Insurer Shares Relatively Unaffected by Japan Damage Estimates

By | March 23, 2011

Insurer shares largely shrugged off the industry’s first round of damage estimates from this month’s earthquake in Japan, which may prove to be the world’s costliest disaster.

Munich Re and Hannover Re, the world’s No.1 and No.3 reinsurers, penciled in expected loss claims of €1.5 billion ($2.13 billion) and €250 million ($355 million), respectively, from the March 11 quake, but said the estimates were subject to great uncertainty.

The loss, which comes on top of heavy damage from an earthquake in New Zealand and flooding in Australia, forced Munich Re to abandon its full-year goal of earning €2.4 billion ($3.4 billion) in net profit this year, while Hannover Re said it would update its full-year guidance on May 3.

Reinsurer shares got hammered in the wake of the magnitude 9.0 earthquake and tsunami near Sendai in northeastern Japan, with Munich Re, Swiss Re and Hannover Re all down more than 7 percent from their level of two weeks ago.

But the slide found a halt on Wednesday after analysts said the companies’ estimates were broadly in line with their expectations.

In its first official assessment, Japan estimated on Wednesday the damage could top $300 billion, making it the world’s costliest natural disaster.

Oriel Securities, however, said in a note to clients that catastrophe losses so far this year would dent reinsurers’ profits rather than erode their capital reserves.

“This (the loss estimates) does not mean that capital bases are being destroyed sufficiently to cause a broad-spread turn in the market,” the broker said, adding that price increases would most likely focus on markets where losses have occurred.

Reinsurance shares stayed in slightly positive territory on Wednesday and the Stoxx Europe 600 insurance index rose 0.3 percent.

Reinsurers, who help insurance companies shoulder the burden of big losses like earthquakes and hurricanes in exchange for part of the premiums, are often able to raise prices in the wake of disasters, and other analysts said a turn towards higher prices was in the cards.

Reinsurers will gain pricing power, “given the row of expensive claims events over the recent months”, said Christian Muschick, an insurance analyst at Silvia Quandt research, in a note to clients.

Munich Re Chief Executive Nikolaus von Bomhard, speaking on the day of the Sendai earthquake, said that reinsurance prices in Japan had already been rising before the disaster struck, but that it was unclear how much other markets would be affected.

Both Munich Re and Swiss Re have said their notional budgets for natural disaster claims for the full year have already been exhausted in the first quarter, well before the start of the Atlantic Hurricane season on June 1.

Munich Re said it expected claims from the Japan and New Zealand earthquakes, as well as flooding and a cyclone in Australia earlier this year, to total more than €2.5 billion ($3.55 billion).

“That means the profit target for 2011 of around €2.4 billion is no longer achievable,” Munich Re said late on Tuesday.

Global No.2 player Swiss Re said on Monday it expected claims of $1.2 billion from the earthquake and tsunami.

(Additional reporting by Ludwig Burger; Editing by Jon Loades-Carter)

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