Japan temblor alone probably won't swamp reinsurers

Mated with other recent disasters, though, pain could be chronic

Mar 11, 2011 @ 4:18 pm

By Darla Mercado

Though yesterday's 8.9-magnitude earthquake in Japan by itself probably won't wallop reinsurers and insurance companies, placing the event in context with other recent disasters in Australia and New Zealand could inflict lasting pain on carriers.

“Most of the time large events like this have a fairly minor impact on insurance prices,” said Paul Newsome, a managing director and an analyst covering insurance at Sandler O'Neill + Partners, LP. “But it's possible that putting this in context with other crises might have a longer-term impact: Many of the Bermudian insurers are looking at losses from the Australian and New Zealand event, and some of them probably have exposure to Japan.”

Yesterday's earthquake in Japan and the tsunami that followed are only the latest natural disasters to strike property-casualty insurers and reinsurers, the companies that back them. In January, floods swamped Australia, and last month, New Zealand was hit by a 6.3 magnitude earthquake. Just yesterday, a 5.8 magnitude earthquake hit southwestern China.

Domestic carriers with international exposure are likely to be unaffected by Japan's temblor. The Travelers Cos. Inc., which Mr. Newsome said has minor exposure to international business, started the day down at $58.36 per share and climbed by 31 cents by 3 p.m. today. Meanwhile, Berkshire Hathaway Inc., which owns global reinsurer General Re Corp., opened at $126,400 per share and dipped 0.07% in share price this afternoon.

Swiss Reinsurance Co. Ltd. closed at 51.70 Swiss francs ($55.63), down 3.5%, while Munich Re AG fell to 111.39 euros ($154.90), a plunge of more than 4%. Both have used catastrophe bonds to reduce exposure to Japanese earthquakes.

Japan likely will see price increases for reinsurance and property insurance, Mr. Newsome added. He noted that while the reinsurers' stocks were down, it was only a short-term reaction to the crisis. “It's more of a sentiment driven change in price,” he said.

Advisers also placed this latest disaster in context with previous catastrophes and noted that while they aren't changing their investment strategies, they're keeping an eye on reinsurers.

Robert K. Haley, president of Advanced Wealth Management, has some clients with holdings in Berkshire Hathaway but tends to eschew other reinsurance companies. “It's too much risk for too little reward for our clients,” he said. “Specifically for reinsurers, the risks are really not predictable or in control. We like stocks that have some illusion of predictability on consumer demand and the cost of goods.”

Mr. Haley added that a question mark hangs over how the afflicted countries will pay for the cost of rebuilding, and whether the fundraising will come from bond issuances or higher taxes.

“There's pressure around the world because of rising interest rates, and that makes current bond purchases more risky, not less,” he said. “I don't think this is a good time to invest in bonds in those affected countries.”

“You have three events that in and of themselves take up more than what carriers could have expected in a whole year,” said Chris Reuschle, a senior partner at RFW Wealth Advisors. “They're on the hook for a lot and we're not even in the hurricane season.”

The event itself is a harsh reminder that markets are global, he added. “As we globalize, you raise the sources of systemic risk, and something that happens in China now affects us,” Mr. Reuschle said.


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