TEXT-Fitch: Christchurch Earthquake Impact on Non-Life Insurers

(The following was released by the rating agency)

June 20, 2011-- Fitch Ratings says that the Christchurch earthquake will impact the earnings of Australia's major non-life insurers, but costs should be manageable due to the buffer provided by their reinsurance programmes and the New Zealand Earthquake Commission."Although still preliminary, market feedback would appear to indicate initial modelled loss estimates for the latest earthquake may be on the high side. Balance sheets nonetheless remain well protected through the maintenance of reinsurance covers and the New Zealand Earthquake Commission," said John Birch, Director in Fitch's Financial Institutions team."

Eqecat, Inc. has estimated the 13 June earthquake to have caused additional insured losses in the range of USD3bn to USD5bn, and cited damage occurring to repaired structures and facilities as the main loss drivers.

Under Australian regulations, insurers are required to hold capital against their net exposure (after reinsurance) to their largest 1-in-250 year catastrophic event, and included in this charge is the cost of reinstating this cover if not pre-paid. While this ensures sound protection, it has resulted in significant reinstatement costs for insurers as they have replaced primary and backup covers during an active catastrophe period.

Ongoing events continue to erode cover and future reinstatement and programme renewal costs are likely to be expensive given that global losses for the reinsurance sector have been significant. However, helping to offset rate pressure and potential capacity constraints is a global reinsurance sector that is still strongly capitalised. Moreover, Fitch believes the Australian majors will seek to ultimately pass on higher reinsurance costs through via premium rate increases.

Insurance Australia Group (IAG) is the largest insurer in New Zealand with approximately 35% of the non-life market. Operating on a calendar year basis, IAG's main catastrophe reinsurance protection provides up to AUD4.1bn of cover in excess of a AUD250m deductible. In addition, the program includes a three-year cover of AUD100m in excess of AUD150m, which reduced the group's maximum first event retention to AUD150m at the outset of 2011. The programme includes further covers which vary according to the location and number of events incurred. With regard to New Zealand, the net retention at the beginning of 2011 was AUD115m. IAG has stated that its maximum event retention immediately prior to the latest Christchurch earthquake was AUD95m, which is after allowing for AUD50m from remaining capacity in the aggregate cover. IAG has also stated that approximately half of the AUD150m protection available under the aggregate cover had been utilised, prior to this latest event. With more than six months remaining before IAG renews its cover, additional reinsurance costs prior to renewal would appear likely, although these may not be incurred during IAG's FY11 which ends 30 June 2011.

Suncorp Group Limited (Suncorp) has approximately 25% of the New Zealand non-life market. Its main catastrophe protection provides AUD5.6bn of cover in excess of a AUD200m deductible, and following the February 2011 quake an additional cover reduced its net retention from a New Zealand event to NZD20m. Its reinsurance program renews from 1 July 2011, and at 30 April 2011 Suncorp had close to two full vertical towers of cover on its main programme. While Fitch believes it is unlikely that any gap in cover will occur prior to renewals at the end of the month, the agency expects reinsurance renewal costs to rise and the group's reinsurers to seek tighter coverage terms.

The largest-listed insurer in Australia, QBE Insurance Group (QBE), has exposure to New Zealand through an approximate 15% market share in addition to risks accepted through syndicates at Lloyds of London. As a global insurer and reinsurer operating in 49 countries, Fitch considers QBE's aggregate exposure to be well managed through geographic and product diversification in addition to its comprehensive reinsurance programs. Following a number of catastrophic events globally, the group has USD770m of the USD1.6bn allowed for large and catastrophe losses during 2011 remaining. Global multi-year reinsurance protections provide a buffer against rising reinsurance costs in the short term and includes a three-year group wide catastrophe program, which for 2011 provides USD1.3bn of protection per event in excess of USD200m with a prepaid reinstatement for the whole cover. Moreover, the group has previously announced that it holds specific high-level catastrophe covers for Australia and New Zealand although the quantum was not disclosed.