Munich Re and Swiss Re Ltd., the world’s biggest reinsurers, are awaiting this month’s peak of the U.S. hurricane season after record first-half catastrophe losses depleted buffers and threatened shareholder payouts.
Munich Re may tomorrow report a drop in second-quarter profit to 661 million euros ($939 million), from 709 million euros a year earlier, according to the average estimate of 12 analysts surveyed by Bloomberg. Smaller rival Swiss Re may post a 39 percent decline to $495 million, according to 11 analysts.
Natural disasters, including the earthquake and tsunami in Japan, cost insurers and reinsurers about $70 billion in the first half, according to estimates by Guy Carpenter & Co., the reinsurance brokerage of Marsh & McLennan Cos. Claims from the U.S. hurricane season could endanger Munich Re’s dividend policy and delay Swiss Re’s bid to regain the AA credit rating that Standard & Poor’s cut in 2009.
“A heavy season with at least one significant landfall could mitigate growth or even result in an impairment of capital for the remainder of 2011,” according to a report by Guy Carpenter. “A light hurricane season with no significant landfalls could enable reinsurance capital to resume growth.”
Catastrophe claims usually increase in the second half of the year with the hurricane season in the North Atlantic and typhoons in the northwest Pacific. Researchers at Colorado State University forecast a “well-above-average” Atlantic June- through-November hurricane season.
Munich Re also expects losses of as much as 200 million euros from U.S. tornadoes in the second quarter, while Zurich- based Swiss Re hasn’t announced any “material losses” so far.
Munich Re scrapped a share buyback and its full-year profit target in March after the earthquake and tsunami in Japan resulted in the company’s first quarterly loss since 2003. The first quarter’s natural disaster claims were almost triple its annual budget, the Munich-based reinsurer said.
Swiss Re estimated first-quarter disaster losses of about $2.3 billion compared with 2.7 billion euros at Munich Re. Large natural catastrophes claims can cut into excess capital, which serves as a buffer against unexpected losses and supports reinsurers’ credit ratings.
“The first half’s natural catastrophes forced Munich Re to put its share buyback on hold and have eaten into Swiss Re’s excess capital, possibly delaying their return to an AA rating,” said Christian Muschick, a Frankfurt-based analyst with Silvia Quandt Research.
Both reinsurers have limited their hurricane exposures, making a “major capital shortage” unlikely, even after a costly hurricane season, said Muschick.
Munich Re Chief Financial Officer Joerg Schneider said in May that the company “would very much like to keep the dividend on the existing level.” Munich Re, which hasn’t cut its dividend since 1969, paid out 1.1 billion euros last year.
“Only the most severe large loss scenario could imperil the dividend,” Morgan Stanley’s London-based analysts including Jon Hocking wrote in a note to clients on July 29. “They have many levers to pull in a stressed scenario.”
In the record 2005 U.S. hurricane season, Munich Re raised its dividend by 55 percent, helped by the proceeds of asset sales. It also kept the payout stable amid the financial crisis in 2008. The company is trying to lure investors including BlackRock Inc. and Warren Buffett with stable payouts.
Munich Re spokeswoman Johanna Weber declined to comment on the reinsurer’s capital position ahead of tomorrow’s second- quarter earnings report.
“While the third quarter can produce a reinsurer’s biggest claims, only the capital position at the end of the year will be decisive for the dividend and that will depend on catastrophe claims as well as on the size of investment writedowns,” said Roland Pfaender, an analyst with Commerzbank AG in Frankfurt.
Writedowns on investments, dividend payouts as well as higher than expected catastrophe claims can reduce a reinsurer’s capital position, while retained earnings as well as sales of new shares can counter the effect.
Swiss Re’s capital exceeded S&P’s AA requirements by more than $10 billion at the end of last year. The Zurich-based reinsurer, which posted a first-quarter net loss of $665 million, is bidding to regain the AA credit rating after repaying a 3 billion Swiss franc ($3.9 billion) injection by Buffett’s Berkshire Hathaway Inc.
“This capital will be either put at work into an improving reinsurance market or next year they would look at potential buybacks,” said Stefan Schuermann, a Zurich-based analyst with Vontobel Holding AG.
Excess capital at Swiss Re, which almost tripled its dividend last year, may have declined to $7.5 billion, according to the mean estimate of four analysts surveyed by Bloomberg.