheclaims, with estimates of total CAT losses at just under $6billion, compared to an annual figure of near $10 billion," henoted.

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"You would think this would have given the reinsurance industrya breathing space to recover from their disappointments on theinvestment side," he told NAMIC members. "But if you adjust lossesto exclude 9/11, 2002 is only slightly better than the average yearfor CAT claims in the United States." And there was no relief forEuropean reinsurers either, he commented, as the market in Centraland Eastern Europe suffered a series of flood losses totaling some$3.2 billion of insured losses.

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Additionally, in 2002 many reinsurers saw huge increases incasualty claims arising not just from the soft market of the late1990s in the directors & officers and errors & omissions,but also from long-tail asbestos and latent disease claims.

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Asbestos, he said, continues to be a problem. In some 80 percentof new notices of claims, "the claimant has no injury and noillness," Mr. Hamblin said. At least, with asbestosis, there is apotential government deal on the table, but "where politicians areinvolved, don't hold your breath," he advised.

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Mr. Hamblin also pointed out that the industry is facingever-more lawsuits and class actions, the latest being obesitycases, which is even gathering pace in Europe. "And if you stillbelieve mold doesn't affect you, I suggest you talk to one of yourTexan colleagues. Many attorneys seek to create disputes ratherthan solve them, and the U.S. court system allows it to happen. SoI think reserving for potential long-tail claims is an impossibletask."

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Mr. Hamblin also observed that because of the knock-on effect ofhigher casualty claims and the time 9/11 will take to settle,reinsurance recoverables are now at record levels.

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"This has greatly increased the potential for credit risk or areinsurer's failure to pay. After all, having passed a claimreserve onto a reinsurer is not the end of the cedant's risk: itsimply takes the form of a credit risk until the claim is finallysettled."

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So where does this perfect storm leave the reinsurance industryin 2003 and beyond? "Well, the storm is not yet over. And as aresult, all the damage is not yet done for reinsurers," hesaid.

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