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MARKETNEWS,DATAANDINSIGHTALLDAY,EVERYDAY THURSDAY26JULY2012
ISSUE3,654
Japan faces elevated typhoon risk
World Loss Intelligence
First-half results
Appealruling:Citizenspolicyholdersproceedincollecting$104m p6-7
Lancashiremakesplanstoreturncapitalp4-5
Aviationmarket
Disconnect emerging betweeninsurance and reinsurance p3
Graph: This week’s winners…
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QBE
Hiscox
Platinum
AIG
IAG
FinancialWorldToday
Stocks boostedby US earningsresilience p8-9
p2
.AP
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THURSDAY 29TH NOVEMBERTHE LANCASTER LONDON
SPONSORED BY:NOW OPEN FOR ENTRIES www.insurancedayawards.com
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North-westPacific’s largestexposureat increasedriskin2012duetoElNiño
2
NEWSwww.insuranceday.com| Thursday 26 July 2012
Marketnews,dataandinsightallday,everydayInsuranceDay istheworld’sonlydailynewspaperfortheinternationalinsuranceandreinsuranceandriskindustries.ItsprimaryfocusisontheLondonmarketandwhataffectsit,concentratingonthekeyareasofcatastrophe,propertyandmarine,aviationandtransportation.It isavailableinprint,PDF,mobileandonlineversionsandisreadbymorethan10,000peopleinmorethan70countriesworldwide.
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Japan at risk as ElNiño slowly develops
J apan is at greater risk of typhoonlandfalls this year as a result of theslow transition to El Niño, whichbrings favourable conditions for aJapanese landfall.
Dr Peter Sousounis, senior principalatmospheric scientist at AIR Worldwide,said he is expecting the 2012 north-westPacific season to have between 23 and 24named storms, largely in line with thelong-term average. “But I expect a moresignificant impact for Japan than we’veseen for the past two or three years,largelyasaresultofthegradualtransitiontowardsElNiño,”hetold InsuranceDay.
Sousounis said the onset of El Niñocauses storms to form further to the east,giving them a longer track over theocean in which to intensify, as well as abetter opportunity to curve northward –all factors which point to a heightenedrisk for Japan.
Sousounis was speaking after the eightnamed storm of the season – typhoonVicente – narrowly missed Hong Kongbefore making landfall in China’s Guang-dong province.
Vicente made landfall as a category-three typhoon, having earlier undergoneexplosive intensification, which saw itbecome a ferocious category-four stormas it approached Hong Kong.
Such was the strength of the storm, theHong Kong Observatory issued a Signal10 warning – its highest alert level – asVicente approached.
It was the first time the observatoryhad issued a Signal 10 since 1999.
“Vicentewouldhavebeenaverysignif-icant loss event for Hong Kong had itmade a more direct hit,” Sousounis said.
The storm eventually made landfall120 km south of Hong Kong on July 23and its relatively small radius meantdamage in both Hong Kong and Macauwas relatively minor.
“ThestrongestwindsobservedinHongKong were around 65 km/hr, which isbarely strong enough to cause any nota-ble damage,” he said.
Rival modelling company Eqecat hasestimated the insured loss from Vicenteto be between $100m and $300m.
Taishan, the main affected area onChina’s coast, has a population of close toone million people and Eqecat said itexpects economic damage to costbetween $600m and $1.5bn.
Conditionsfavourstrongerstormsthatcurvenorthwards
Scott VincentDeputy editor
Typhoon Vicente:th storm in briefVicente became a named storm on July 21 while it was churning in the South ChinaSea. On July 23, the storm intensified to become a category-one typhoon.
Owing to low vertical windshear and high sea-surface temperatures (conditionsconducive to storm intensification), Vicente rapidly intensified near the Pearl RiverDelta and became a category-four typhoon. Before making landfall, Vicente weak-ened to a category-three typhoon.
The maximum storm surge from this event was close to 3.5 metres and is not likelyto cause significant insured losses from storm surge. Macau reported one to twometres of storm surge and Hong Kong reported less than one metre of storm surge.Macau is largely built on reclaimed land and the Macau airport, which is in closeproximity to the South China Sea, did not experience significant impact from thisevent. The event caused denuded trees, power outages and debris, which disruptedpublic transportation in Hong Kong and Macau. Low windspeeds and storm surgeimpact within Hong Kong and Macau are not likely to cause significant insured loss.
Source: Eqecat
“I expect a more significant impact for Japan than we’veseen for the past two or three years, largely as a result ofthe gradual transition towards El Niño”
Dr Peter SousounisAIR Worldwide
TyphoonVicentenears landfall inChina’sGuangdongprovinceonJuly23
3
NEWSwww.insuranceday.com| Thursday 26 July 2012
Disconnect emerging betweenaviation insurance and reinsurance
A significant disconnectis emerging betweenpricing in the aviationinsurance and reinsur-
ance markets, as although bothlines of business are reportingreductions, those in the primarymarket are far more pronounced.
This means primary airlineunderwriters are putting theirprofitability at increased risk asmargins get ever tighter.
According to Aon’s latest reporton the airline insurance market,premium volume has continuedlast year’s trend and carried ondecreasing. In July to date, premi-ums have dropped 12% year onyear, while in 2012 so far, pre-mium has fallen 9%.
And although pricing in the avia-tion reinsurance market has also
decreased, it has not done so to thesame extent.
Guy Carpenter’s recent reviewof the July 1 aviation reinsurancerenewal, which includes portfo-lios of both airline and aerospacebusiness, said reductions on pric-ing of 3% to 5% for like-for-likeexposure were commonplace.Programmes with increased expo-sure levels, a higher number ofexpected passengers or averagefleet value (AFV), for example,renewed at as-before terms orwith slight increases.
The key difference is in the pri-mary market, premium volumehas fallen while at the same timeunderwriters’ exposure to loss hasincreased substantially.
“Rates in the airline insurancemarket continue to decline, withthe price of premium fallingdespite rising AFV and passengernumber forecasts,” Aon said.
So while premiums have fallenin the primary market 9% in 2012to date, AFV has risen by 4% and
expected passenger numbershave grown 6%.
“Capacity continues to be a keydriver, with healthy competitionfor attractive risks. The low level ofclaims in 2011 and so far in 2012 isalso a significant factor,” Aon said.
TheJuly1renewalisanimportantdateforboththeairlineandaviationinsurance and reinsurance mar-kets. On the primary side, it is thefirst time in the year when a consid-erable amount of airline business isconcluded. Indeed, close to 40% ofthe year’s 2012 year-to-date leadhull and liability premium is placedon this day, with airlines such asAmerican Airlines, Federal Express,Republic, Indigo Partners and Pin-nacle/ColganallrenewingonJuly1.
In the general aviation reinsur-ance sector, the tuly 1 renewals var-ied by market. Internationalbusiness became more competitiveas positive results continued, whileUS risks stayed competitive, andratesfellasexposuregrewandprof-itabilitymarginsbecametighter.
Christopher MunroSenior reporter
6%Growth inexpectedpassengernumbers
12%Year-on-year
drop inpremiums
4%Rise in
average fleetvalue in2012
9%Drop in
premiums sofar in 2012
Costa Concordia loss felt onJuly 1 ILW pricingThe impact of the Costa Concordiadisaster on reinsurers’ bottom linescaused pricing and attach-ment levels for marineand energy industryloss warranties (ILW)to rise at the recentJuly 1 renewals, oneof the few areas of themarket where this actu-ally occurred, writes Chris-topherMunro.
Ample ILW capacity has meantbuyers’ demand has been met,although pricing itself was up sig-nificantly year on year, Guy Car-penter reported.
ILW pricing for the marine andenergy market increased acrossthe board primarily because of theCosta Concordia loss, the originalloss reserve of which was recentlyupped to $1bn.
Butitwasonlythissegmentofthemarine and energy insurance mar-ket where any notable increaseswere imposed at the July 1 renew-als,GuyCarpenterhasreported.
“In general terms, primaryrates on global marine and energy
covers were flat. Despite the rela-tively large losses that occurred,
even energy rate increasestailed off somewhat.
“There were no spe-cific moves to increaseprimary rates, whichfiltered through to
marine reinsuranceplacements, where
individual accounts weretreated on case-by-case bases,” thebrokersaid.
The recent upward revision ofthe Costa Concordia lossreserve comes as thefamily of the youngestvictim of the disasterreportedly receiveda seven-figure sumfrom the operator ofthe liner.
Costa Cruises paidthe compensation to therelatives of five-year-old DayanaArlotti, whose body was foundalongside that of her dead father,Williams Arlotti.
