International First Quarter Earnings Gone With the Credit Crunch

Myanmar’s disaster and a 100-year, $800 billion plan to combat climate change

The cruelest months for many insurers, reinsurers and brokers, were undoubtedly the end of April and the beginning of May when they reported first quarter earnings. With few exceptions the results were heavily impacted by softening market conditions, the U.S. subprime mortgage meltdown and the resulting credit crunch. The former depressed operating earnings, while the latter bludgeoned investment returns and values.

A by no means exhaustive European list for the first quarter includes the following:

• Munich Re recorded a profit of $1.2 billion, down 19 percent from the $1.495 billion in 2007. Operating results which exclude finance costs and taxes on income, dropped 12 percent to $1.766 billion from $2.01 billion.
• Swiss Re reported a 53 percent drop in net income, earning $592.4 million, compared to the $1.261 billion in 2007.
• Allianz profits declined 65 percent to $1.777 billion from $5.008 billion. Allianz said the drop was mainly due to its decision not to sell investments while stock markets were down, but the losses at Dresdner Bank — it wrote down $1.3 billion on structured finance investments — had at least something to do with it.
• France’s AXA Group, Europe’s second-biggest insurer, said first-quarter total revenues (turnover) fell 2.7 percent to $43.46 billion.
• Net income at Willis, the third largest insurance broker, was $166 million, down from $169 million in Q1 2007.

Things weren’t any better in Bermuda.

• ACE Limited’s net income dropped 46 percent from $701 million in 2007 to $377 million, due to investment losses, which went from a $16 million profit last year to a $353 million loss.
• XL Capital’s net income plunged to $211.8 million from $549.7 million, again due to losses on investments.
• RenaissanceRe’s net income also declined to $137 million from $190.8 million, again due to a drop in net investment income to $52.5 million from $108 million.
• Endurance Specialty reported net income of $77.8 million for the first quarter of 2008, compared to $101.8 million last year.
• Aspen’s net income decreased to $81.2 million, compared to $121.9 million in Q1 2007, largely as a result of a 42 percent decline in net investment income.
• Montpelier Re, the reinsurance arm of the White Mountains Group saw its comprehensive net income fall to a $1.8 million loss, compared to the $72.6 million profit it earned in the same quarter of 2007. Operating income, however, which excludes foreign exchange and investment gains and losses, was in the black at $28.2 million, compared to $60.3 million in Q1 2007.
• PartnerRe’s net income fell to $129 million, compared to $169.3 million for Q1 2007, a 24 percent decrease.
• Arch Capital reported Q1 net income of $189.4 million, or $2.78 per share, compared to $198.6 million, or $2.59 per share, in Q1 2007.
• Although the Max Capital Group increased its gross premiums written by over 30 percent from $213.6 million to $306.6 million, that wasn’t sufficient to escape the credit crunch, Q1 net income fell by 90 percent to $7.75 million from $80 million.

There were some bright spots as well.

• AXIS Capital reported net income of $238 million, compared with net income of $228 million in Q1 2007.
• Validus Holdings net income increased to $66.5 million from $56.7 million. Operating income was also up to $65.5 million from $53.7 million. This was partially due to the acquisition of Talbot in the earnings figures.
• CastlePoint Holdings reported that net income rose by 26 percent to $9.565 million, while operating earnings, which exclude capital gains/losses, were $11 million and net premiums written for the quarter were up 64.3 percent to $118.1 million.

As the grisly toll of the dead rose precipitously from 350 to an estimated 100,000 or more, the world watched, as Myanmar’s (Burma’s) paranoid generals dithered over allowing foreign aid agencies to begin rescuing the estimated one million or more victims of tropical cyclone Nargis.

Risk Management Solutions produced a stark analysis of the devastation wrought by the storm. Maximum sustained winds were near 132 mph (213 km/hr), the equivalent of a category 4 hurricane on the Saffir Simpson Hurricane Scale. As the cyclone tracked inland after nightfall on May 2, it moved directly over the former capital and largest city in Myanmar, Yangon [Rangoon]. Maximum sustained winds did decrease eventually to 80 mph (130 km/hr), the equivalent of a category 1 storm.

Domenico del Re, senior model manager at RMS, acknowledged that the event “is a massive humanitarian disaster.” However, he noted that it’s a “catastrophe that the international insurance industry has escaped,” essentially because the country is too poor and undeveloped to have any insurance network. Non-life premiums were barely $5 million in 2004.”

Spending $800 billion on a comprehensive solution to combat the effects of climate change could eventually yield more than $2 trillion. As reported by Reuters, a group of scientists advocates an assault on climate change on many fronts, rather than tackling only greenhouse gas emissions.

A 100-year package costing $800 billion to help people adapt to the impacts of warming while also funding research into new technology and curbing emissions could yield benefits of $2.1 trillion, according to Gary Yohe, an environmental economist at Wesleyan University in Connecticut, the lead author of the 56-page study with colleagues in Ireland and the United States.

“Mitigation is not enough,” Yohe told Reuters of the study, prepared for a May 26-28 conference in Copenhagen run by Bjorn Lomborg, the Danish author of “The Skeptical Environmentalist.” The $800 billion total works out at roughly 0.05 percent of global gross domestic product a year and adds to evidence from studies by the Intergovernmental Panel on Climate Change and British economic expert Nicholas Stern in 2007 that costs are affordable.

Topics Profit Loss Climate Change