Munich Re, Swiss Re Tumble as Earthquake, Tsunami Hit Japan's North Coast
European reinsurers including Munich Re and Swiss Reinsurance Co., the world’s biggest, tumbled after an 8.9 magnitude earthquake struck the coast of Japan unleashing a tsunami that engulfed towns north of Tokyo.
The quake, the world’s strongest in more than six years, struck offshore 373 kilometers northeast of Tokyo, and the subsequent 10 meter-high tsunami swept across buildings and farmland as far as 1.5 kilometers inland. At least 26 people were killed and many more are missing, according to state broadcaster NHK Television.
The insurance industry may have to pay out about $10 billion in claims, according to James Shuck, a London-based insurance analyst at Jefferies International Ltd. That would make the disaster the second-most costly temblor on record, after the $15.3 billion quake that struck Northridge in the U.S. in 1994, according to data compiled by Swiss Re.
“This looks like an expensive incident, but with that in mind, both architects and the insurance industry plan for major events in the region,” said Christian Muschick, a Frankfurt- based analyst with Silvia Quandt & Cie. AG “Tokyo seems not to be severely hit.”
The disaster caused the Bloomberg Europe 500 Insurance Index to fall 2.3 percent to 101.82 points, the largest drop since August. Scor SE (SCR), Swiss Re, Amlin Plc (AML) and Munich Re, led the declines. The four reinsurers, which provide cover to primary insurers, said it’s too early to provide loss estimates for themselves or the industry.
Buildings Swept Away
The earthquake and tsunami caused damage across “broad areas” of northern Japan, according to Newark, California-based Risk Management Solutions Inc. State broadcaster NHK Television showed footage of waves sweeping away buildings and vehicles. Airports were closed and bullet train services suspended. More than 4 million homes are without power, Tokyo Electric Power Co. said.
A Japanese earthquake is one of catastrophe insurers’ four “peak zones” along with a San Francisco earthquake, U.S. hurricanes and Gulf of Mexico hurricanes, so costs will probably be spread equally among the biggest reinsurers, according Joy Ferneyhough, a London-based insurance analyst at Banco Espirito Santo de Investimento SA.
“My initial sense is this isn’t going to be a huge industry loss,” she said. “This will be something smaller and manageable, which will impact 2011 earnings, but not ‘the big one’ that we’ve been waiting for to turn pricing.”
Lloyd’s of London insurers appear to have more at risk than European reinsurers, based on “realistic disaster scenarios,” according to Ben Cohen, a London-based analyst at Collins Stewart. Catlin Group Ltd. (CGL) has the highest exposure, followed by Hardy Underwriting Bermuda Ltd. and Lancashire Holdings Ltd. (LRE), he wrote in a note to clients today.
The cost of protecting insurance companies’ bonds rose, with credit-default swaps protecting the senior debt of Swiss Re climbing 9 basis points to 125, the highest since Jan. 14, and contracts on Munich Re increasing 9 basis points to 77, according to CMA. A basis point is 0.01 percentage point.
The Markit iTraxx Japan index of default swaps tied to the nation’s government and corporate bonds rose 4 basis points to 102, the biggest jump since November, according to Markit Group Ltd.
Swaps linked to Hannover Re’s senior debt rose 10.5 basis points to 126, the highest since June, and its junior swaps increased 14 basis points to 165. Contracts on the lower-ranking debt of ING Groep NV’s insurance holding company, ING Verzekeringen, jumped 17 basis points to 285 and Swiss Re’s increased 14 basis points to 154.
Reinsurers are already facing losses from the flooding in Queensland, Australia at the end of last year and the New Zealand earthquake that struck Christchurch on Feb. 22. Claims from the New Zealand temblor may be between $6 billion and $12 billion, according to Swiss Re. The company’s own claims burden is likely to be $800 million, it said.
Munich Re, the world’s biggest reinsurer, yesterday said its full-year profit target of about 2.4 billion euros ($3.3 billion) “will only remain achievable, if random losses in the further course of the year remain below expectations.”
The most costly earthquake to hit Japan struck Kobe, Osaka and Kyoto in 1995, costing insurers about $3 billion, not taking inflation into account. The quake caused $100 billion in total economic losses, much higher than the sum covered by insurers as infrastructure such as motorways and bridges were rarely insured due to the high cost of insurance in an earthquake-prone area.
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