This settlement is the first majorpayout of what is sure to be a long
and complex compensatory proc-ess. Lloyd’s List Intelligencereported Costa Cruises has alreadyoffered €11,000 ($13,336) to pas-sengers who were not injured orbereaved, with those who acceptthe money agreeing to drop allfuture litigation against the firm.
However, the Italian consumergroup heading the class actionagainst Costa Cruises, Codacons, isurging passengers to decline theoffer and called on them to demandaminimumof€125,000eachtotake
into account the psycho-logical trauma they will
haveundergone.In the immediate
aftermath of theincident, Codaconssaid it expected
compensation to be“at least €125,000 for
each passenger, up to twoor three times more for specificcases and more than €1m for themost serious cases”.
The organisation launched theinternational class action againstCosta Cruises in Miami, Florida.
$1bnLoss reserve for
the CostaConcordia loss
€11,000CompensationCosta Cruises isreported to have
offered to passengersnot injured orbereaved
Eiopa highlightslack of IGSharmonisationEiopa has published a report on therole of Insurance GuaranteeSchemes (IGS) when winding upinsolvent operations in the EU andthe European Economic Area,writes Peter Birks.
The report highlights a lack ofharmonisation in areas such aswhich authority takes a decision tointervene when an insurerbecomes insolvent; the ability toprovide for portfolio transfers; alack of “pre-warning systems” forinsurers in difficulties but not yetinsolvent; and the role of the rele-vant supervisory authority whenan insurer collapses.
Eiopa also points out policy-holders face the possibility ofinconsistent treatment, depend-ing on the country in which theinsurer goes into insolvency. Inmore detail, only two respondentcountries had no IGS at all.Seven had a life IGS and five had anon-life IGS, while five morehad an IGS that covered bothsectors. “Comprehensive cover is
scarce and cover is often limited tothe motor insurance sector,”Eiopa said.
One example of the many areaswhere powers and treatment dif-fer is whether continued insur-ance cover is provided. Fourteenmember states reported the IGSdoes not provide continuance ofcover, while in nine memberstates the IGS did provide for con-tinuance of cover.
“Comprehensive coveris scarce and cover isoften limited to themotor insurance sector”
Eiopa
4
NEWSwww.insuranceday.com| Thursday 26 July 2012
Surge in premium pushesWR Berkley 1H net incomeup 23% to $244.2m
Lancashire plans to return capitalunless conditions improve
L ancashire revealed plansto return capital to share-holders unless marketconditions improve as it
unveiled a net operating profit of$102.6mforthefirsthalfoftheyear.
Jonny Creagh-Coen, Lanca-shire’s head of investor relations,told Insurance Day the ratingenvironment has proved dis-appointing in light of last year’srecord-breaking internationalcatastrophe losses.
“The property direct and faculta-tive market has hardly moved atall and it’s 40% to 50% off where itwas in 2005/06,” he said. “We’llprobably move some PML [proba-ble maximum loss] from the directand facultative book and put itinto treaty.”
One region in which Lancashirehas increased its presence is Japan,where the company grew its bookat the April 1 renewal. “This is a
Companyreports$103.7mprofit in1Hbutwarnsofstaticpriceenvironment
A surge in growth in net premiumswritten during the second quarterhelped US insurer WR Berkley topost net income of $244.2m for thefirst half of the year, up 23%, writesGreg Dobie.
However, the property/casualty(p/c) group’s chairman and chiefexecutive, William Berkley, saidthe pace of price increases was notaccelerating as fast as the companyhad anticipated, with the carrier’saverage renewal rate increasing6% during the second quarter.
Berkley said he expects this tochange later this year as morecompanies begin to realise theirloss reserves are weakening.
The p/c group saw its net premi-ums increase 12.6% between Apriland June to $1.19bn. Meanwhile,net premiums written during thefirst half of 2012 totalled $2.39bn,up 11% year on year.
The improved bottom line alsoreflected an 8% increase in invest-ment income to $318.9m and a 38%jump in realised gains to $71.8m.
Berkley attributed the rise ininvestment income to the strongperformance of the carrier’s fundsduring the second quarter.
“In spite of the difficult environ-
ment, our overall investmentreturns have proven to be satisfac-tory and we have continued to ben-efit from substantial realised gainsfrom our non-fixed-income port-folio,” he said. “This is in part aresult of our continuing ability tofind small opportunities offeringattractive returns.”
The combined ratio improved to97.4% from 98.9%, as a 10% rise inclaims costs to $1.41bn did notmatch the increase in premiums.
Each of the group’s regionalalternative markets, reinsuranceand international segments postedimproved combined ratios; only itsspecialty segment did not.
Net income during the secondquarter totalled $108.8m, up from$82.2m a year earlier.
“We still see pricing momentumthroughout the balance of theyear,” Berkley said. “Many compa-nies are beginning to recognisetheir weakening loss reserveposition, which will continue to putforward upward pressure on thepricing environment. We continueto have a positive outlook for thesecond half of the year, as we workdiligently to grow our business andeffectively manage our capital.”
Scott VincentDeputy editor
“As we enter the USwind season we arecomfortable withcapital levels and aninterim dividend of 5¢ per common sharehas been declared bythe board”
Richard BrindleLancashire
$102.6mLancashire’s netprofit for the first sixmonths of this year,up from $97.5m forthe first half of theprevious year
6%Average pricechange at renewal –likely to be betterthan rivals anddriven by…
Strong Japanese yen boosts Aflac growthUS-based supplemental healthinsurer Aflac has booked netearnings of $1.27bn for the firsthalf of 2012, up from $663m inthe comparable period last year,writes Peter Birks.
Aflac generated revenues of$12.1bn during the six-monthperiod, up from $10.2bn in the
first half of 2011. The Columbus,Georgia-based company saidresults for the period benefitedfrom a stronger Japanese yen. Newannualised premium sales for theperiod for Aflac Japan were¥105.6bn ($1.3bn).
Aflac’s US operation reported a3% increase in total new sales,
Lancashire first-halffinancial highlights
“In spite of the difficultenvironment, ouroverall investmentreturns have proven tobe satisfactory and we have continued tobenefit from substantialrealised gains from ournon-fixed-incomeportfolio. This is in part a result of ourcontinuing ability to find smallopportunities offeringattractive returns”
William BerkleyWR Berkley
Graph: WR Berkley, first-half financials, 2011 versus 2012 ($m)
Source: WR Berkley
n 2012 n 20112,500
2,000
1,500
1,000
500
0Net investment gainNet investment incomeNet profitNet written premiums
Greenberg warns of USdrought as Ace 1H net profitsoars 50% to $1.3bn
Ace saw its net profit soar morethan 50% to $1.3bn in the first halfof 2012, bolstered by a significantyear-on-year fall in catastrophe-related losses, writes Greg Dobie.
However, Ace chief executive,Evan Greenberg, warned droughtconditions in the US continue toaffect the insurer’s crop insurancebusiness and will also affect itssecond-half earnings.
Its updated guidance for the fullyear includes a reduction of 19¢ ashare to reflect a projected third-quarter increase in the year-to-date crop insurance loss ratio,amid the worst drought in the USfor half a century.
Crop insurance aside, Ace said itis optimistic about its revenue andearnings prospects for the remain-der of the year as it revealed its pre-mium growth rate had accelerated4.5% during the second quarter.Full-year guidance is now $7.20 to$7.60 a share after-tax operatingincome, from the previously pro-jected range of $7.03 to $7.43.
Greenberg said Ace is benefitingfrom “strong, broad-based growth,both geographic and product,along with an improving property/casualty [p/c] price environmentglobally”, adding: “For the first
time, pricing in our internationalp/c operations in aggregate turnedpositive, whereas for our US busi-ness rates continued to rise, up4.7% on average for the quarter.”
The insurer’s improved firsthalf largely reflected a decline incatastrophe-related losses to $74mfrom $557m a year earlier.
Underwriting income of $767mwas more than four times the year-earlier $190m, with the combinedratio for the first half improving to88.9% from 98.5%. Ace’s under-writing income from p/c businessduring the second quarter of theyear was $374m, compared with$239m in 2011. The p/c combinedratio for the second quarter was88.7%, a result Greenberg called“distinguishing”.
However, the carrier’s netincome for the second quarteractually declined year on year to$328m, down 45%, as a jump inrealised losses took its toll on theZurich-based group.
Realised losses soared to$394m from $73m, primarilyowing to variable-annuity reinsur-ance derivatives.
Gross written premiums for theyear-to-date totalled $9.4bn, upfrom $9.1bn a year earlier.
market we intend to keep as acore part of our business,” Creagh-Coen said.
The Japanese growth was amajor driver in Lancashire’sincreased gross written premiums,which rose 36% to $514.8m forthe period.
