China quake will put pressure on earnings

Fitch Ratings commented today that, based on preliminary estimates, the earthquake in China is not expected to have a material impact on the balance sheets of the Hong Kong-listed Chinese insurance companies.

That said, the agency believes that the losses arising from the tragic event, coupled with the poor performance of the A-share market in the first few months of 2008, will put pressure on the insurers' earnings for the year.

Fitch also believes that the tragic event is a timely reminder of the perils facing the Chinese market and the importance of establishing effective risk transfer mechanisms through reinsurance and other alternative methods.

The massive earthquake that hit China's Sichuan Province on Monday 12 May 2008 was the country's worst natural disaster in over 30 years.

According to official figures as of the time of writing, the total death toll has risen to close to 15,000. The magnitude-7.9 earthquake has also left almost 65,000 injured. As the largest rescue effort in the Chinese army's history continues, the ultimate death toll and injury count are set to rise further.

While it is still premature to gauge the impact of insured losses on individual insurance companies, risk modeling firms AIR Worldwide and Risk Management Solutions have estimated the economic losses from the tragedy to be in the range of $10-20bn.

The insured losses, according to AIR Worldwide, are estimated to be between $300m and $1bn, as compared to the $41bn in insured losses arising from the hurricanes in the US in 2005.

As reflected in the low insured loss estimates relative to expected economic losses, the epicenter of the earthquake is located in a predominantly rural area, where insurance coverage is minimal as compared to the coastal cities.

More importantly, earthquakes are generally not covered under residential property and motor policies. The bulk of the non-life claims are, therefore, expected to arise from larger-scale commercial properties farther away from the earthquake's epicenter.

The Sichuanese provincial capital, Chengdu, is located some 55 miles from the hardest hit area and has markedly higher concentration of insured commercial and industrial risks.

In addition to commercial property and business interruption claims, payouts on life insurance policies are also expected to be sizable. The Sichuan province is home to 84m residents.

In Wenchuan county alone, China Life Insurance Co Ltd (China Life), the country's largest life insurer, has over 110,000 life insurance policies. China Life has received 150 claims so far, amounting to $19m. Fitch expects that it will take weeks, if not months, before reliable figures on ultimate life and accident benefit payments can be gathered.

If market shares in the affected areas are used as guidance, the insured losses from the earthquake will likely be spread among the largest companies in the market, namely: The People's Insurance Co (Group) of China, China Life, Ping An Insurance (Group) Co of China Ltd and China Pacific Insurance (Group) Co Ltd.

A large portion of the losses facing the direct insurance market will likely be passed on to China Reinsurance (Group) Co, the country's national reinsurer, depending on the structures of the direct companies' reinsurance programmes.

Fitch expects China International Reinsurance Co Ltd (China International Re, Insurer Financial Strength (IFS) 'A-' (A minus)) to have manageable exposure to the event, although the company has yet to release figures publicly.

Through the use of excess-of-loss reinsurance, the company reported a net loss of HKD35m ($4.5m), or 1.6% of end-2007 capital from the snowstorms earlier this year.

The agency also does not expect any significant impact on China International Re's sister company, Tai Ping Life Insurance Co Ltd (IFS 'BBB+'), which has somewhat lower exposure to the region as compared to its larger peers.

Fitch's current assessment on the earthquake's impact is based on the most recent estimates released by official sources and catastrophe modeling firms. The agency will continue to evaluate the earthquake's impact as loss estimates are updated and insured losses disclosed.