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Fitch: Quake and tsunami unlikely to impact Chilean insurer ratings

Staff writer |
Based on preliminary analysis of available information, Fitch Ratings does not expect its ratings of Chilean insurance companies to be affected by yesterday's earthquake and tsunami.

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Fitch believes the industry will likely be able to absorb the resulting claim losses, which most strongly impacted Chile's north and central-north zones.

Even though Chilean reinsurance coverage is sound and of limited counterparty risk, the recent quake adds to a series of natural disasters that have affected the country this year (floods in the north and volcanic eruptions in the south).

These events have pressured the forecasted insurer profitability for 2015 year-end and reinstallation capabilities of catastrophe reinsurance coverage, considering the increased frequency of disasters during the reinsurance coverage period.

On Sept. 16, 2015, Chile suffered an earthquake measuring 8.3 on the Richter scale with an epicenter in north-central Chile. The area has relatively low population density compared to the epicenter of the country's last major earthquake, which occurred in 2010, and therefore Fitch expects damages from yesterday's tsunami to be less devastating.

However, effects of the quake and tsunami will still extend to residential and commercial properties, roads, infrastructure and sensitive industrial sectors to the economy (agriculture, metallurgy and fishing industry).

Based on estimates from the U.S. Geological Survey, economic losses may be anywhere from $100 million up to $1 billion, and Fitch anticipates actual results may come in at the high end of the range. However, insured losses are likely to be a fraction of the total losses at $500 million or less, with losses to insurers netting out much lower because of the industry's strong catastrophic reinsurance protection.

Fitch expects the bulk of claim losses from yesterday's events would be assumed by recognized international reinsurers with sound creditworthiness; Fitch is confident in the reinsurers' ability and willingness to meet their claims obligations in a timely manner.

Fitch is also confident in the availability of reinsurers to supply cash advances to facilitate claims payments and thus avoid industry liquidity pressures (caused by potential mismatches between claims payment and cash collection from reinsurers) or pressure on the industry's capital adequacy.

International reinsurers have historically been able to make rapid payments on their obligations when catastrophic events occur, which was demonstrated following Chile's larger earthquake and tsunami in 2010. Fitch expects that associated costs of the current catastrophe would be easily absorbed by international reinsurers.

The Chilean insurance industry is highly regulated compared to regional peers; foreign insurers own a high proportion of gross written premiums in the non-life insurance segment (61.5% of gross written premium as of June 15).

This highlights the importance of foreign insurance groups as Mapfre, RSA, Zurich, Liberty Mutual, Santander, Cardif, Chubb and Ace among the majors. The significant presence of strong international insurers in Chile suggests the ability and propensity for international insurer's subsidiaries to receive support from their parent companies if it is required.

Most local insurance companies maintain, in Fitch's opinion, solid reinsurance protections to cover its obligations, and most of them remain associated with large financial groups in the country. The top 10 largest non-life insurance companies represent 84.6% of gross written premium as of June 30, 2015.

The property and technical insurance branches, which are the sectors most exposed to earthquake and tsunami, represent 37.2% of gross premium income as of June 30, 2015; however, they only represent a 19.9% of net retained premium. Premium retention rates for those segments remain in the 25% to 35% range.

The reinsurance protection for the retained risks could result in equity exposure to a maximum level of 5% for larger exposed entities when catastrophic events occur. However, the average equity exposure remains at around 2% with greater variability for reinsurance reinstallation costs.

While Fitch expects claims will result in significant losses as a result of the earthquake and tsunami, currently ratings assigned to non-life insurance companies are not likely to be significantly affected.

Current industry leverage ratios will remain within bounded ranges in addition to sound levels of capitalization and reserve adequacy. The industry may deal with increased leverage, but this effect would be temporary and constrained by regulatory limits to a maximum of 5 times.

Fitch's preliminary opinion is still under development, and the agency will issue a more extensive comment regarding claim losses in the coming days.

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