Brokers Say Japan Quake/Tsunami Will Reduce Insurers’ Capital

March 16, 2011

Losses from the Japanese earthquake will reduce insurers’ capital reserves, insurance brokers said Tuesday, as sector shares continued their sharp declines on fears the disaster’s size could grow.

ACE, a leading insurer and reinsurer, warned the Japanese earthquake would cause it net losses of $200 million to $250 million, numbers it cautioned were still preliminary.

The cost of the quake to the industry, expected to range up to $35 billion according to AIR Worldwide, will be in addition to some $20 billion in catastrophe claims over the past six months, wiping out its budget for natural disasters, said David Flandro, global head of business intelligence at Guy Carpenter, the world’s No. 2 reinsurance broker.

“This is going to be a capital event as well as an earnings event,” Flandro told Reuters in an interview. “We’ve moved over a line now. Before we were exhausting the natural catastrophe budget; now we are probably going to encounter negative underwriting earnings for many in the sector.”

The financial squeeze on the sector could affect prices across all categories of reinsurance, not just catastrophe cover, with the first evidence of any increase likely to emerge from annual policy renewals in June and July.

“If this is a capital event, that could apply to all business lines, because the capital of the sector supports all business lines,” Flandro said.

But at least one other broker said the events, while causing some losses, would not trigger higher prices, a source of heavy debate within the industry since last Friday.

“Yes, this will have an impact, but it will not have an impact that drives prices higher. I’m firm on that,” said Al Tobin, head of the property practice at the Risk Solutions business of Aon Corp.

Among the insurers most exposed to Japan generally, besides ACE, are Aflac, AIG, MetLife, Munich Re and Swiss Re. The degree to which they will be affected by the disaster is not yet clear, however.

Reinsurance prices have been flat or falling across most of the market for nearly three years, held back by stiff competition between abundantly capitalized insurers.

Major natural disasters typically cause an increase in prices as claims eat into insurers’ capital, forcing less well-funded players to retrench and freeing those still in the market to charge more.

Going into this year, most brokers and analysts said it would take a loss event in the range of $40 billion to $50 billion to “harden” the market and push prices higher. At the high end of current estimates, that threshold would be hit — first-quarter catastrophe losses look set to outstrip all of 2010, and then some.

Financial analysts are deeply split on whether this event tips the industry over that mark.

The latest loss estimate “increases our conviction that this is a market-changing event for the catastrophe reinsurance market,” said Larry Greenberg, an analyst at Janney Capital Markets unit Langen McAlenney, in a note.

But others argue much of the cost will be borne by the Japanese government and local insurers.

“We expect some stability to global insurance pricing, but not enough to turn the market as a whole,” analysts at stockbroker Jefferies International wrote in a note on Monday. U.S.-based analysts at Barclays Capital said the same.

The question of nuclear liability is becoming clearer, but also remains a concern nonetheless for the industry.

A source familiar with the situation said Monday that nuclear plant insurance contracts in Japan exclude coverage for damage from tsunamis and earthquakes. That is likely to limit the liability of the international pools that reinsure risk in Japan, the world’s third-largest economy.

Whether plant operator Tokyo Electric Power is liable for the problems at its plants remains an open question, depending on whether the Japanese government declares the magnitude 9.0 earthquake and subsequent tsunami an “exceptional” natural disaster.

Insurers are still under pressure, though. Canada’s Manulife Financial Corp said Tuesday it was sticking with its Monday exposure estimate of C$150 million despite the growing nuclear threat.

European insurance shares closed down 2.6 percent, while those in the United States dropped 1.9 percent, underperforming the market.

(Editing by Jon Loades-Carter, Gerald E. McCormick, Steve Orlofsky and Phil Berlowitz)

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