Lloyd’s Certain It Can Cope with Japan Claims

By Myles Neligan | March 30, 2011

The Lloyd’s of London insurance market is confident it can deal easily with claims from Japan’s earthquake even though natural disasters almost halved its profit last year.

Lloyd’s said its businesses had enough capital to withstand a Japanese quake generating insured losses of up to $64 billion, which compares with the $20 billion to $30 billion hit from the March 11 disaster expected by risk-modelers AIR Worldwide.

“As part of our market oversight we have a realistic disaster scenario which looks at a $64 billion earthquake centered on Tokyo,” Lloyd’s CFO Luke Savage told Reuters. “We think that this loss which we have seen will come well within that.”

Lloyd’s plans to give an initial estimate of how much the quake will cost it in May, Savage said.

Credit investors reacted positively, with Lloyd’s of London 5.625 percent €300 million [$422 million] bond tightening by 8 basis points on the day, bid at 306 basis points over swaps, according to Tradeweb.

The earthquake, one of the most powerful ever to hit Japan, triggered a tsunami off the country’s north-eastern coast and killed over 11,000 people, with thousands more missing.

The Japanese government has estimated the total economic impact at $198 billion-$309 billion, although the insurance industry is expected to pick up only a fraction of this as most losses to households are covered by a state-funded program.

Outside Japan, global reinsurers are expected to be most exposed, with sector leaders Munich Re and Swiss Re estimating their losses at $2.1 billion and $1.2 billion respectively.

The Japanese quake followed a spate of disasters in 2010 including earthquakes in Chile and New Zealand and floods in Australia which cost insurers $43 billion, a 60 percent increase on the previous year, according to Swiss Re.

Lloyd’s, which traces its origins back 323 years to a London coffee house where merchants met to insure ships, said last year’s disasters pushed the combined pretax profit of its 85 syndicates down 43 percent to £2.2 billion ($3.53 billion).


Analysts said that with catastrophe losses already mounting up ahead of the June-November U.S. hurricane season, Lloyd’s profits were likely to fall again in 2011.

“At this stage, I’d say profits will be lower,” said Nick Pope at stockbroker Jefferies.

“The Japan earthquake is a serious loss, the New Zealand earthquake is a serious loss, and the north Atlantic hurricane season, which is traditionally a very active period for losses, has not yet begun.”

The Chilean earthquake of Feb. 2010 was the single costliest event for Lloyd’s last year, accounting for about 40 percent of £2.17 billion [$3.485 billion] in total net claims.

That made 2010 the market’s most expensive year since 2005, when it paid out a record £4 billion [$6.42 billion], adjusted for inflation, in the wake of hurricane Katrina.

The market, made up of competing insurance and reinsurance syndicates who provide cover against large-scale, complex risks, was also hit by a 29 percent drop in investment income amid weaker financial markets and low interest rates.

Separately, insurer Hiscox, which operates in the Lloyd’s market, said the Japanese quake could cost it about $100 million.

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