NU Online News Service, March 28, 12:58 p.m. EDT
Early Japan earthquake loss estimates from two major reinsurers are credit negative for the reinsurance industry because they indicate that reinsurers will take the largest share—perhaps even more than half—of insured losses, according to Moody's Investors Service.
Moody's refers to the $2.1 billion loss estimate made last week by Munich Re and the $1.2 billion loss estimate made by Swiss Re. Munich Re said it expects to miss its 2011 profit target of around $3.4 billion because of first-quarter catastrophe losses.
"These figures highlight the importance of Japan's insurance market to the global reinsurance industry, and vice versa," Moody's says in its Weekly Credit Report. "For many years, reinsurers have sold some of the largest earthquake reinsurance protections in the world to Japan's insurers, with notional liability in the tens of billions of U.S. dollars."
Moody's says the form of reinsurance coverage and the amount of total insured damages will determine how losses will be distributed among reinsurers. Moody's says industrywide loss estimates currently stand at between $12 billion and $30 billion.
Modeling firm AIR Worldwide recently narrowed its loss estimate to between $20 billion and $30 billion. The firm's previous estimate was between $15 billion and $35 billion.
Another "swing factor" for reinsurers, according to Moody's, will be the extent of losses from reinsurance protections sold to Zenkyoren, Japan's largest mutual insurer, and to non-life insurers Tokio Marine Group, NKSJ Group and MS&AD Insurance Group.
Last week, Moody's revised its outlook on the three Japanese non-life insurer groups to negative due to the damages from the earthquake and tsunami. "The negative outlook for these P&C insurers reflects the view that losses from the event will further pressure the profitability and, to a lesser degree, the capitalization benchmarks of these insurers at their current rating levels," Moody's said at the time.
Moody's notes that reinsurers came into the year in a position of capital strength. The rating agency adds that the first-quarter catastrophe losses could raise reinsurance prices. Moody's says early reports for April renewals for Japan earthquake reinsurance indicate price increases of at least 20 percent.
Prices for U.S. catastrophe reinsurance renewals in June and July are expected to stabilize or rise by single digits, Moody's says. "A lot will depend on what the large European reinsurers do and any changes in the perception of risk," the rating agency explains.
Moody's cautions, though, that while major losses in two of the largest reinsured earthquake zones are "tough to dismiss," other factors exist that could prevent reinsurance prices from increasing. Moody's says that "first-quarter disaster losses eroded capital, but planned share buybacks would have reduced excess capital anyway…."
The rating agency adds that reinsurers may feel compelled to write business because they already spent money to hedge their positions for the rest of the year. Additionally, Moody's notes that the cost of writing reinsurance in Florida has fallen due to relaxed collateral requirements.
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