Sarah Lewandowski, analyst atPeel Hunt, said: “Lancashire’sinterim results show again how it isquick to act on market conditions,pulling back from direct and facul-tativeandonshoreenergybusinessand announcing it expects toreturn capital should the tradingenvironment not improve beforethe end of the year.
“This decisive action highlightsLancashire’s strength: it is trulyopportunistic and will not writebusiness it deems unprofitable.”
Lewandowski said Lancashire’s6% average renewal rate changewas likely to be stronger than itspeers. The increase was driven by a25% rise in retrocession and rein-surance renewal rates.
“Lancashire’s marine portfolioalso saw a 15% rate rise. Aviationand terrorism are still seeing
pressure, down 5% and 3%respectively year-to-date. Overall,Lancashire expects to reducerisk levels slightly and reducecapital accordingly, should thetrading environment not improvethroughout the rest of 2012.
Lancashire’s first-half combinedratio improved year on year to67.2% from 69.5%, helped by asignificant decline in the accidentloss year ratio, down to 46.5%from 73.0%.
The first-half numbers includean estimated net loss of $58.7mafter reinsurance and reinstate-ment premium relating to the totalloss of the Costa Concordia. In 1H2011, Lancashire suffered netlosses of $142m because of theTohoku and Christchurch earth-quakes and the Gryphon Alphafloating production, storage andoffloading vessel.
Lancashire chief executive,Richard Brindle, said: “As weenter the US wind season we arecomfortable with capital levelsand an interim dividend of 5¢ percommon share has been declaredby the board.”
$58.7mEstimated first-half net lossLancashire bookedin relation to theCosta Concordiatotal loss
25%Rate increaseLancashire achievedat renewal forretrocession andreinsurance
bringing the total figure to $709m.Aflac’s chief executive, Daniel
Amos, said: “Aflac Japan hadanotherstrongquarter, continuingimpressive sales momentum, espe-cially through the bank channel.”
He said he expects operatingearnings for the year to increase inthe range of 3% to 6%.
“Aflac Japan hadanother strong quarter,continuing impressivesales momentum,especially through thebank channel”Daniel AmosAflac
$9.4bnGross written
premium for theyear to date, upfrom $9.1bn for
2011
88.9%Combined ratiofor the six-monthperiod versus98.5% during1H 2011
$1.3bnAce’s first-halfnet profit, up54.1% on thesame periodlast year
Ace’sZurich,Switzerlandheadquarters: theinsurercut its full-yearearningsguidanceby19¢ashare
5
NEWSwww.insuranceday.com| Thursday 26 July 2012
Surge in premium pushesWR Berkley 1H net incomeup 23% to $244.2m
Lancashire plans to return capitalunless conditions improve
L ancashire revealed plansto return capital to share-holders unless marketconditions improve as it
unveiled a net operating profit of$102.6mforthefirsthalfoftheyear.
Jonny Creagh-Coen, Lanca-shire’s head of investor relations,told Insurance Day the ratingenvironment has proved dis-appointing in light of last year’srecord-breaking internationalcatastrophe losses.
“The property direct and faculta-tive market has hardly moved atall and it’s 40% to 50% off where itwas in 2005/06,” he said. “We’llprobably move some PML [proba-ble maximum loss] from the directand facultative book and put itinto treaty.”
One region in which Lancashirehas increased its presence is Japan,where the company grew its bookat the April 1 renewal. “This is a
Companyreports$103.7mprofit in1Hbutwarnsofstaticpriceenvironment
A surge in growth in net premiumswritten during the second quarterhelped US insurer WR Berkley topost net income of $244.2m for thefirst half of the year, up 23%, writesGreg Dobie.
However, the property/casualty(p/c) group’s chairman and chiefexecutive, William Berkley, saidthe pace of price increases was notaccelerating as fast as the companyhad anticipated, with the carrier’saverage renewal rate increasing6% during the second quarter.
Berkley said he expects this tochange later this year as morecompanies begin to realise theirloss reserves are weakening.
The p/c group saw its net premi-ums increase 12.6% between Apriland June to $1.19bn. Meanwhile,net premiums written during thefirst half of 2012 totalled $2.39bn,up 11% year on year.
The improved bottom line alsoreflected an 8% increase in invest-ment income to $318.9m and a 38%jump in realised gains to $71.8m.
Berkley attributed the rise ininvestment income to the strongperformance of the carrier’s fundsduring the second quarter.
“In spite of the difficult environ-
ment, our overall investmentreturns have proven to be satisfac-tory and we have continued to ben-efit from substantial realised gainsfrom our non-fixed-income port-folio,” he said. “This is in part aresult of our continuing ability tofind small opportunities offeringattractive returns.”
The combined ratio improved to97.4% from 98.9%, as a 10% rise inclaims costs to $1.41bn did notmatch the increase in premiums.
Each of the group’s regionalalternative markets, reinsuranceand international segments postedimproved combined ratios; only itsspecialty segment did not.
Net income during the secondquarter totalled $108.8m, up from$82.2m a year earlier.
“We still see pricing momentumthroughout the balance of theyear,” Berkley said. “Many compa-nies are beginning to recognisetheir weakening loss reserveposition, which will continue to putforward upward pressure on thepricing environment. We continueto have a positive outlook for thesecond half of the year, as we workdiligently to grow our business andeffectively manage our capital.”
Scott VincentDeputy editor
“As we enter the USwind season we arecomfortable withcapital levels and aninterim dividend of 5¢ per common sharehas been declared bythe board”
Richard BrindleLancashire
$102.6mLancashire’s netprofit for the first sixmonths of this year,up from $97.5m forthe first half of theprevious year
6%Average pricechange at renewal –likely to be betterthan rivals anddriven by…
Strong Japanese yen boosts Aflac growthUS-based supplemental healthinsurer Aflac has booked netearnings of $1.27bn for the firsthalf of 2012, up from $663m inthe comparable period last year,writes Peter Birks.
Aflac generated revenues of$12.1bn during the six-monthperiod, up from $10.2bn in the
first half of 2011. The Columbus,Georgia-based company saidresults for the period benefitedfrom a stronger Japanese yen. Newannualised premium sales for theperiod for Aflac Japan were¥105.6bn ($1.3bn).
Aflac’s US operation reported a3% increase in total new sales,
Lancashire first-halffinancial highlights
“In spite of the difficultenvironment, ouroverall investmentreturns have proven tobe satisfactory and we have continued tobenefit from substantialrealised gains from ournon-fixed-incomeportfolio. This is in part a result of ourcontinuing ability to find smallopportunities offeringattractive returns”
William BerkleyWR Berkley
Graph: WR Berkley, first-half financials, 2011 versus 2012 ($m)
Source: WR Berkley
n 2012 n 20112,500
2,000
1,500
1,000
500
0Net investment gainNet investment incomeNet profitNet written premiums
Greenberg warns of USdrought as Ace 1H net profitsoars 50% to $1.3bn
Ace saw its net profit soar morethan 50% to $1.3bn in the first halfof 2012, bolstered by a significantyear-on-year fall in catastrophe-related losses, writes Greg Dobie.
However, Ace chief executive,Evan Greenberg, warned droughtconditions in the US continue toaffect the insurer’s crop insurancebusiness and will also affect itssecond-half earnings.
Its updated guidance for the fullyear includes a reduction of 19¢ ashare to reflect a projected third-quarter increase in the year-to-date crop insurance loss ratio,amid the worst drought in the USfor half a century.
Crop insurance aside, Ace said itis optimistic about its revenue andearnings prospects for the remain-der of the year as it revealed its pre-mium growth rate had accelerated4.5% during the second quarter.Full-year guidance is now $7.20 to$7.60 a share after-tax operatingincome, from the previously pro-jected range of $7.03 to $7.43.
Greenberg said Ace is benefitingfrom “strong, broad-based growth,both geographic and product,along with an improving property/casualty [p/c] price environmentglobally”, adding: “For the first
time, pricing in our internationalp/c operations in aggregate turnedpositive, whereas for our US busi-ness rates continued to rise, up4.7% on average for the quarter.”
The insurer’s improved firsthalf largely reflected a decline incatastrophe-related losses to $74mfrom $557m a year earlier.
Underwriting income of $767mwas more than four times the year-earlier $190m, with the combinedratio for the first half improving to88.9% from 98.5%. Ace’s under-writing income from p/c businessduring the second quarter of theyear was $374m, compared with$239m in 2011. The p/c combinedratio for the second quarter was88.7%, a result Greenberg called“distinguishing”.
However, the carrier’s netincome for the second quarteractually declined year on year to$328m, down 45%, as a jump inrealised losses took its toll on theZurich-based group.
Realised losses soared to$394m from $73m, primarilyowing to variable-annuity reinsur-ance derivatives.
