Lloyd's of London warns of 'perfect storm' threat to insurance market

[Hoodlum]

Interesting to see some preliminary loss projections for the oil spill.  Maybe we will finally see some price increases if the hurricane season is as bad as projected.

 

http://www.guardian.co.uk/business/2010/may/18/lloyds-insurance-disasters-profit-warning

 

The head of the Lloyd's of London insurance market warns today that one more major disaster could plunge the insurance industry into the red this year.

 

Richard Ward will tell a gathering of insurance chiefs that the industry is facing the toughest year he can remember, the Guardian has learned.

 

"It isn't overstating the situation to say that the insurance industry is facing a potential perfect storm this year," Ward says in his keynote speech at the Insurance Day London Summit.

 

Speaking as the industry braces itself for the US hurricane season, Ward says: "That is a significant challenge for the industry worldwide but it is a storm we can see coming and we can prepare for. Insurers who keep their discipline and don't chase risky short-term profit will stand the best chance of long-term survival."

 

 

 

 

[Hoodlum]

I expect the oil spill costs to get upgraded throughout the year as the damage becomes more known.  The estimates are all over the map right now.

 

http://content.usatoday.com/communities/ondeadline/post/2010/05/oil-update-spill-to-harm-europe-arctic-wildlife-hurricane-season-looms/1

 

"It's a huge mess and the liabilities are in the billions, possibly the tens of billions," said Gregory Slayton, a reinsurance expert at the Tuck School of Business. "This is a failure of risk management of epic proportions."

 

 

 

I found it interesting that BP is quoted as saying in the following article that there is an equal amount of Natural Gas is coming out of the pipe.  I guess NG is not as bad as oil for the environment so it doesn't get mentioned, but this should have some impact as well.

 

http://www.marketwatch.com/story/bp-says-study-due-saturday-on-size-of-gulf-spill-2010-05-21?reflink=MW_news_stmp

[StubbleJumper]

The author seems to have gotten a little ahead of himself in calling this a perfect storm.  To date, we've had two smallish events:

 

Chile + oil spill = impact of one good wind storm in Florida

 

It's a little early to start calling this a high-cat year!

 

SJ

 

 

[Hoodlum]

The "perfect storm" comment came from Richard Lloyd, CEO of Lloyd's.  He is suggesting it is a combination of higher payouts and low returns that will have a "very significant" impact on the insurance industry. 

 

[SharperDingaan]

 

You might want to listen to what the head of Lloyds has just told you.

(1) This "perfect storm" will lower all boats; & do it very quickly if there is even just 'average' hurricane damage in the US Gulf Coast (2) All P&C carriers should expect to trade at lower multiples by year-end.

 

Then keep in mind that oil slicks heat up sea water by absorbing more of the solar gain; & that the warmer the water, the stronger the seasonal hurricane.

 

SD   

[Uccmal]

I wonder if oil slicks slow down evaporation.  Less water vapour and fewer storms. Maybe we found the cure to the common hurricane.

 

I agree.  I wont buy FFH before storm season.  Its not relevant whether or not they will benefit from a hard market if they get hammered  along the way.  However, I am not selling either.  So there you have it.   

[StubbleJumper]

 

You might want to listen to what the head of Lloyds has just told you.

(1) This "perfect storm" will lower all boats; & do it very quickly if there is even just 'average' hurricane damage in the US Gulf Coast (2) All P&C carriers should expect to trade at lower multiples by year-end.

 

Then keep in mind that oil slicks heat up sea water by absorbing more of the solar gain; & that the warmer the water, the stronger the seasonal hurricane.

 

SD   

 

Ultimately, time will tell.  On this board and its predecessor, we've been calling for a hard market for about three or four years.  The cats have just not appeared to drive the required shortage of capital.  Maybe it'll be this year, but the hurricane season will be a big factor.  However, my experience in P&C investing tells me to ignore the oil spill and Chile as they are not really big cats (ie, the oil spill is like a bad spring in tornado alley). 

 

Who knows, maybe this year will be like KRW?

 

SJ

[Viking]

Stubble, I hear you on the call for a hard market. It likely will not happen until a catalyst comes along. In 2008 and early 2009 falling asset values would have done the trick but risk assets came roaring back so fast capital was not permanently removed. I do believe that underwriting has deteriorated to the point that companies now rely on reserve releases to make their CR. Clearly this game cannot go on indefinitely.

 

When you look at accident year combined ratio's (over 100) and low bond yields we have an accident waiting to happen. Should we get an above normal accident year things should accelerate. Should we get another below average accident year the hard market will be delayed.

 

Bottom line, most companies are driven by hitting quarterly and annual numbers = raise, promotion and big bonus payout. And as we all know these things can be fudged for a time...

 

My guess is Berkley's call on hardening in Q4 to be optomistic (i.e. I am not counting on it to make my investment decision). I do think a hard market is coming sooner rather than later..  

 

I am also quite surprised by the number of companies who are buying back an enormous amount of stock. This does suggest that perhaps capital is plentiful. But this action is also taking it our of the system.

[Uccmal]

I think what you guys are describing is a tipping point.   Companies are releasing past reserves, buying back stock, and generally using their capital in a frivolous manner.  Eventually, you reach a point where even a small or midsize event tosses everything to the dark side.  Rather suddenly they cannot meet their capital needs, and things spiral out of control for the poor operators.  While the weak operators are struggling to raise capital the strong ones take away business at a premium.  

[SharperDingaan]

 

Its worth thinking of the see-saw.

