Shares in European insurers fell sharply this morning after Japan was hit by a massive earthquake, the fifth-biggest recorded.
The quake off Japan’s northeastern coast, measuring 8.9 on the Richter scale, triggered a 10-metre tsunami that swept away ships, houses, and farm buildings locally, and led to warnings around the Pacific basin.
Reinsurers, which help insurance companies absorb large damage claims in exchange for a share of the premiums, took the brunt of the share price falls.
The top three global players — Munich Re, Swiss Re and Hannover Re — were all down more than 5 percent, though off their early lows. French group Scor fell 6.5 percent.
Reinsurers said it was too early to estimate the damage.
“We are unable to say anything at the moment. The situation is still unlcear,” said Tom Armitage, a spokesman for Swiss Re, adding that Japan was one of his company’s top 10 markets.
Munich Re and Swiss Re have both said that an earthquake in New Zealand in February, plus flooding in Australia, had already exhausted their annual budgets for natural catastrophe claims.
Analysts said profit warnings were likely.
“It is now a near certainty that assuming normalised developments for the rest of the year, this will be another year of above-average nat-catlosses for reinsurers and earnings downgrades would be likely for 2011,” Credit Suisse said in a research note.
If Japanese claims were big enough to affect reinsurers’ capital base, however, the losses could prompt a broad-based rebound in the prices reinsurers can charge for risk cover, which could improve the outlook for 2012, Credit Suisse said.
Munich Re, the world’s biggest reinsurer, had said on Thursday it might not reach its 2011 target of earning 2.4 billion euros ($3.3 billion) net profit if big damage claims did not decline to below average in the remainder of the year.
“Japan earthquake risk is significant for Munich Re,” board member Torsten Jeworrek told reporters on Thursday, hours before the quake struck.
Swiss Re generates around $688 million in life and non-life in Japan out compared with $25 billion globally, its spokesman said.
When U.S. markets open, all eyes will be on Bermuda-based reinsurers such as ACE, XL Group, PartnerRe and Everest Re Group, whose shares fell sharply in the wake of the New Zealand quake.
INSURER EXPOSURE
News of the quake and tsunami hit the whole European insurance sector on Friday, with the STOXX Europe 600 Insurance index down 2.6 percent by 1015 GMT.
Analysts said not all individual insurers held significant exposure. “At the moment this is just a kneejerk reaction within the sector as a broader movement, and then people start focusing on exactly where the exposures lie,” City Index market analyst Joshua Raymond said.
British, French and German insurers were among the fallers, with Aviva, Allianz and Axa all down around 2.5 percent.
Shares in Prudential, Britain’s biggest insurer whose better than expected results this week were driven by strong growth at its flagship Asian operations, fell 2 percent.
Among mid-tier British insurers hit hard by other recent natural disasters such as the earthquakes in Chile and New Zealand and the Australian floods, shares in Amlin and Catlin both fell around 4 percent.
Financial investors could stand to lose millions in investments through seven catastrophe bond transactions totalling over a $1 billion in exposure to Japanese earthquake.
Cat bonds are issued by reinsurers, such as Munich Re and Scor, seeking collateralised protection from investors, as opposed to traditional reinsurance market.