Gross written premiums for theyear-to-date totalled $9.4bn, upfrom $9.1bn a year earlier.
market we intend to keep as acore part of our business,” Creagh-Coen said.
The Japanese growth was amajor driver in Lancashire’sincreased gross written premiums,which rose 36% to $514.8m forthe period.
Sarah Lewandowski, analyst atPeel Hunt, said: “Lancashire’sinterim results show again how it isquick to act on market conditions,pulling back from direct and facul-tativeandonshoreenergybusinessand announcing it expects toreturn capital should the tradingenvironment not improve beforethe end of the year.
“This decisive action highlightsLancashire’s strength: it is trulyopportunistic and will not writebusiness it deems unprofitable.”
Lewandowski said Lancashire’s6% average renewal rate changewas likely to be stronger than itspeers. The increase was driven by a25% rise in retrocession and rein-surance renewal rates.
“Lancashire’s marine portfolioalso saw a 15% rate rise. Aviationand terrorism are still seeing
pressure, down 5% and 3%respectively year-to-date. Overall,Lancashire expects to reducerisk levels slightly and reducecapital accordingly, should thetrading environment not improvethroughout the rest of 2012.
Lancashire’s first-half combinedratio improved year on year to67.2% from 69.5%, helped by asignificant decline in the accidentloss year ratio, down to 46.5%from 73.0%.
The first-half numbers includean estimated net loss of $58.7mafter reinsurance and reinstate-ment premium relating to the totalloss of the Costa Concordia. In 1H2011, Lancashire suffered netlosses of $142m because of theTohoku and Christchurch earth-quakes and the Gryphon Alphafloating production, storage andoffloading vessel.
Lancashire chief executive,Richard Brindle, said: “As weenter the US wind season we arecomfortable with capital levelsand an interim dividend of 5¢ percommon share has been declaredby the board.”
$58.7mEstimated first-half net lossLancashire bookedin relation to theCosta Concordiatotal loss
25%Rate increaseLancashire achievedat renewal forretrocession andreinsurance
bringing the total figure to $709m.Aflac’s chief executive, Daniel
Amos, said: “Aflac Japan hadanotherstrongquarter, continuingimpressive sales momentum, espe-cially through the bank channel.”
He said he expects operatingearnings for the year to increase inthe range of 3% to 6%.
“Aflac Japan hadanother strong quarter,continuing impressivesales momentum,especially through thebank channel”Daniel AmosAflac
$9.4bnGross written
premium for theyear to date, upfrom $9.1bn for
2011
88.9%Combined ratiofor the six-monthperiod versus98.5% during1H 2011
$1.3bnAce’s first-halfnet profit, up54.1% on thesame periodlast year
Ace’sZurich,Switzerlandheadquarters: theinsurercut its full-yearearningsguidanceby19¢ashare
6 www.insuranceday.com| Thursday 26 July 2012
WORLD LOSS INTELLIGENCE/LIABILITY & SETTLEMENTS
IN TOMORROW’S WORLD LOSS INTELLIGENCE:LIVES & LIVELIHOODS
Appeal ruling: Citizens policyholders proceed in collecting $104m
LOUISIANA: On July 23, Louisiana CitizensPropertyInsurance, thestate’s last-resortprop-erty insurer, paid out a $104m jury award,whichwillbedistributedlaterthisyeartomorethan 18,500 policyholders who sued the com-pany for its slow handling of claims in the wakeof 2005’s hurricanes Katrina and Rita.
The funds are to be held in trust for three tosix months while a state court judge deter-mines how much of the award, which includesinterest, will go toward attorneys’ fees. Citi-zens made the payment in the wake of a stateappeals court ruling last Friday to grant aRegions Bank’s writ to deny the insurer’srequest to block the seizure of its assets.
The payment ends a drawn-out appeals proc-essthatreportedlywasadding$300,000amonthin interest to the award. With the payment, Citi-zens has close to $100m in cash reserves forclaims payments into the foreseeable future,chiefexecutive,RichardRobertson,said.
Sandusky case: Insurer seeks release from obligations
PENNSYLVANIA: Illinois-based State Farmhas sought a formal court decision that wouldrelease it from any possible obligation to con-victed sex offender Jerry Sandusky under San-dusky’s homeowners’ insurance policy.
State Farm said in a submission to the US Dis-trict Court for the Middle District of Pennsylva-nia the homeowner’s policy issued toSandusky does not cover claims for injuriescaused by intentional acts.
Sandusky was convicted last month of 45counts related to the sexual abuse of 10 youngboys over the course of 15 years, with some ofthe offences taking place at his home. DuringthetrialofSandusky,evidencepresentedbythedefenceclaimedsignsofapersonalitydisorder.
This, observers said, could lead to a claimSandusky’s actions were not intentional acts,but the result of mental illness. Homeowners’policies cover policyholders against negligentacts, provided there was no intent.
Medical malpractice: Payouts lowest since 1991
US: Medical malpractice insurers in the US paid out9,758 claims last year, the lowest annual figuresince full-year figures started being compiled in1991, marking the eight consecutive year ofdecline, according to a report by consumer advo-cacy group Public Citizen, which analysed datafrom the federal National Practitioner Data Bank.
The inflation-adjusted value of claims payments forthe year was $3.2bn, another record low. Actual out-lays in 2011 were also down for the eighth straightyear and were at their lowest since 1998, thereport said.
Public Citizen said the figures showed med-mal lawsuits are not responsible for the risingcost of healthcare.
JerrySanduskyleavescourtafterbeingfoundguiltyofmultiplechargesofchildsexualabuse
AP Photo/Gene J Puskar
Settlement: AIG agrees to pay settlement toCalifornian city
CALIFORNIA: AIG’sCalifornian insuranceunit has agreed to pay$1.1m to the city ofGlendale, just north ofLos Angeles.
The payment settles alawsuit the city filed torecover close to $15.4mit paid out to nine localhomeowners and theirattorneys in the wake ofa destructive mudslidein2005.
Floodwaters inNewOrleansthedayafterhurricaneKatrinapassedthroughthecity
AP Photo
$104mJury award tobe paid out by
Louisiana CitizensPropertyInsurance
18,500+Policyholderswho will receivea share of thejury award
Glendale
$1.1mPayment
Glendale willreceive from
AIG
7www.insuranceday.com| Thursday 26 July 2012
WORLD LOSS INTELLIGENCE/LIABILITY & SETTLEMENTS
IN TOMORROW’S WORLD LOSS INTELLIGENCE:LIVES & LIVELIHOODS
Qatalum outage: Norsk Hydro receives $23m insurance settlement
QATAR: The second-quarter results of aluminium producer Norsk Hydro have been boosted by the final insurance settlement worthNKr140m ($23m) relating to the 2010 power outage at its Qatalum plant.
Norsk Hydro, a global supplier of aluminium that participates in all facets of the metal’s production, including bauxite extractionand creation itself, is a joint partner in the Qatalum facility along with Qatar Petroleum.
The facility was shut down for more than a month following a five-hour power outage on August 9, 2010. The delay in restarting thefacilityoccurredbecausetheQatar-basedoperatorhadtopreparethe444cellsaffectedbytheoutageforasafeandsecurerestart.
At the time, Qatalum’s chief executive, Jan Arve Haugan, said: “We have insurance related to property damage and loss owing tobusinessinterruptionandweareinaconstructivedialoguewithourinsurerstodeterminethefinancialimpactsofthisincident.”
Norsk Hydro initially predicted a loss of close to NKr625m, with the company receiving a NKr300m payout from its insurersduring the course of 2010 to offset some of the losses associated with the shutdown. The final insurance payout is not far off theNKr625m initially estimated, with the Qatalum facility receiving a total of NKr600m in claims payments.
Duringthesecondquarteroftheyear,underlyingearningsbeforeinterestandtaxforQatalumdivisionincreasedcomparedwith the first three months of 2012, mainly owing to this final insurance payout.
Underlying net income amounted to NKr15m at the end of 2012’s second quarter, compared with a NKr64m loss in the firstthree months of the year.
ThemostrecentresultwasnegativelyaffectedbycostsrelatingtoafirethateruptedinaseawatercoolingtowerattheQatalumsite.Following publication of the first-quarter results earlier this year, Bent Andersen, head of corporate financial reporting, perform-
anceand taxat theoperation, said insurancecoverage is inplacetooffset thecostsof thefire,but itwillbesometimebeforetheextentofanysettlementcanbeaccuratelyassessed.Threemonthsdowntheline,itremainsunclearhowlargetheultimateclaimwillbe.
This is because although no injuries occurred and production of primary aluminium has not been affected, additional operating costsof close to NKr70m were incurred during the second quarter because the company has had to buy electricity from the grid rather than usingits own resources. This situation is expected to continue into the next quarter.
