by winston » Sat Sep 06, 2008 8:49 pm
Munich Re May See Higher Rates, Profits in Wake of 2008 Storms
By Oliver Suess and Jon Menon
Sept. 5 (Bloomberg) -- The worst hurricane season in three years improves the odds that Munich Re and Swiss Reinsurance Co., the biggest reinsurers, can raise rates and profit next year.
Hurricane Katrina, which devastated New Orleans and socked insurers in 2005 with a record $41 billion in claims, had an upside: it pushed reinsurance prices to new highs. On the flip side, the toothless hurricanes of 2006 and 2007 were bad for reinsurers, who will try to reverse a two-year, 20 percent decline in rates when they meet this weekend in Monte Carlo.
``Reinsurance shares tend to get a boost from major disasters like Hurricane Katrina or Hurricane Andrew in 1992,'' said Thomas Radinger, who helps oversee about $80 billion, including Munich Re and Swiss Re shares, at Pioneer Investments in Munich. ``We would need to see a single catastrophe costing more than $10 billion or several disasters causing more than $25 billion in claims.''
This week's Hurricane Gustav was a disappointment by Radinger's standards. Insured damages were a less-than-estimated $3 billion to $7 billion in Louisiana and Mississippi, as Gustav lost steam and spared New Orleans another direct hit, according to the modeling firm Eqecat Inc.
There's still time, though, for 2008 to resemble 2005. Tropical Storm Hanna is forecast to strengthen and hit the Carolinas as a hurricane this week, and Ike is hovering in the Atlantic as an ``extremely dangerous'' Category-4 hurricane, according to the U.S. National Hurricane Center. Josephine could also make landfall next week.
`Sweaty Two Weeks'
``The real story is that there are three storms heading toward the Gulf of Florida,'' said Bronek Masojada, chief executive officer at Bermuda-based Hiscox Ltd., a Lloyd's of London insurer and reinsurer. ``It looks like it's going to be a sweaty two weeks.''
Colorado State University forecasters this week predicted ``well-above-average'' tropical-storm activity in the Atlantic for September, with four or five named hurricanes.
Inaccurate hurricane predictions in 2006 and 2007 made weather forecasters sound like Chicken Little and turned European reinsurers into a bad investment. Munich Re, the world's biggest reinsurer, is down 12 percent in Frankfurt trading from two years ago. Zurich-based Swiss Re, the second-largest reinsurer, is down 29 percent in the same period.
The credit crunch has compounded the drag of declining rates. Munich Re shares fell the most in five years after the company said July 25 that stock-investment writedowns will reduce 2008 profit. Second-quarter earnings fell 47 percent after Munich Re wrote down 889 million euros ($1.3 billion) on its equity investments.
Profit Drops
``We are earning a solid profit, even under the difficult conditions on the capital markets and the growing price pressure in reinsurance,'' Munich Re Chief Executive Officer Nikolaus von Bomhard, 52, said at an Aug. 6 press conference. He declined a request for an interview this week.
Zurich-based Swiss Re said Aug. 5 that second-quarter profit declined 53 percent after 362 million Swiss francs ($327 million) of writedowns related to credit-default swaps.
Munich Re is down 21 percent in Frankfurt this year and trades at about seven times estimated earnings. Swiss Re, led by Chief Executive Officer Jacques Aigrain, 54, is down 16 percent to trade at six times earnings. The multiples trail the median of nine for European insurers and 11 for the 600 companies in the Dow Jones Stoxx Index.
``While reinsurance stocks like Munich Re and especially Swiss Re are dirt cheap, one can't really expect much in terms of profit growth either,'' said Joerg de Vries-Hippen, who oversees about $26 billion as European chief investment officer at Allianz Global Investors in Frankfurt. ``That will only change if the credit crisis really cuts into the sector's capitalization or if a major disaster does so.''
Insurer Writedowns
Munich Re may be able to profit as cash-strapped U.S. insurers try to conserve capital by transferring more risk to reinsurers, said Torsten Jeworrek, head of reinsurance underwriting at Munich Re.
``The U.S. subprime crisis separated well-capitalized insurers from others,'' Jeworrek said in an Aug. 6 interview. ``Those that saw their capital depleted may have to buy more reinsurance cover going forward.''
The biggest insurers in the U.S. and Bermuda posted more than $77 billion of writedowns linked to the collapse of the mortgage market from the start of 2007 through the first quarter. American International Group Inc., the largest insurer in the U.S. by assets, accounts for about half that total, data compiled by Bloomberg show. New York-based AIG had three straight unprofitable quarters on writedowns tied to the housing slump.
`Peak Risks'
AIG considers many factors when it buys reinsurance, spokesman Nicholas Ashooh said. Capital is ``a very important factor in the life of any insurer or reinsurer,'' he said.
``The crisis has created huge writedowns on the asset side of insurance companies,'' said Stephan Kalb, an analyst at Sal. Oppenheim in Frankfurt who recommends buying Munich Re shares. ``To balance out peak risks, primary insurance companies need more reinsurance coverage than before.''
Reinsurers worldwide have not suffered capital erosion. The industry's capital was $129 billion at the end of 2007, up 20 percent from 2005, helped by retained earnings, according to a report by New York-based Guy Carpenter & Co.
``Capitalization at the four major reinsurers is very solid, as they used the last benign years to prop up reserves,'' said Markus Engels, who helps oversee about 60 billion euros, including Munich Re and Hannover Re, at Cominvest Asset Management in Frankfurt. ``Still, it would need a shock event for a real turnaround of the two-year decline of reinsurance rates.''
Gustav No Katrina
While Gustav was no match for Katrina, it did make this year's hurricane season the most costly since 2005. If initial insured-loss estimates are correct, Hurricane Gustav will rank among the 10 most costly hurricanes to hit the U.S., according to Oldwick, New Jersey-based A.M. Best Co., which tracks the insurance industry.
Hurricane Katrina holds the top spot, followed by Hurricane Andrew, with about $23 billion in claims. The next most costly hurricanes, A.M. Best said, were 2005's Wilma, $11 billion; 2004's Hurricane Charley, $8.2 billion; and 2004's Ivan, $7.8 billion.
``While the damage caused by Gustav could have been much greater, this will still represent a significant insured loss,'' said Peter Grant, a reinsurance analyst at Standard & Poor's Ratings Services in London. ``And the capital erosion caused by the credit crisis to date is comparable to a significant natural disaster in terms of its effects on the reinsurance market.''
It's all about "how much you made when you were right" & "how little you lost when you were wrong"