Reinsurers’ Investment Hit Won’t Stop Price Drop

European reinsurers’ losses on investments due to the financial crisis may dampen their appetite for a reinsurance price war, but will not interrupt the trend toward a weakening market.

As reinsurers descend on the Mediterranean resort of Monte Carlo this weekend for their annual jamboree, which sets the scene for tough contract negotiations with their insurance company clients in the weeks ahead, they will be keen to see how subprime-related losses instill discipline among rivals.

This year’s meeting contrasts sharply with last year, when the prospect of subprime-related losses was not on the radar screen and the focus of big players like Swiss Re was on returning any unused cash to shareholders.

“Reinsurers’ pockets may not be as deep as they had anticipated,” said Hannover Re board member Juergen Graeber of the world’s fourth-biggest reinsurer, Hannover Re.

“For 2008 going into the 2009 renewal, the subprime experience will generate a little shockwave to reinforce underwriting discipline on the reinsurance side. Whether the clients share this view is a different ballgame,” Graeber said.

Reinsurers globally posted net losses of about $3 billion on their investments in the first half of this year, compared with gains of nearly $5 billion in the same period last year, credit rating agency Fitch estimated. European companies were hit much harder than rivals in the United States and Bermuda, Fitch said.

Some of the hit came from investments in complex asset-backed securities but reinsurers have also found themselves unveiling a string of writedowns on their equity holdings, as the trough in financial markets drags on.

The losses sent shares in top players plummeting, with Swiss Re down a third over the last year, while Munich Re and Hannover Re have fallen by 18 percent and 14 percent respectively.

Munich Re, the world’s biggest reinsurer, has tried to look on the bright side of the sector’s investment losses.

“Despite the need for writedowns, our capitalization is very solid and the present environment could even lead to new business opportunities,” it said last month.

“The demand for reinsurance cover should be stimulated by the fact that a large number of our clients are confronted with a weakening of their capitalization. Capacity is also likely to have declined on the supply side due to the market-wide investment losses,” it said in its report on the second quarter.

But analysts warned not to place too much hope in prospects for better business as a result of the writedowns, saying prices were still likely to fall 4-5 percent in the next renewals round, only slightly less than the 6-7 percent expected without the financial market impact.

“There is a little bit of wishful thinking” in Munich Re’s upbeat outlook, said JP Morgan analyst Michael Huttner.

Capital reserves in the sector are strong despite the investment hit, and payouts for natural disasters such as hurricanes have been limited so far, compared with the devastating hurricane season three years ago.

“You haven’t had a Katrina since you had Katrina,” said one analyst, referring to the deadly storm that pounded New Orleans in 2005.

Barring such huge losses this year, all of these factors are likely to keep intact the broad trend of downward pressure on the prices reinsurers can charge insurance company clients for helping to shoulder their risks.

“I would assume that the softening will slowly but surely continue,” said Hannover Re’s Graeber. “That won’t be reversed and whoever believes it will be is misguided.”