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Cat Losses Could Provide Silver Lining for Reinsurers

Source: WSJ - Hester Plumridge

Posted on 09 May 2011

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This year so far has already seen a number of natural disasters, but 2011 could yet have a silver lining for reinsurers.

Insured losses of $40 billion to date could make 2011 the costliest year since Hurricane Katrina's 2005 landfall. Munich Re and Swiss Re booked first-quarter losses of $1.4 billion and $665 million, respectively. It looks increasingly likely these disasters will wipe out excess industry capital, paving the way for higher prices.

The market may not see it this way yet. Share-price falls of 3% to 4% in the sector since the Japanese earthquake in March have largely tracked the estimated impact of this year's catastrophes. Credit Suisse, for example, forecasts those should halve European reinsurers' full-year profits and shave around 5% off their market capitalization. The market hasn't so far revised upward its 2012 and 2013 earnings expectations to reflect improved pricing.

That is understandable. Even losses of $40 billion are unlikely to eliminate the industry's current huge buffer of excess capital; Swiss Re alone had a cushion of $10 billion at the end of 2010. The last price-changing events occurred in 2005, when U.S. hurricanes including Katrina and Rita caused a cumulative $117 billion in losses.

But the upcoming hurricane season could further reduce industry capital. Reinsurers may also redeploy capital to increase catastrophe reserves, after above-average 2010 and 2011 losses. And they may need to boost reserves for U.S. casualty reinsurance; the market currently believes the industry may be underestimating future losses.

Indeed, there are already signs the multiyear trend of flat or falling prices may be over. Reinsurance contracts renewed in April included an average 3% rise, with prices in Japan up to 50% higher, notes Swiss Re. Munich Re is expecting global reinsurance price increases this year. And one model used by reinsurers and ratings firms to estimate U.S. catastrophe risk was revised in February to raise estimated peak losses.

For reinsurers currently trading near historic lows of 80% to 90% of book value, higher prices could provide a much-needed boost.