UPDATE 1-Munich Re plays down hit from pension fund investors

Sun Sep 8, 2013 11:33am EDT

Related Topics

* Munich Re sees own portfolio stable in January renewals

* Institutional investor money squeezing reinsurance prices

* Munich Re's own book has limited exposure to competition (Adds Munich Re quotes, broker comment)

By Jonathan Gould

FRANKFURT, Sept 8 (Reuters) - Munich Re played down the threat to its reinsurance portfolio from insurance investors like pension funds, saying it expected a stable outcome when it renews contracts with its insurance company clients in the coming months.

The world's biggest reinsurer on Sunday said it was seeing increasing price competition from institutional investors, who are buying into the securitisation of insurance risks such as hurricane damage in the United States, in direct competition with traditional reinsurers like Munich Re.

These investors pumped around $44 billion into the lucrative market for natural catastrophe risk cover last year, representing about 17 percent of worldwide reinsurance capacity for those risks.

But the figure is expected to grow to $75 billion in 2016, or about 25 percent of global capacity, Munich Re board member Torsten Jeworrek told a news conference at the annual meeting of the reinsurance industry in Monaco.

This new supply of reinsurance was putting continuous but moderate pressure on the price of traditional reinsurance, particularly in catastrophe markets, Jeworrek said.

"We have a concern. We take a very serious approach here, particularly when the new capacity undermines current price levels," Jeworrek said, adding that the company was actively managing its book to keep it profitable.

However, the natural catastrophe segment makes up only 1.5 billion euros in premiums or less than 10 percent of Munich Re's 17 billion euro property and casualty book, Jeworrek said.

"The general impact is manageable and one should not exaggerate," he said.

Institutional investors hungry for yield have been increasingly attracted to insurance "catastrophe bonds" because they pay high returns compared with other bonds available in the market.

The downside of the bonds for investors is that they risk losing some or all of their capital to pay damage claims in the event of a big storm or earthquake.

Jeworrek said it was unclear how long traditional reinsurers, who help insurance companies shoulder the risk of big damage claims in exchange for part of the premium, would have to face the competitive threat from pension funds.

Institutional investor interest in catastrophe bonds might diminish if general interest rates start to rise, and the "cat bond" investors have yet to face big losses, which might one day dampen their enthusiasm, Jeworrek said.

Big reinsurers like Munich, Swiss Re or Hannover Re can also diversify their risk through other lines of business, rather than concentrate on catastrophe risk.

Jeworrek said there was no clear trend for the market when reinsurers renew annual contracts with insurance companies for risk cover starting on Jan. 1, 2014.

"All in all, we expect still very fragmented and heterogeneous markets and profitability levels," he said.

The effect of third-party investors on reinsurers' prospects is a major theme of the industry gathering.

Broker Willis Re said the new money may "crowd out" traditional reinsurers.

"The influx of third-party capital into the reinsurance market may displace up to $40 billion of traditional equity capital, which could either be returned to shareholders or redeployed elsewhere in the reinsurance market," Willis Re said in a statement on Sunday.

Munich Re has already said it is contemplating buying back its own shares. (Editing by Christoph Steitz)

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