Medical malpractice: Payouts lowest since 1991
US: Medical malpractice insurers in the US paid out9,758 claims last year, the lowest annual figuresince full-year figures started being compiled in1991, marking the eight consecutive year ofdecline, according to a report by consumer advo-cacy group Public Citizen, which analysed datafrom the federal National Practitioner Data Bank.
The inflation-adjusted value of claims payments forthe year was $3.2bn, another record low. Actual out-lays in 2011 were also down for the eighth straightyear and were at their lowest since 1998, thereport said.
Public Citizen said the figures showed med-mal lawsuits are not responsible for the risingcost of healthcare.
© Norsk Hydro
CF Arch Cru claims: FSAwarns insurers not to breach obligations
UK: The Financial Services Authority (FSA) has warned profes-sional indemnity (PI) insurers it will take action against any firmthat breaches its obligations under the policies they wrote for CFArchCruInvestment&DiversifiedFunds,whichcollapsedin2009.
In a Dear CEO letter, the FSA said it had been contacted byindependent financial advisers who are concerned their PI pol-icies might not cover claims for mis-selling compensation. TheFSA said: “Firms have told us they have attempted to notifytheir insurers of circumstances which are likely to lead to aclaim… and have been told such notifications cannot be madesimply on the basis the FSA is consulting on a proposed con-sumer redress scheme.”
CliveAdamson,directorofsupervision,said:“Tobeclear, it isnotourintentiontodictatewhatrisksinsurersshouldcover,norareweseeking to require insurers to go beyond the cover as described inthe relevant PI insurance policies, but we are certainly prepared toconsidertakingactionwhereinsurersseektobreachoravoidtheirobligationstothedetrimentofconsumers.”
In the Dear CEO letter, the FSA asks insurers a number of PI/Arch Cru-related questions. The FSA’s consultation over its£110m ($171m) redress scheme ends this month. The proposedredress scheme is in addition to a £54m payment schemeannounced in 2011. That involved Capita Financial Managers,BNY Mellon Trust & Depositary (UK) and HSBC Bank.
9,758Claims paid by USmedmal insurers
last year
$3.2bnInflation-adjustedvalue of claimspayments forthe year
“Firms have told us they haveattempted to notify their insurersof circumstances which are likelyto lead to a claim… and have beentold such notifications cannot bemade simply on the basis the FSAis consulting on a proposedconsumer redress scheme”
FSA
8
FINANCIALWORLDTODAYwww.insuranceday.com| Thursday 26 July 2012
Sector stocks boostedby resilience of UScorporate earnings
V ery much reflecting thepattern of sharp peaksand deep troughs thathas characterised the
recent financial market fortunes ofthe sector, insurance and reinsur-ance stocks rallied strongly duringthe week ending July 19.
Upward driftInevitably, the upward drift wasfacilitated by broader financialmarket developments rather thanby insurance sector-specific issues,although during the period underreview there were no shortage ofthe latter, particularly relating tothe cost of severe weather events tothe industry in the US now insurersare beginning to report second-quarter results.
But it was the surprising resil-ience of US corporate profits morebroadly that moved the marketand, indeed, prompted Europeanstock indices to a 15-week high.Very much against the run of play,of the 63 companies in the S&P 500that reported their second-quarterearnings, close to 72% exceededanalysts’expectations,11%wereinline with analysts’ prediction andonly 17% delivered results thatwere worse than expectations.
A week earlier, the markets hadbraced themselves for a sharpreduction in corporate earnings asa result of the slowdown in the US,the eurozone and the Japanese andChinese economies, the signs ofwhich were pretty much in evi-dence during the week underreview. For example, the usuallyvibrant Chinese stock markets fellto a six-month low after China’spremier, Wen Jiabao, warned theeconomic recovery is still very
EarlyreportinginsurancegroupssuchasPlatinumandTravellerssawvastly improvedsecond-quarterresultsowingtolowercatastrophelosses
Rasaad JamieGlobal markets editor
Table:Share pricesasatcloseJuly19,2012
Company/group Currency Dec31,2011 Jul12,2012 Jul19,2012 ChangefromJul12(%) Capitalisation($m)
Ace USdollar 70.12 71.52 71.64 0.2 24,264
AIG USdollar 23.20 30.47 31.76 4.2 56,978
AlleghanyCorporation USdollar 285.29 341.20 344.06 0.8 5,825
Allianz Euro 73.43 77.68 80.85 4.1 45,107
Allstate USdollar 27.41 33.65 34.71 3.2 17,055
Alterra USdollar 23.63 23.54 23.71 0.7 2,383
Amlin Pence 313.90 361.00 374.10 3.6 2,917
ArchCapital USdollar 37.23 39.03 39.56 1.4 5,358
Aspen USdollar 26.50 29.34 29.56 0.7 2,114
Aviva Pence 300.80 288.70 300.10 3.9 13,235
Axa Euro 10.05 9.97 10.16 1.9 28,560
AxisCapital USdollar 31.96 32.98 33.26 0.8 4,304
BerkshireHathaway(A) USdollar 114,755.00 125,321.00 126,995.00 1.3 118,232
Catlin Pence 398.70 428.50 444.20 3.7 2,508
Chubb USdollar 69.22 70.61 71.65 1.5 19,342
CNAFinancial USdollar 26.75 26.85 27.49 2.4 7,405
EnduranceSpecialty USdollar 38.25 36.59 35.43 (3.2) 1,537
EverestRe USdollar 84.09 103.98 103.13 (0.8) 5,440
Generali Euro 11.63 9.94 9.98 0.4 18,958
HannoverRe Euro 38.30 47.10 48.70 3.4 7,210
Hiscox Pence 373.50 419.20 438.00 4.5 2,620
InsuranceAustraliaGroup Australiandollar 2.98 3.59 3.74 4.2 8,071
KoreanRe SouthKoreanwon 15,000.00 11,200.00 11,600.00 3.6 1,161
MontpelierRe USdollar 17.75 21.39 21.30 (0.4) 1,233
MS&ADInsuranceGroup Yen 1,426.00 1,325.00 1,336.00 0.8 7,163
MunichRe Euro 94.59 112.00 116.00 3.6 28,109
NKSJHoldings Yen 1,510.00 1,566.00 1,579.00 0.8 31,746
PartnerRe USdollar 64.21 74.32 74.42 0.1 4,804
Platinum USdollar 34.11 38.29 40.02 4.5 1,394
QBEInsuranceGroup Australiandollar 12.95 13.24 14.08 6.3 15,119
RenaissanceRe USdollar 74.37 75.52 76.11 0.8 3,940
RSA Pence 105.20 108.20 111.60 3.1 6,051
ScorParis Euro 18.06 18.99 19.45 2.4 4,397
ScorZurich Swiss franc 21.50 23.15 23.15 0.0 4,442
SwissRe Swiss franc 47.87 59.35 61.40 3.5 23,262
TravelersCompanies USdollar 59.17 62.24 63.69 2.3 24,778
TokioMarineHoldings Yen 1,705.00 1,883.00 1,922.00 2.1 19,264
XLGroup USdollar 19.77 20.29 20.84 2.7 6,496
ZurichInsuranceGroup Swiss franc 212.50 214.20 220.50 2.9 33,214
Source: Insurance Day
much in doubt and there are stillsome tough times ahead.
So much so, at the beginning ofthe week, the markets wereboosted by better-than-expectedresults from JP Morgan Chase andCitigroup,evenastheglobal invest-ment banking sector continued tobe pressured by the fallout fromthe eurozone debt crisis. For exam-ple, there was a record decline inSpanish bank deposits in May com-pared with the same period lastyear. In addition, the number of
ing a week earlier and the ratingagency is now in the process ofaligning its corporate ratings toreflect the wider reality.
Indeed, the recent much-publicised consensus among euro-zone leaders as to how to deal withthe regional crisis was also underpressure as investors becameincreasingly uneasy about anumber of reported delays of bail-out funds being made available tosome of the peripheral economies.But they were even more uneasyabout the outcome of a ruling byGermany’s constitutional court onSeptember 12 as to whether theregional bailout fund (the Euro-peanStabilityMechanism)itself,aswell as the recent changes to some
of the eurozone fiscal rules torelieve the pressure on some of themost indebted countries, are com-patible with German law.
There were further pressure oninsurance sector stocks fromreports detailing the rising costs toinsurers of the recent severeweather events in the US, as well asfrom the news that as a result of theprolonged periods of drought inthe Midwest, crop insurers (whichinclude Ace, QBE and Everest Re)could face their first underwritingloss since 2002. Outside the US, ayear’s worth of rain fell in southernJapan over the previous week-end,flooding 10,000 residential andnon-residential buildings and kill-ing 26 people.
