Munich Re Chile loss upped $300m as sector capital concerns rise

This compares to the company’s original estimate of $700m. The group also believes that the total industry loss could now reach about $8bn. This will add to rising fears among experts within the market such as credit rating agencies Moody’s and Standard & Poor’s that the market could face a capital shortage if the recent slew of forecasts of a particularly lively Atlantic hurricane season are borne out. Munich Re’s estimate for reinsurance claims for Winter Storm Xynthia, which battered Europe on 27 and 28 February, remains at around €70m. The company has also set aside provisions of around €160m for the two hailstorms that occurred in Australia this March.hideLosses are expected from the latest floods on the Rivers Oder and Vistula, but the figures are not yet available, said Munich Re. Munich Re said that the scale of catastrophes in the first quarter of this year have confirmed that the predicted rise in the cost of such events will continue. The reinsurance group said that 2009 saw a substantially lower level of natural catastrophe losses than in the previous years and contrasted sharply with the first few months of 2010 of this year. It pointed out that exposure to geophysical events remains unchanged despite the earthquakes in Haiti, Chile, Turkey and Costa Rica and volcanic eruptions in Iceland, Ecuador and Guatemala, adding that this exposure is not affected by human activity. But, Munich Re said that steadily increasing insured values have led to a substantial rise in exposures, and thus risks, over the years. Also, the meteorological risk situation is also changing in the case of storms and heavy precipitation, said the company. “The number and intensity of weather-related catastrophes is expected to increase in the coming decades, largely on account of climate change,” said Munich Re. The company said that the Chile estimates had proved tricky because of low primary insurer retentions, a high proportion of individually (facultatively) reinsured production facilities and buildings and ongoing business interruption losses. The company said that the number of individual losses was also very high. Local insurance companies had received more than 190,000 claims notifications by the end of April, it noted. Torsten Jeworrek, Munich Re's Reinsurance CEO, said he expects prices to rise as a result of the rising losses. “Events like Chile’s devastating earthquake reinforce our case for insisting that risks be consistently written at adequate prices, even after years where losses have been relatively low,” he said. For the renewals on 1 July, 2010, (parts of the U.S. market, Australia and Latin America), Munich Re said it expects price increases in the loss-affected regions and business segments. Munich Re’s share price dipped slightly by 1.2% down to €99.7 on the day the news was released against a 52 week low of €90.82 and high of €123.45. Meanwhile, credit rating agency Moody's said this week that reinsurers' current low price-to-book ratios are the main credit concern for the sector as it prepares for what experts expect to be a heavy hurricane season. Moody’s said that the vast majority of reinsurers worldwide have entered the U.S. hurricane season trading below book value which makes bondholders in the sector ‘particularly vulnerable’. Moody’s said that the reinsurance industry is renowned for raising equity capital after major catastrophes or downturns. For this reason the historically low price-to-book ratios raise ‘doubts’ about the ability of reinsurers to recapitalise if faced with major catastrophe losses. If they are unable to do so, bondholders would be left with less credit support, said the rating agency. This is the biggest concern currently and one of the main reasons why Moody's changed its outlook on the global reinsurance sector to negative last September. "The past eighteen months have been highly unusual if not unprecedented for reinsurance stocks, as nearly all reinsurers continue to trade below book value," said Kevin Lee, Senior Credit Officer at Moody's. "On average the sector is currently trading at 0.8 times book, worse than other insurance sectors and global financials," he added in the report ‘Reinsurers Enter Hurricane Season Trading Below Book: Will Investors Be There to Recapitalize?’ available on Moodys.com. Moody’s said that the low price-to-book ratios may signal that reinsurers are currently out of favour against other asset classes or that investors may be discounting returns at a higher rate than what the sector can generate in the face of weakening industry fundamentals. "A bigger issue still is that the industry's investor base is very concentrated," added Mr. Lee. The Moody’s analysis shows that the top 20 shareholders often make up 50-75% of total shares outstanding in the sector. It also noted that some of the largest shareholders in the sector have recently sold down their positions nearly across the board or have become more selective, according to SEC filings. The agency said that reinsurers have tried to counter the low price-to-book ratios and weakening industry fundamentals in one of four ways, with varying levels of success. They have bought back shares, issued debt to buy back shares, merged or moved the holding company and listed shares on foreign exchanges to try and diversify their investor base over the long term. It said that some reinsurers are also developing ‘break-the-glass’ plans in case catastrophe losses wipe out large amounts of capital at a time when fresh capital will only be made available to those that are best prepared. At the end of the first quarter as the market began to digest the scale of the cat losses, rival rating agency Standard & Poor’s said that the events should only hurt profits and not balance sheets. But it also warned that fresh capital could be scarce if the subsequent months turned out to be expensive for reinsurers. “In many cases, catastrophe losses have already exhausted more than 50% of re/insurers' budgets, thereby reducing the cushion for the remainder of the year. We believe the accumulated losses—particularly from the European Windstorm Xynthia and the Chilean earthquake—could have material unfavourable effects on the earnings of property/casualty re/insurers worldwide,” stated S&P at the time. The rating agency calculated that the weighted average catastrophe losses accounted for about 25% of re/insurers’ 2009 reported net incomes. For this reason it said that it expects that the losses will be an ‘earnings event’ rather than a capital event and should be contained within the first-quarter 2010 results—with the exception of a few outliers. Based on the early estimates, S&P said that it did not expect rating changes. It also noted that a few companies' 2009 reported net incomes were distorted because they included material realised investment losses from the de-risking of investment portfolios and restructuring costs. The agency said, however, that if the level of catastrophes that hit in the first quarter continued then rates would rapidly harden as re/insurers attempted to protect increasingly vulnerable balance sheets. ”It is possible that the cumulative effects of these losses could erode the capital of a few re/insurers to the point that they might need to access the capital markets for replenishment, which could result in a rating action,” stated the agency. Since this forecast was made Munich Re and others have upped their existing loss forecasts for the first quarter catastrophes, the leading re/insurance groups have suffered big and rising losses from the Deepwater Horizon oil spill in the Gulf of Mexico and the world’s leading catastrophe forecast experts have all predicted a particularly lively Atlantic hurricane season. A number of the leading re/insurance groups that so eagerly returned capital to shareholders after a buoyant 2009 may now, therefore, be wondering whether it was such a good idea as capital could well become very tight in the second half.

Munich Re Chile loss upped $300m as sector capital concerns rise

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