Reinsurers Say $4 to $7 Billion Chile Quake Loss ‘Unlikely’ to Raise Rates

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Last month’s huge earthquake in Chile might cost the insurance industry up to $7 billion in damage claims, the world’s top two reinsurers said, but it looks unlikely to raise reinsurance prices.

World leader Munich Re said it expected the 8.8 magnitude Chile quake to cost it around €400 million ($543 million), while nearest rival Swiss Re eyed claims of around $500 million [See IJ web site – https://www.insurancejournal.com/news/international/2010/03/10/108005.htm ].

Analysts said the losses, while large, were probably not sufficient to reverse a slightly falling trend in the prices reinsurers charge their insurance company clients to cover risks such as earthquakes or hurricanes.

“Although it will almost certainly lead to a change in reinsurance prices for business in that region, it is not an industry-changing event on its own,” said Helvea analyst Tim Dawson in a note to clients on Wednesday.

Big insurance losses drain buffers at insurance companies and force them to turn to reinsurers to help pay claims, underscoring the need for good reinsurance cover and opening the door for reinsurers to raise prices.

Vontobel analysts agreed the Chile quake was not on its own large enough to force a trend change in reinsurance prices. “In our view, we would need more than one ‘big’ event and only then see a reversal of the softening pricing trend,” they said in a research note.

The two reinsurers were also hit by February’s European wind storm Xynthia, with Munich Re eyeing damage claims of up to €100 million [$136 million] and Swiss Re of around $100 million.

Munich Re said it expected reinsurance prices to move sideways, “with a slight downward tendency”, in contract talks with insurers due for April and July.

Munich Re’s share had edged up 0.3 percent and Swiss Re’s shares were down 0.5 percent by 0915 GMT, while the Stoxx European insurance share index was up 0.5 percent.

Data from Thomson Reuters StarMine, which weights analysts’ forecasts according to their track record, shows Munich Re trading at 9.4 times 12-month forward earnings, a slight premium to Swiss Re’s multiple of 9.1.

MUNICH RE OUTLOOK
Munich Re said that despite the quake and storm losses it still expected to earn a net profit of more than €2 billion [$2.72 billion] this year, down from more than €2.5 billion [$3.4 billion] in 2009, when it had no big losses for natural disasters and financial markets rebounded.

“For 2011, Munich Re anticipates an increase in results,” it said in a statement.

U.S. billionaire investor Warren Buffett has amassed a stake of more than 5 percent in the reinsurer, which analysts say is probably financial rather than strategic and may reflect an appreciation that Munich Re came through the financial crisis relatively unscathed. He also holds 3 percent of Swiss Re.

“Munich Re will carefully consider further buy-backs, weighing up the benefit against the advantages of comfortable capitalization — also with a view to opportunities for organic and possibly external growth,” it said.

The company’s investment income rose by a third in 2009 to nearly €8 billion [$10.88 billion] as financial markets found their feet after the crisis.

Chief Financial Officer Joerg Schneider said he planned to invest more in renewable energy and other technologies. “We will slightly increase our risk profile, but not depart fundamentally from our prudent investment policy,” he said.

Data from Munich Re showed that it had around €11.5 billion [$15.64 billion] in sovereign debt exposure to the so-called PIIGS euro area periphery countries, Portugal, Italy, Ireland, Greece and Spain, which are battling to get their public finances in order.

The countries represent 16 percent of Munich Re’s overall government bond exposure of around €72 billion [$98 billion] and only about 7 percent of its €164 billion [$223 billion] fixed-income portfolio.

(Editing by Will Waterman)