Generali: Italian,GermanandFrenchunitsdowngradedbyMoody’s
bad loans in the Spanish bankingsector increased for the 14th con-secutive month.
Italian downgradesIn terms of the insurance sector,Moody’s downgraded the financialstrength ratings of three Italianinsurers, including the ratings ofthe Italian, German and Frenchoperations of Generali and the rat-ings of Allianz Italy. This was notunexpected, as Moody’s down-graded Italy’s sovereign credit rat-
Lower cat lossesOn the bright side, early reportinginsurance groups such as Platinumand Travellers posted vastlyimproved second-quarter resultsowing to lower catastrophe losses.This sense of a positive outlook forthe sector in 2012 was furtherunderlined by a report from theInsurance Information Institute(III), which revealed the US prop-erty/casualty (p/c) industry couldbe set for its most profitable yearsince 2008, despite the heavyinsured losses (estimated at $8.8bnby the III) suffered during the firsthalf of this year. However, thiscompared with insured losses ofmore than $24bn over the sameperiod last year.
According to the III, the sector’sfirst-quarter profits were up bynearly 30% compared with thesame period in 2011 and was likelyto exceed the $62.5bn net profitachieved in 2008. Last year, despitea steep increase in underwritinglosses and difficult financial mar-ket environment, the US p/c sectorrecorded a net profit of $19.2bn.
As the European debt crisis con-tinues to disorientate the financialmarkets,theglobalreinsurancesec-tor received what amounted to aclean bill of health from a bodyno less than the International Asso-ciation of Insurance Supervisors(IAIS),whichinareportsaidthefail-ure of a traditional reinsurer isunlikelytorepresentasystemicrisk
to the financial system. Notably, theIAIS applied the same status to non-traditional reinsurance or alterna-tive risk transfer (ART) arrange-ments. Commenting on the latter,the IAIS said ART does not inter-mediate credit and therefore, “thefailure of a reinsurer engaged inART would not undermine a largercredit pyramid and it is unlikely toaffectotherfinancialmarketpartic-ipantsortherealeconomy”.
Intermsofthetraditionalreinsur-ance industry, the report said therehad only been 29 reinsurance fail-ures in the past 32 years. These fail-ures represent a total loss of $1.8bn.AccordingtotheIAIS,thisamountedto just 0.43% of reinsurance premi-umscollectedoverthatperiod.n
Graph: This week’s winners…
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9www.insuranceday.com| Thursday 26 July 2012
Sector stocks boostedby resilience of UScorporate earnings
V ery much reflecting thepattern of sharp peaksand deep troughs thathas characterised the
recent financial market fortunes ofthe sector, insurance and reinsur-ance stocks rallied strongly duringthe week ending July 19.
Upward driftInevitably, the upward drift wasfacilitated by broader financialmarket developments rather thanby insurance sector-specific issues,although during the period underreview there were no shortage ofthe latter, particularly relating tothe cost of severe weather events tothe industry in the US now insurersare beginning to report second-quarter results.
But it was the surprising resil-ience of US corporate profits morebroadly that moved the marketand, indeed, prompted Europeanstock indices to a 15-week high.Very much against the run of play,of the 63 companies in the S&P 500that reported their second-quarterearnings, close to 72% exceededanalysts’expectations,11%wereinline with analysts’ prediction andonly 17% delivered results thatwere worse than expectations.
A week earlier, the markets hadbraced themselves for a sharpreduction in corporate earnings asa result of the slowdown in the US,the eurozone and the Japanese andChinese economies, the signs ofwhich were pretty much in evi-dence during the week underreview. For example, the usuallyvibrant Chinese stock markets fellto a six-month low after China’spremier, Wen Jiabao, warned theeconomic recovery is still very
EarlyreportinginsurancegroupssuchasPlatinumandTravellerssawvastly improvedsecond-quarterresultsowingtolowercatastrophelosses
Rasaad JamieGlobal markets editor
Table:Share pricesasatcloseJuly19,2012
Company/group Currency Dec31,2011 Jul12,2012 Jul19,2012 ChangefromJul12(%) Capitalisation($m)
Ace USdollar 70.12 71.52 71.64 0.2 24,264
AIG USdollar 23.20 30.47 31.76 4.2 56,978
AlleghanyCorporation USdollar 285.29 341.20 344.06 0.8 5,825
Allianz Euro 73.43 77.68 80.85 4.1 45,107
Allstate USdollar 27.41 33.65 34.71 3.2 17,055
Alterra USdollar 23.63 23.54 23.71 0.7 2,383
Amlin Pence 313.90 361.00 374.10 3.6 2,917
ArchCapital USdollar 37.23 39.03 39.56 1.4 5,358
Aspen USdollar 26.50 29.34 29.56 0.7 2,114
Aviva Pence 300.80 288.70 300.10 3.9 13,235
Axa Euro 10.05 9.97 10.16 1.9 28,560
AxisCapital USdollar 31.96 32.98 33.26 0.8 4,304
BerkshireHathaway(A) USdollar 114,755.00 125,321.00 126,995.00 1.3 118,232
Catlin Pence 398.70 428.50 444.20 3.7 2,508
Chubb USdollar 69.22 70.61 71.65 1.5 19,342
CNAFinancial USdollar 26.75 26.85 27.49 2.4 7,405
EnduranceSpecialty USdollar 38.25 36.59 35.43 (3.2) 1,537
EverestRe USdollar 84.09 103.98 103.13 (0.8) 5,440
Generali Euro 11.63 9.94 9.98 0.4 18,958
HannoverRe Euro 38.30 47.10 48.70 3.4 7,210
Hiscox Pence 373.50 419.20 438.00 4.5 2,620
InsuranceAustraliaGroup Australiandollar 2.98 3.59 3.74 4.2 8,071
KoreanRe SouthKoreanwon 15,000.00 11,200.00 11,600.00 3.6 1,161
MontpelierRe USdollar 17.75 21.39 21.30 (0.4) 1,233
MS&ADInsuranceGroup Yen 1,426.00 1,325.00 1,336.00 0.8 7,163
MunichRe Euro 94.59 112.00 116.00 3.6 28,109
NKSJHoldings Yen 1,510.00 1,566.00 1,579.00 0.8 31,746
PartnerRe USdollar 64.21 74.32 74.42 0.1 4,804
Platinum USdollar 34.11 38.29 40.02 4.5 1,394
QBEInsuranceGroup Australiandollar 12.95 13.24 14.08 6.3 15,119
RenaissanceRe USdollar 74.37 75.52 76.11 0.8 3,940
RSA Pence 105.20 108.20 111.60 3.1 6,051
ScorParis Euro 18.06 18.99 19.45 2.4 4,397
ScorZurich Swiss franc 21.50 23.15 23.15 0.0 4,442
SwissRe Swiss franc 47.87 59.35 61.40 3.5 23,262
TravelersCompanies USdollar 59.17 62.24 63.69 2.3 24,778
TokioMarineHoldings Yen 1,705.00 1,883.00 1,922.00 2.1 19,264
XLGroup USdollar 19.77 20.29 20.84 2.7 6,496
ZurichInsuranceGroup Swiss franc 212.50 214.20 220.50 2.9 33,214
Source: Insurance Day
much in doubt and there are stillsome tough times ahead.
So much so, at the beginning ofthe week, the markets wereboosted by better-than-expectedresults from JP Morgan Chase andCitigroup,evenastheglobal invest-ment banking sector continued tobe pressured by the fallout fromthe eurozone debt crisis. For exam-ple, there was a record decline inSpanish bank deposits in May com-pared with the same period lastyear. In addition, the number of
ing a week earlier and the ratingagency is now in the process ofaligning its corporate ratings toreflect the wider reality.
Indeed, the recent much-publicised consensus among euro-zone leaders as to how to deal withthe regional crisis was also underpressure as investors becameincreasingly uneasy about anumber of reported delays of bail-out funds being made available tosome of the peripheral economies.But they were even more uneasyabout the outcome of a ruling byGermany’s constitutional court onSeptember 12 as to whether theregional bailout fund (the Euro-peanStabilityMechanism)itself,aswell as the recent changes to some
of the eurozone fiscal rules torelieve the pressure on some of themost indebted countries, are com-patible with German law.
There were further pressure oninsurance sector stocks fromreports detailing the rising costs toinsurers of the recent severeweather events in the US, as well asfrom the news that as a result of theprolonged periods of drought inthe Midwest, crop insurers (whichinclude Ace, QBE and Everest Re)could face their first underwritingloss since 2002. Outside the US, ayear’s worth of rain fell in southernJapan over the previous week-end,flooding 10,000 residential andnon-residential buildings and kill-ing 26 people.
Generali: Italian,GermanandFrenchunitsdowngradedbyMoody’s
bad loans in the Spanish bankingsector increased for the 14th con-secutive month.
