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Severe Losses for Reinsurers From US Drought: Munich Re CEO

Matt Clinch, special to CNBC.com
Thursday, 9 Aug 2012 | 9:47 AM ET

The recent dry weather affecting crops across the midwest of America will hit the reinsurance industry with perhaps the biggest loss ever, according to Nikolaus von Bomhard, Chairman at Munich Re.

Stuart McCall | Photographer's Choice | Getty Images

“We do think it will be severe and probably one of the severest losses for this market ever,” he told CNBC Wednesday.

“It’s too early to tell what the exact claim will be because we have to wait until the harvest is done.”

The prolonged hot spell is said to be the worst in five decades and has damaged corn production across 26 U.S. states.

Low corn yields are expected to increase consumer food prices but the reinsurance business — where insurance is sold to other insurance companies — is also preparing for the worst.

Munich Re is one of the biggest reinsurance companies in the agriculture market and have put aside $200 million in reserves to deal with future claims due to spoilt crops.

“Based on current estimates, Munich Re anticipates a net burden of approximately 160 million euros ($200 million) [before tax] from losses under crop failure covers, as a consequence of the persistent drought in large agricultural areas in the USA,” the company said in a statement.

“These losses occurred in the second quarter but will only become more quantifiable over the further course of the year.”

Another major player in the industry, Swiss Re, posted earnings on Thursday that beat expectations. Quarterly net profit declined 91 percent to $83 million but a Reuters poll had forecast a loss of $119 million.

Chief Finance Officer at Swiss Re, George Quinn, explained that the company has less exposure to the U.S. agricultural sector.

“I expect it will have some impact on us but I think from what we see at the moment we don’t expect that to be significant in the context of Q3 earnings but of course it’s not over yet,” he told CNBC.

“We’re not a massive player in the (agriculture) market in the U.S. and therefore I think that proportionally we’ll suffer less than others.”

Market analysts Aon, who collate and analyze the financials of global reinsurers are also keen wait before finalizing loss estimates. Speaking to CNBC they say “overall it is too early for reinsurers to comment."

Most global reinsurance firms are due to release full details of losses in their third quarter earnings data.

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