Shareholders of reinsurers still counting losses from the biggest Japanese earthquake on record are betting on a share rebound comparable to the one that followed Hurricane Katrina in 2005.
Munich Re, the world’s biggest reinsurer, climbed about 25 percent in the six months following the storm that devastated New Orleans, while Swiss Reinsurance Co., the world’s second largest, rose 14 percent. Amlin Plc (AML), the biggest Lloyd’s of London insurer, advanced 49 percent.
“Could that happen again? Absolutely,” said Clive Beagles, who manages about $1.3 billion at JO Hambro Capital Management Ltd. in London, including shares of insurers. “This is probably the event that turns the market in terms of pricing.” Beagles said he is adding to his holdings of Amlin and Dublin-based insurer Beazley Plc. (BEZ)
Prices for coverage are likely to rise after the disaster, helping insurance companies, investors said. The 9.0-magnitude earthquake and the tsunami that struck northeast Japan on March 11 left 5,178 people dead and 8,913 missing as of 12 p.m. Tokyo time, the National Police Agency said. The Fukushima Dai-Ichi power plant was flooded, and a possible reactor breach raised the specter of a radioactive leak.
Amit Kumar, an analyst with Macquarie Group Ltd., said there is “a lot of confusion” about how much insurers will pay because of the disaster. Insurers and reinsurers will probably have losses of $12 billion to $25 billion, catastrophe modeling firm Eqecat said. Rival modeler AIR Worldwide estimated the range to be 1.2 trillion yen ($15 billion) to 2.8 trillion yen.
“I would be hesitant to tell people to start buying reinsurance stocks right now,” Kumar said in an interview. “One should wait to get more clarity on the loss estimates.”
Japan’s catastrophe may be the second-most expensive on record behind Katrina, which cost the insurance industry $62.2 billion. Moritz Rehmann, who helps manage about $13.9 billion at DJE Kapital AG in Munich, said the prospect of insurance-rate increases may help the industry.
“While what is currently happening in Japan is a great human tragedy, it made me bullish on reinsurers again,” Rehmann said. “They should be able to manage expected claims payments without a need to raise capital.”
The Stoxx Europe 600 Insurance Index rose 2.9 percent today, the biggest gain in six months, after tumbling for four straight days following the quake. Amlin climbed 3.5 percent, Munich Re rallied 4.1 percent and Swiss Re advanced 2.4 percent. The companies haven’t yet published estimates of the potential costs of the catastrophe.
Scor SE (SCR), the world’s sixth-largest reinsurer, estimated on March 14 that its claims will be less than 185 million euros ($257 million). The Paris-based company’s shares increased 2.7 percent today.
Four previous disasters in the Asia-Pacific region within the past year caused about $20 billion in insured losses, according to projections by Guy Carpenter & Co. Two temblors struck New Zealand, while Cyclone Yasi and floods hit Australia.
“This is definitely a big event for the insurance industry, but whether it’s big enough to turn the rating environment is the key question,” said Simon Gergel, who manages about $1 billion at Allianz Global Investors in London. “If rates went up significantly and the share prices didn’t move, then clearly that would be a great buying opportunity.”
Following Hurricane Katrina, reinsurance rates rose to their highest since 1994, ending a two-year decline, according to the Guy Carpenter Global Property Catastrophe Rate on Line Index. That helped the Bloomberg Europe 500 Insurance Index rise 24 percent in the 12 months following the disaster.
Benefiting From Disaster
“Reinsurers typically benefit from a major disaster that’s big enough to affect prices but not big enough to kill the industry,” said Karl Huber, a fund manager at Pioneer Investments in Munich, which oversees about $221 billion globally. “That’s the business of reinsurance.”
Paul Morgan, a London-based fund manager at Baring Asset Management, which manages about $44 billion, said this time may be different. “A lot of the costs will be borne by the Japanese state so it’s difficult to read across from Katrina in terms of pricing,” he said.
The share price declines over the last few days mean insurers are trading at less than their book value, or assets minus liabilities. The 27 members of the Bloomberg Europe 500 Insurance Index traded at 0.92 times book value, meaning insurers have erased all gains from the beginning of the year.
“There’s not a huge amount of valuation optimism baked in anyway,” said JO Hambro’s Beagles. “In a bizarre sort of way the worse it is, the better it is.”