Italian downgradesIn terms of the insurance sector,Moody’s downgraded the financialstrength ratings of three Italianinsurers, including the ratings ofthe Italian, German and Frenchoperations of Generali and the rat-ings of Allianz Italy. This was notunexpected, as Moody’s down-graded Italy’s sovereign credit rat-
Lower cat lossesOn the bright side, early reportinginsurance groups such as Platinumand Travellers posted vastlyimproved second-quarter resultsowing to lower catastrophe losses.This sense of a positive outlook forthe sector in 2012 was furtherunderlined by a report from theInsurance Information Institute(III), which revealed the US prop-erty/casualty (p/c) industry couldbe set for its most profitable yearsince 2008, despite the heavyinsured losses (estimated at $8.8bnby the III) suffered during the firsthalf of this year. However, thiscompared with insured losses ofmore than $24bn over the sameperiod last year.
According to the III, the sector’sfirst-quarter profits were up bynearly 30% compared with thesame period in 2011 and was likelyto exceed the $62.5bn net profitachieved in 2008. Last year, despitea steep increase in underwritinglosses and difficult financial mar-ket environment, the US p/c sectorrecorded a net profit of $19.2bn.
As the European debt crisis con-tinues to disorientate the financialmarkets,theglobalreinsurancesec-tor received what amounted to aclean bill of health from a bodyno less than the International Asso-ciation of Insurance Supervisors(IAIS),whichinareportsaidthefail-ure of a traditional reinsurer isunlikelytorepresentasystemicrisk
to the financial system. Notably, theIAIS applied the same status to non-traditional reinsurance or alterna-tive risk transfer (ART) arrange-ments. Commenting on the latter,the IAIS said ART does not inter-mediate credit and therefore, “thefailure of a reinsurer engaged inART would not undermine a largercredit pyramid and it is unlikely toaffectotherfinancialmarketpartic-ipantsortherealeconomy”.
Intermsofthetraditionalreinsur-ance industry, the report said therehad only been 29 reinsurance fail-ures in the past 32 years. These fail-ures represent a total loss of $1.8bn.AccordingtotheIAIS,thisamountedto just 0.43% of reinsurance premi-umscollectedoverthatperiod.n
Graph: This week’s winners…
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10
LAW&ORDERwww.insuranceday.com| Thursday 26 July 2012
Marine kidnap and ransomcoverage: who needs it?
M arine kidnap andransom(K&R) insur-ance is a relativelynew product devel-
oped in response to the number ofships seized by Somali pirates.Before 2008, it was unusual forshipowners to purchase K&R,although K&R has been purchasedfor years by international busi-nesses operating in countrieswhere kidnapping is common.
Today, almost every shipownerwhose vessels transit the Gulf ofAden/Indian Ocean region pur-chasessomeformofK&Rcoverage.
A new eraTraditionally, a shipowner pur-chases an annual hull and machin-ery (H&M) policy to cover itsphysical loss or damage to its ves-sel, protection and indemnityinsurance to cover liability stem-ming from the operation of the ves-sel and war risk insurance to coverwar-related damages.
Ransom demands made bypirates do not always fit neatlywithin these typical coverages, norare they specifically covered in theshipowners’ existing policies.Nevertheless, shipowners havemade successful arguments tounderwriters for contribution orpayment of ransom demands.
As the Somali pirate risk devel-oped, however, it became apparenttraditionalmarineunderwritersdidnot want to cover ransoms specifi-cally. Shipowners and their insur-ancebrokersthenturnedtotheK&Rmarketforcertaintyofcoverage.
While comprehensive K&R poli-cies already existed, a tailor-mademarine K&R policy needed to bedeveloped. The marine K&R poli-cies that ensued took modellingfrom typical war risk policies andtraditional K&R policies.
Additional coverages were alsodevelopedtoaddressthelossofhire(income) exposure, as well as port
of refuge expenses. Many marineK&R policies today reference high-risk areas (HRAs) as defined by themarinewarriskmarket.
Inadditiontothegeographicriskprofile, the vessel’s freeboard(height above water), speed capa-bilities, age and, most importantly,security measures aboard the ves-sel are critical to the K&R under-writing process.
Underwriters typically basetheir pricing using vessels thathave four metres or greater free-board, are capable of maintaining12 knots through the HRAs, are 15years old or younger and are com-pliant with best management prac-tices–asetofrecommendationsforshipowners developed by the ship-ping industry for security meas-ures while transiting HRAs.
For instance, if a vessel ownerchooses to hire armed guards, theunderwriter typically gives a 50%discount to the premium charged.Also, an owner can choose toinsure its exposure on a one-offtransit policy or a more compre-hensive annual policy against pre-agreed rating.
As copy-cat piracy acts arealready occurring off the westcoast of Africa, an annual world-wide coverage is recommended bymarine insurance brokers.
K&R pricingToday, the marine K&R marketcomprises only a handful of under-writers. Pricing appears to be theoveralldrivingfactorwhenreview-ing insurance offerings. The years2010 and 2011 were particularlybad underwriting years for a fewunderwriters, given the frequencyofsuccessfulattacksthatoccurred.
Increased loss-prevention meas-ures, additional armed guard tran-sits and a greater naval presencehas significantly reduced the suc-cessful pirate captures in the firsthalf of this year. This is certainly a
was to bear the entire cost of the dis-cardedgoodsalone.
The law of general average pre-vents injustice by requiring all thepartiestocontributeaportiontothecostoftheloss.Generalaveragelawis anchored in fairness and it existseven without marine insuranceandisnotdependentoncontract.
The law of general averagerequires four elements: peril,extraordinary loss/expenditure,voluntary incurrence of the loss/expenditureandacommonbenefit.While general average law hasevolved with slight differencesthroughout the world, the Englishand US legal regimes are the mostcommonlyencounteredinpractice.
Courts have long recognised ran-som payment as a general averageexpenditure. Armed pirates onboard a ship constitute a peril. Ran-som payments are extraordinary
because they are not reasonablycontemplated in a voyage. Ransompayments are voluntary because ashipowner has no legal duty to paya ransom. Common benefit isachieved when the ship and cargoare released upon payment of ran-som and the voyage is completed.
The recovery of general averagepayments will be apportionedbetween the hull and cargo accord-ing to their relative value. TheH&M, cargo and war risk insurerswill indemnify the owner for suchpayments according to the policywording. Accordingly, under theirtraditional insurances an ownercan recover some or all of the ran-som paid without K&R cover. How-ever, general average does notcover all piracy expenses.
Expenses recoverable in generalaverage can include ransom, ran-som delivery costs, negotiators’fees,lawyers’fees,transitinsuranceon the ransom, delivery of bunkersand stores, port of refuge expenses,average disbursement insuranceandcommissionandinterestfortheadvancement of payments. K&Rtypically covers even more, includ-ing theft of ransom, public relationscosts, psychological assistance forcrewandothers.
How to choose?The first step in recovery under thelaw of general average is anappraisal by an adjuster. This takestime – months at least. A K&R pol-icy, however, will normally indem-nifytheshipowner(K&Risa“paytobe paid” policy) within 10 days ofpayment of the ransom.
The fact the general averageprocess is time-consuming andcovers fewer expenses makes it adifficult route for owners, particu-larly those who are short on cashand cannot afford to front a ran-som and then wait months or morefor recovery.
K&R may require more up-frontexpense but, in the event of a suc-cessful pirate attack, it can be aninvaluable asset.n
• Joyce Lai assisted in thepreparation of this article
Alookattheworldofmarinekidnapandransominsurance
Lars Gustafson, seniorvice-president, globalmarine practiceMarsh
Bruce Paulsen,litigation partnerSeward & Kissel LLP
welcome trend for owners, under-writers and crew that sail thisregion of the world.
Can an owner recoverwithout K&R?There is a way for owners torecover ransoms and otherexpenses paid in connection with apirate attack through a legal theoryknown as general average. Thisconcept recognises all voyages areessentially joint ventures betweenship and cargo. It is a fairness prin-ciple as old as the earliest commer-cial sea voyages.
It recognises in extraordinary cir-cumstances,allthepartiestotheven-ture must contribute proportionallytothecostofrescuingtheircargoandship from danger. For example, ifdiscarding easily accessible cargo istheonlywaytosavearapidlysinkingship, it would be unfair to cargo if it
Security:hiringarmedguardscangetvesselownersasmuch
asa50%discounttotheirpremium
11www.insuranceday.com| Thursday 26 July 2012
Expecting the unexpected
ABSolutelyfabulous?
T he continuing eurozonedebt crisis has caused the(re)insurance market toconsider the conse-
quences of the exit of a eurozonestatefromtheeuroandaredenomi-nationintoalocalcurrency.
