Fitch Preliminary Analysis: Quake & Tsunami Losses Unlikely to Impact Chilean P&C Insurance Ratings

Based on preliminary analysis, Fitch Rating believes that the Chilean property/casualty insurance industry will likely be able to absorb losses from the earthquake and Tsunami that hit the central-south part of Chile on Feb. 27. However, industry profitability ratios will be negatively impacted, and the 2010 fiscal year could end with net losses and higher leverage ratios. It should be emphasized that Fitch's assessment of the event is still evolving, and more accurate estimates will be forthcoming over the following days and weeks.

Based on estimates from modeling firm Applied Insurance Research (AIR) and others, total expected losses may equal USD 15 billion to USD 30 billion, or 10% to 15% of Chile's GDP. However, insured losses are expected to be a fraction of those total losses at USD 2 billion to USD 8 billion. Consequently, only the lowest estimates of insured losses (USD 2 billion) would be similar to the industry reserves (USD 1.3 billion) and equity (USD 0.62 billion) as of September 2009, excess that will be covered by reinsurance protection. Even more importantly, Fitch believes that net retained insured losses (i.e. after cessions to international reinsurance companies) should remain manageable relative to industry capitalization.

Fitch's expectation is that a vast majority of insured losses will be borne by reinsurance companies located outside of Chile, and so Chilean insurance companies will be highly reliant on the willingness and ability of reinsurers to honor their payments in a timely manner. Timely payments will be necessary so as to avoid both liquidity problems (caused by gaps in timing between claim payment by insurers and collections from reinsurers) or losses to capital (due to bad debts). Fitch notes that historically reinsurers have honored their obligations in a timely manner in the event of major catastrophes and that total losses from the earthquake and Tsunami should be relatively easily absorbed by the reinsurance industry as a whole, even in light of major European storms the same weekend as the Chilean earthquake.

The Chilean P&C insurance market, which is regulated by one of the more advanced regulatory frameworks in Latin America, is a relatively concentrated market, in which foreign primary insurers hold major equity stakes. Primary insurance companies including RSA, Mapfre, Chilena (Zurich Group), Liberty Mutual, Cardif, Chartis and Santander are important players in this market, while locally owned insurance companies (sometimes associated with large local financial groups) make up the remainder of the list of the 10 largest insurance companies in the country, managing around 87% of total collected premium as of September 2009 (around USD 2.2 billion projected for FY09). The significant presence of strong international players in the primary insurance market in Chile suggests the ability and propensity to provide support to its subsidiaries, should it be required.

The 8.8 Richter scale earthquake and Tsunami affected the most densely populated zone in Chile (almost 80% of the population), including Santiago, Chile's capital city. Despite the long-standing strict building codes in the country, the strength of the quake and Tsunami have resulted in damages not only to housing in the central-south area of Chile, but have also affected roads, infrastructure facilities and sensible industrial areas for the economy (agriculture, metallurgy, fishing, forestry). Even mining activities, located mostly on the north end of the country have reported minor problems, which indicates that overall economic activity in the country is likely to need some time to recover.

Fitch estimates that similar to many countries, auto insurance is the largest portion of the industry's retained premium at around 37% of the total, while Fire (which is the line of business that includes Earthquake and natural disaster coverage) makes up another 19%. However, Fire and its additional coverage represent the bulk of maximum losses exposure (70% of total). As noted, net retention levels across the system tend to be modest, with maximum retention levels per event and catastrophe under 5% of total equity, with several companies managing limits closer to 2% of its equity, depending on each business lines. Despite such low retentions, Fitch also recognizes that in the case of particularly large catastrophic events like this, there is a risk that gross losses could exceed reinsurance coverage; Fitch plans to address this potential exposure as more information is provided from the rated entities.

Despite expectations of very large gross losses, Fitch expects that the ratings currently assigned to P&C companies in Chile may not be significantly affected. Current leverage levels are relatively lower than other markets in the region, implying good capital-reserves adequacy; however, Fitch expects an increase in industry leverage ratios at least in the short term, but always limited to not exceed the maximum regulatory level of five times.

As noted, this commentary reflects Fitch's initial and preliminary assessment, and there is a chance actual results could differ materially from these expectations. Fitch plans to keep gathering information from its rated universe in the P&C market as it becomes available and will reassess the situation as needed. Fitch will provide additional comments should its views change for either the market as a whole or for any individual company.

Additional information is available at 'www.fitchratings.com'.

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