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European reinsurers drop for second day on Japan disaster bill

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

(Bloomberg)—European reinsurers slid for a second day on concern the global insurance industry may face claims of as much as $34 billion tied to the earthquake in Japan.

Munich Reinsurance Co., the world's biggest reinsurer, Hannover Re Group and Catlin Group Ltd. led declines in the Stoxx Europe 600 Insurance Index, which dropped 1.4% as of 9:05 a.m. London time. That followed a 2.2% slump for the group on March 11 when a 8.9-magnitude quake struck off the coast of Sendai, a city of 1 million north of Tokyo.

“Despite a probably low insurance penetration we feel that the magnitude of this event might make it the largest insured event ever,” Thorsten Wenzel, an analyst at DZ Bank AG in Frankfurt, wrote in a note to clients Monday.

The top-of-range preliminary estimate, which catastrophe modeler AIR Worldwide Corp. disclosed Sunday, doesn't include damage caused by the tsunami that followed the March 11 quake. Insurers and reinsurers may face claims of $15 billion to $34 billion tied to the Japanese earthquake, AIR said.

Losses at the top end of AIR's estimate, equivalent to $34 billion, would make the disaster the second-most costly for insurers and reinsurers after Hurricane Katrina devastated New Orleans in 2005 and cost the industry $62.2 billion not accounting for inflation, according to estimates from Munich Re.

The total insured loss could exceed $60 billion, according to London-based analyst Barrie Cornes at Panmure Gordon & Co.

"The loss will be so large that it will probably provide the trigger to ensure a re-rating of the non-life sector as sufficient capacity (capital) is withdrawn to allow rates to rise," he said in a note. "A similar impact happened post 9/11."

”Too early”

“Any impacts due to major accidents in Japanese nuclear power plants will not significantly affect the private insurance industry,” Munich Re said in a statement Monday. “In connection with earthquake covers, in Japanese personal lines business only a small portion of the risk is transferred to other countries.”

The reinsurer said it's “far too early at this stage to issue an estimate of economic and insured losses,” reiterating earlier comments.

“We are optimistic that it will be a market changing event, especially if seen in connection with recent large claims,” wrote Christian Muschick, a Frankfurt-based analyst with Silvia Quandt & Cie. AG. “We thus would expect natural catastrophe segments to harden in general and believe that the coming renewals thus should provide some relief.”

First-quarter losses

In reinsurance terms, a hardening of markets or rates refers to an increase in prices for coverage. Reinsurers help primary insurers such as Allianz S.E. shoulder risks for clients.

Munich Re, Swiss Reinsurance Co. and smaller reinsurers face what may be record catastrophe losses worldwide in the first quarter, according to Standard & Poor's Corp.

The carriers will add their shares of the losses in Japan to costs from U.S. winter storms, Middle East unrest and last month's earthquake in Christchurch, New Zealand.

“Near-term profitability is likely to remain under pressure, as claims for this event are likely to set new records,” Cathy Seifert, an equity analyst at S&P, said in a March 11 research note. “S&P remains concerned that some smaller reinsurers may suffer outsized losses relative to their capital positions.”

Kobe Earthquake

Japan's most destructive earthquake until last week struck Kobe, Osaka and Kyoto in 1995 and cost insurers about $3 billion, not accounting for inflation. The quake caused $100 billion in economic losses, much higher than the amount covered by insurers.

Insurers and reinsurers incurred about $50 billion in losses from Hurricane Katrina, which struck the U.S. Gulf Coast in 2005 in the industry's costliest natural disaster, according to AIR.

The Japanese earthquake and ensuing tsunami may have killed 10,000 in Miyagi, national broadcaster NHK reported, citing local police. The official toll reached 1,597, with 1,481 more missing and 1,683 injured, the National Police Agency said. More than 350,000 people are in emergency shelters.