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Buy insurance brokers as quake may boost sales: Stifel

Posted On: Mar. 14, 2011 12:00 AM CST

BALTIMORE (Bloomberg)—Aon Corp. and Marsh & McLennan Cos., the world's biggest reinsurance brokers, may sell more coverage at higher rates as earthquakes and tighter regulation of primary insurers spur demand, Stifel Nicolaus & Co. said.

“If you take a step back and you look at what the planet's been through for the last 12 months, I think that what we're going to see is a significant amount of upward pressure on reinsurance rates,” Meyer Shields, a Baltimore-based analyst with Stifel, said in a March 11 interview. “We like the brokers on this.”

Insurers, which rely on brokers to negotiate loss-sharing agreements with reinsurers, face what may be record first-quarter catastrophe losses after last week's 8.9-magnitude earthquake in Japan, according to Standard & Poor's Corp. The industry also is preparing for Solvency II, an overhaul of regulation in Europe designed to ensure that insurers have sufficient capital to withstand catastrophes and market shocks.

“This confluence of events pushes up the amount of severity that these regulators will use,” said Mr. Shields, who has “buy” recommendations on Chicago-based Aon and Marsh & McLennan. “They'll insist that insurers have more reinsurance.”

Aon and New York-based Marsh & McLennan Cos. Inc. were the top performers of the KBW Insurance Index Monday. Marsh & McLennan gained 38 cents, or 1.3%, to $30.65 at 11:20 a.m. in New York Stock Exchange composite trading. Aon climbed 31 cents to $51.56. Both firms had gained 11% this year through the end of last week, compared with a 2.2% increase for the 24-company index.

Storms, social unrest

Insurers and reinsurers are assessing their liability to the quake that struck off the coast of Sendai, Japan, a city of 1 million north of Tokyo. Costs associated with the temblor and subsequent tsunami will be added to a first-quarter tally that already includes losses tied to an earthquake in New Zealand, winter storms in the U.S. and social unrest in the Middle East.

First-quarter claims “may spark a firming of worldwide insurance and reinsurance rates,” Cathy Seifert, an equity analyst at S&P, said in a March 11 research note.

Japanese insurers and the global reinsurance companies that backstop their policies may face claims of 1.2 trillion yen ($15 billion) to 2.8 trillion yen from the March 11 earthquake, AIR Worldwide said. That estimate doesn't include damage from the 23-foot tsunami. The quake in New Zealand may register at least $10 billion of insured losses, Ms. Seifert said.

Aon and Marsh & McLennan, also the largest brokers of primary coverage, may gain from increased sales of catastrophe bonds as well, Mr. Shields said. The securities allow insurers to bypass reinsurers and share risks with investors.

The Japanese earthquake and tsunami may have killed 10,000 in the prefecture of Miyagi, said a spokesman for the prefectural police department. The official toll reached 1,823 dead and 2,369 missing, the National Police Agency said.

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