 

Large numbers of fairly well capitalized carriers on one end, all collegially doing the same thing, & progressively moving closer to the fulcrum. Increasing, & additional, risks on the other side moving further from the fulcrum. A small change on either side, producing a disproportional effect.

 

SD

[wiessman]

Very cool analogy, Sharper

[Hoodlum]

The NOAA will be releasing their hurricane forecast tomorrow.  Here is one from WSI that was released yesterday.

 

http://news.yahoo.com/s/nm/20100525/us_nm/us_storm_wsi_forecast_1

 

NEW YORK (Reuters) – The 2010 Atlantic hurricane season could be the most active since 2005, the most active season in recorded history, Weather Services International (WSI) said on Tuesday.

 

In its latest forecast, WSI, of Andover, Massachusetts, called for 18 named storms, 10 hurricanes and five intense hurricanes, rated as category 3 storm with winds of 110-130 mph, or greater.

 

WSI said the coastal region from the Outer Banks of North Carolina northward to Maine was twice as likely as normal to experience a hurricane this year.

 

"Our model suggests the threat to the Northeast coast this season is on par with that in Florida and the Gulf coastal states," WSI Chief Meteorologist Dr. Todd Crawford, said in a release.

 

WSI said the 2009 tropical season was the quietest since 1997, as an emerging El Nino event combined with relatively cool tropical Atlantic waters to suppress widespread storm development.

 

"However, the primary drivers for tropical activity have sharply reversed course this year and everything is in place for an incredibly active season ... eastern and central tropical Atlantic sea surface temperatures are currently at record warm levels for May, even warmer than the freakishly active season of 2005," Crawford said.

 

The 2005 Atlantic hurricane season, which included Hurricanes Katrina and Rita that devastated the oil and natural gas-rich U.S. Gulf Coast, was the most active in history, causing more than 1,500 U.S. deaths and more than $115 billion in damages, according to the U.S. National Hurricane Center.

 

"While we've increased our forecast numbers in both of the last two monthly updates, we are still more likely to raise than lower these numbers going forward," Crawford noted.

 

[omagh]

Thanks Hoodlum.  That's why we keep some dry powder...

 

-O

The NOAA will be releasing their hurricane forecast tomorrow.  Here is one from WSI that was released yesterday.

 

http://news.yahoo.com/s/nm/20100525/us_nm/us_storm_wsi_forecast_1

NEW YORK (Reuters) – The 2010 Atlantic hurricane season could be the most active since 2005, the most active season in recorded history, Weather Services International (WSI) said on Tuesday.

[Rabbitisrich]

http://www.noaanews.noaa.gov/stories2010/20100527_hurricaneoutlook.html

 

Uh oh.

[Hoodlum]

WOW, Atlantic water temperatures are 4 degrees above normal.  Outside of the insurance damages I fear most for Haiti.

 

If La Nina develops this summer then we should be in for a record hurricane year.

 

“The main uncertainty in this outlook is how much above normal the season will be. Whether or not we approach the high end of the predicted ranges depends partly on whether or not La Niña develops this summer,” said Gerry Bell, Ph.D., lead seasonal hurricane forecaster at NOAA’s Climate Prediction Center. “At present we are in a neutral state, but conditions are becoming increasingly favorable for La Niña to develop.”

 

 

 

[Rabbitisrich]

I sold my lots that I purchased between $345-$352 to be ready for potential volatility. It's still a fairly small chunk of my Fairfax stake, so it'll be pretty painful if the negative scenarios occur.

[Myth465]

I have FFH 2011 Leaps and am thinking its time to offload them. 1 or 2 bad storms and my gains could disappear. I am thinking of selling the leaps and buying a smaller chunk of shares for a core position.

[Uccmal]

I hold Leaps at 220, 240, 260, 280.  All are deep in the money but trading like stocks i.e. they no longer have time value at all.  In fact the bid is often lower than the FRF bid for the common stock. 

 

Looking at FFH specifically:

- They have 1 billion in cash on hand and dividend capacity at Zenith, and NB (out of the hurricanes way)

- The severity of the hurricane season is unlikely to eliminate this cash hoard.

- IF/When some major hurricanes hit some of the competitors are going to be forced to raise capital probably when it is least available to stay in business.  Barring unforeseen combination of disasters FFH will not be in this situation.

 

When hurricane season ends and we know prices are rising by 30, 40 and 50% across the world will FFHs stock not snap back and reach new highs - all before January 2011.  If the hurricane season turns out to be a dud then the odds of a hard market are reduced and the status quo is maintained. 

 

I have considered selling a portion of my position but so far have relented.  If I could replace the Leaps I would probably sell some and buy back on the dips but that is no longer an option.  So, I will stick with them and do some sort of simple gains loss analysis - what do I lose on the upside when I sell, versus what do I lose on the downside if I dont.

 

 

[Myth465]

I havent watched the cycle for more than 2 years. Do stocks trend up after the season either way. My fear is in September we get a massive set of storms and FFH's stock gets knocked down. Then by Jan it doesnt recover and I have to look in losses. Then it picks back up in Feb or March once everyone sees the hard market. I am comfortable with the stock but dont want to lose 20% of my gains on leaps. If FFH moves down 3% then my leaps move down quite a bit due to the leverage. With the rocky markets I dont see much upside over the next 6 months but quite a bit of downside which is why I am thinking of selling. The gain has finally hit the long term requirements.

[SharperDingaan]

 

Uccmal: You might want to sell down some Leaps & go long common on a margined basis once we know the outcome of hurricane season. Yes you give up some leverage, & hedging does have a cost, but does it really matter if the whole industry is down 15-20%?

 

SD