Any withdrawing state would belikely to enact new laws makingcompulsory the redenomination ofcontractual payment obligationsgovernedbylocal lawintoareplace-ment local currency, as well asrequiringpaymentsintothatstatetobe in the new local currency. Thegoverning law and jurisdiction thatapplies to such contracts will be cru-cial in determining the impact ofsuchredenominationprovisions.
Contracts governed by expresslocal law and jurisdiction clauseswill have to comply with local lawson redenomination, which will bedifficult to avoid as they are likely totrump any currency conversion orredenomination clauses providingforotherhardercurrencies(eg,euro,poundsterlingandUSdollar).
However, even where contractsincorporate express English choice
of law and jurisdiction clauses,issues may still arise because of twoconflictof lawsprinciples.
First, there is the principle of lexmonetae, where the choice in a con-tract of a particular currency istaken to imply a choice of the coun-try of that currency to determine,where necessary, what that cur-rencyisormayredenominateinto.
In the context of the risk of re-denomination into a replacementlocalcurrency, issuesmayariseastowhether an English court shouldregard the choice of the euro in acontract as a choice of the law of aparticular member state or a choiceofthelawoftheeurozoneasawhole.
To avoid such difficulties, cur-rency fluctuation or conversionclauses should be incorporated intopolicies. Such clauses should alsosaywhatrateofexchangewillapply.
Second,thereistheprincipleoflexlocisolutionis,wherebyunderRomeI regulation, art 9(3), English courtsmayalsogiveeffecttotheoverridingmandatory rules of the law of theplaceofperformanceofacontract.
Courtsthenhavethediscretiontorender performance unlawful ifpaymentofaclaimunderacontractis unlawful in the country wherepaymentmustbemade.
Possible solutions include incor-porating clauses that require pay-
ment to be made to a party outsidethe country at risk of currency re-denomination. It would be sensibleto incorporate such clauses beforeanyredenominationoccurs.
The prospect of redenominationpresents various uncertaintiesand parties to potentially affectedcontracts may wish to act now tomitigate any future impact. Toavoid exposures, parties shouldconsider revising their contractsas above to avoid those EU statesperceived as higher risk.
In the case of existing contracts,this may be achievable by endorse-ment; inthecaseofnewcontracts,byexpressprovision.Wherenecessary,standardmarketclausescanbemod-ifiedforthesepurposes.Theyshouldalsoconsiderincludingcontractcon-tinuity clauses, which maintain thevalidity of the contracts in the eventofaeurozoneredenomination.
While redenomination couldaffect contractual obligations, it willalso of course affect counterpartyand investment risks. In that con-text, parties to (re)insurance under-takings must consider minimisingtheir exposure through carefulnegotiationoftheirfutureandexist-ingcontracts,withaparticularfocuson governing law, jurisdiction, cur-rencyconversion,validityandplaceofperformanceprovisions.n
One-third of respondents werelooking to spin off servicesthrough an ABS (33%) or alterna-tively looking to access externalinvestmenttofundgrowth(29%);One-fifth of respondents werelookingtoincentivisestaffthroughoffersofprivateequity(20%);23% of respondents were inter-ested in being part of a collectivemembership organisation withother law firms “to share commonservicesaspartofthenetwork”;35% of respondents said “owner-ship by a recognised brand” was a“compelling”or“verycompelling”reasonforABSconversion;andRegulatory and tax issuestopped the list of areas wherespecialist advice is needed (35%and 41% respectively).
The variety of business models ofthe early adopters of ABS – fromconsumer brand and volume con-veyancethroughtothefirstforeign-ownedABSandthefirst tobepartofa stock exchange-listed company –shows members of the professionwilling to embrace change to gain acompetitiveadvantage.n
A recent survey of 100 commerciallaw firms in the UK furthers thedebate on changes to the legal mar-ket under the Legal Services Act(LSA) and looks at the appetite foralternative business structures(ABS). “ABSolutely fabulous – Astudy of alternative business struc-tures and their role in a changinglegal market”, commissioned by FoxWilliams LLP and undertaken bylegal research company Jures, looksat the ABSs available; a changingpartnership model; and the arrivalofprivateequityinvestmentintolawfirmsandlegalservicesproviders.
The research shows it would bewrong to dismiss a low-profile startto the new regime as evidence ofdisinterest by the profession in thelegislation-liberalising agenda.
Of the 100 respondents, 54%described as either “compelling” or“very compelling” accessing privateequity or other third-party invest-
ment to finance their firms’ growthasareasonforABSconversion.
Access to finance (not availablefrom partners or traditional bankborrowing) was considered either“important” or “very important”by 77% when converting to an ABS.
But such a radical structuralchange in the legal services marketdoes not come without internalopposition. “Loss of control” wasidentified as the biggest barrier toABS conversion (62%), followed byresistance from partners (51%).
Other main findings from thesurvey include:
Almost half of respondents(49%) said they were “not confi-dent” in the Solicitors Regulat-tion Authority’s (SRA) ability tomanage the ABS applicationprocess successfully;39% have already changed theirmanagement strategy as a resultof the LSA and 14% have changedtheirpartnershipstructure;70% of respondents said improv-ing cashflow was either “impor-tant” or “very important” whenconsideringanABSconversion;
A sea change ahead
As the sea ice along Russia’s coast-line makes its annual summerretreat, the Northern Sea Route(NSR), the shipping passage fromMurmansk to the Barents Strait, isnow open for shipping companiesto take advantage of the potentialcostsavingsoftransitingtheroute.
Sovcomflot, the Russian state-owned shipping company, is fore-casting the NSR may remain openuntilas lateasNovember2012.Hullandprotectionandindemnity(P&I)insurers can therefore expectassureds to start considering thecommercial viability of transitingthe passage, which is the shortestroutebetweenEuropeandAsia.
The potential benefits are signif-icant; it is estimated a voyage fromKirkness, Norway to Shanghai,China through the NSR, ratherthan the Suez Canal, could save 16days’ sailing time and 1,000 tonnesof bunkers. However, there areconsiderable risks unique to theArctic region for insurers to con-sider before insuring vessels tosail outside the institute warrantylimits inhullpolicies.
Sea ice in the Arctic Ocean hasretreated at record levels recentlyand scientists forecast increasingtemperatures will mean the Arcticwill be ice-free during the summerby the end of this century, or evenwithinthenext30to40years.
The increase in shippingactivity in the region has beenconsiderable. In 2011, 34 vesselscarrying 820,000 tonnes of cargopassed through the NSR. Morethan one million tourists visitedthe region, many on cruiseships.Russia’s Ministry of Transportestimates 1.5 million tonnes ofcargo will be shipped along theNSR this year, with 64 milliontonnes being carried by 2020.
Extraction of the wealth ofhydrocarbons locked under theArctic’s seabed is on thehorizon. Russian oiland gas producerGazprom com-menced drillingof its first wellin the Yamalfield last monthand has statedits intention toexport oil and gasthrough the NSR to the
Asian markets. The Russian gov-ernment has authorised plans todevelop ports in the Ob bay andYamal Peninsula and VladimirPutin has promised significantinvestment to develop the NSR asan alternative to the Suez Canal.As a result, a sharp increase inshipping activity is expected.
Russian regulations imposerequirements on ships transitingthe NSR, including that vessels arebuilt to Ice Class 1A standard andare escorted by ice-breakers. How-ever, there remain considerablerisks as unpredictable weatherconditions, varying water depthsand a lack of charts exacerbate theriskofcollisionorgrounding.With-out significant investment the geo-graphical remoteness of the Arcticwill be a major constraint to effec-tive rescue and salvage facilities.This was illustrated by the ground-ing of the MV Clipper Adventurer inAugust2010.
The London market’s joint hullcommittee has expressed con-cerns regarding the Arctic’s geo-graphical remoteness and alsohighlighted the need for under-writers to consider a number ofissues before providing cover tovessels transiting Arctic waters,including the proposed route,date and time of the voyage, expe-rience of the crew, access toweather/ice information andpresence of an ice pilot.
Substantial sums are beinginvested to develop a shippinginfrastructure in the Arctic, butthe challenges of navigating itswaters remain considerable. Thedawn of Arctic shipping hasarrived, but we are unlikely to seeGulf of Aden pirates flocking toArctic waters as the Suez Canalwill remain, for now at least, themain passageway betweenEuropeandAsia.n
JohnFlaherty,partner,andTomGorrard-
Smith,associate,Clyde&Co
Costas Frangeskides, partner,and Ben Atkinson, associateHolman Fenwick Willan
NorthernSeaRoute(blue)andtheSuezCanal (red)
Bobamnertiopsis
12 www.insuranceday.com| Thursday 26 July 2012
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