Arch Estimates NZ Quake Loss at $35-$70 Million; Assessing Japan

The Bermuda-based Arch Capital Group announced that the Company’s 2011 first quarter results will be negatively impacted by the New Zealand earthquake, which occurred in February 2011, in the range of $35 million to $70 million, net of reinsurance and reinstatement premiums. The preliminary loss estimate is based on industry insured losses ranging from $6 billion to $12 billion.

Arch noted that the estimate is “based on currently available information derived from modeling techniques, industry assessments of exposure, preliminary claims information obtained from the Company’s clients and brokers to date and a review of in-force contracts.

“The Company’s actual losses from this event may vary materially from the estimates due to the inherent uncertainties in making such determinations resulting from several factors, including the preliminary nature of available information, the potential inaccuracies and inadequacies in the data provided by clients and brokers, the modeling techniques and the application of such techniques, the contingent nature of business interruption exposures, the effects of any resultant demand surge on claims activity and attendant coverage issues.

“In addition, actual losses may increase if the Company’s reinsurers fail to meet their obligations to the Company or the reinsurance protections purchased by the Company are exhausted or are otherwise unavailable.”

Arch also said it is “assessing its exposures to the recent earthquake and tsunami that struck Japan, but it is too early to issue an estimate of losses given the significant unknowns, early stages of the damage assessment process and the enormity of these events.

“While considerable uncertainty remains, as of January 1, 2011, the Company’s modeled exposures for property losses arising from an earthquake in Japan were net probable maximum pre-tax losses of (a) approximately $60 million for a 1-in-100 year return period and (b) approximately $100 million for a 1-in-250 year return period (the estimates are net of expected reinsurance recoveries, before income tax and before excess reinsurance reinstatement premiums).

The bulletin cautioned that these “modeled estimates only reflect losses from property lines of business and do not include potential losses arising from marine or other lines of business. In addition, the modeled estimates do not account for the effects of a tsunami or the impact that the events may have on areas outside of Japan and, as a result, may not provide a comprehensive indication of the Company’s exposures for the events.

In addition Arch said that the “modeled estimates do not represent the Company’s maximum exposures and it is highly likely that the Company’s actual incurred losses will vary materially from the modeled estimates due to several factors, including inherent uncertainties in estimating the frequency and severity of such events and the margin of error in making such determinations resulting from potential inaccuracies and inadequacies in the data provided by clients and brokers, the modeling techniques and the application of such techniques, the contingent nature of business interruption exposures, the effects of any resultant demand surge on claims activity and attendant coverage issues.

“In particular, the models used for risks affecting Japan are relatively untested by actual experience and may be subject to even greater variability. In addition, actual losses may increase if our reinsurers fail to meet their obligations to us or the reinsurance protections purchased by us are exhausted or are otherwise unavailable.”

Source: Arch Capital Group