2011 has already been a hell of a year for the global reinsurance industry. We are barely at the end of what has been an all-time, record-breaking first quarter for cat losses, which begs the question: how well are reinsurers equipped to deal with the next nine months?

So far, while the losses have been large, for the industry in general they represent an earnings loss rather than a capital one. So while profits will be hit, underlying capital reserves – which were at record levels at the beginning of the year – should remain sound.

Ratings agency AM Best last week put out an industry-wide analysis that concluded all global reinsurers “should have the capital to absorb these forthcoming losses”, while JP Morgan Cazenove analyst Michael Huttner’s investment thesis “remains that Japan does not in any way affect the capital strengths of the reinsurers we follow” – which are mainly those based in Europe.

Indeed, both Swiss Re and Munich Re have gold-plated capital holdings well in excess of that required for AA ratings.

The situation is slightly different for some smaller, property and catastrophe specialist reinsurers.

Many of those who were formed in 2005 after Hurricane Katrina – where a dearth of capacity created opportunities for a sub-market able to raise capital and willing to accept risks – shied away from US hurricane exposure.

In some cases they diversified their exposure to markets such as Australia and NZ – out of proportion with the size of these markets.

Which is fine when Mother Nature is kind, but with multiple earthquakes, floods, cyclones, major storms and bushfires all affecting the region over the past two years, what may have been seen as a good bet no longer looks so appealing. 

Flagstone has been identified as the most exposed, with its estimated 2011 losses representing between 10-15% of its equity. New York investment broker Keefe, Bruyette & Woods says this is “well above the peer group average for these events”.

In comparison, the exposure of another Bermudian reinsurer, Endurance Specialty, represents just 2% of its shareholder equity.

But while the industry isn’t awash with reinsurers in trouble, AM Best’s Mr Huttner says the vast majority have already “used up not just their claims budget for natural catastrophes this year, but also the premiums they collected”, and will inevitably be holding their collective breaths as the US hurricane season approaches.

The new US wind model from Risk Management Solutions (RMS), which was updated in February for the first time since 2003, has produced “significantly higher” output numbers than the ranges previously indicated by the cat modeller.

RMS says it now expects “to see wind risk increase for all hurricane states on an industry-wide basis”.

Coupled with forecasts from pre-eminent climate scientists Philip Klotzbach and William Gray from Colorado State University’s Department of Atmospheric Science for an “above-average Atlantic basin tropical cyclone season in 2011”, it is inevitable that nervous times await the reinsurers.

Klotzbach and Gray will release a much-awaited update to their forecasts on April 6, but currently they anticipate “an above-average probability of US and Caribbean major hurricane landfall” with 17 named storms, nine hurricanes and five major hurricanes anticipated.

Storm clouds may sometimes have a silver lining, but in this case analysts believe that the culmination of catastrophes in Japan, NZ and Australia will certainly push up prices for risks in those regions, and the cumulative effect of the events should be enough to see a hardening of rates across the reinsurance market.

Predictions of rises in the magnitude of up to 15% at the top end compare with suggestions prior to the catastrophes that rates could fall by 5-10%.

In light of the events in Japan, the April 1 Japanese reinsurance renewal season will be extended, though all eyes will be on it.

Other major April 1 program renewals include Chubb and Balboa, which will be watched closely as a barometer of the impact on global rates. 

Should significant rate hardening result, those reinsurers who have endured the heavy weather will be rewarded with an opportunity to make hay while the sun shines.