Reinsurance stock prices hit by Japan earthquake; what about cat bonds?

by Artemis on March 11, 2011

Update: Our list of the cat bonds exposed to Japan quake can be found here.

We’re hearing reports from around the world that reinsurer stock prices have dropped as exchanges opened this morning as traders get to grips with the prospects of a major insured loss event from the earthquake that struck Japan this morning.

The share price of French reinsurer SCOR is reported to have fallen by as much as 4% when the Paris exchange opened and AXA and CNP Assurances are reported to have dropped by 1.5% and 2.5%.

It’s far too early for any damage estimate from this awful earthquake that Japan has suffered today but looking at footage from news channels it’s obvious that this will be a multi-billion dollar insured loss event. Coming on the heels of the earthquake in New Zealand this event is sure to have re/insurers worrying about their profits for 2011.

As far as the catastrophe bond market goes we’ll have to wait and see whether there has been any impact to the cat bonds which are exposed to Japanese earthquake risks. A number of deals placed during 2010 are exposed, including Swiss Re’s Successor X, Flagstone Re’s Montana Re 2010, Swiss Re’s Vega Capital 2010, SCOR’s Atlas VI Capital Ltd. There are more cat bonds issued in 2009 which could also be exposed.

It will be some time before the outcome for the reinsurance or catastrophe bond market is fully understood. The tsunami which is currently crossing the Pacific could bring further loss potential to this event. We’ll bring you updates as we receive them.

Updates: The BBC reports that Munich Re’s share price fell 4.8% when trading opened, Allianz 1.6% while Swiss Re and Hannover Re were both down more than 4%. An analyst has estimated that Japan could see a GDP cost of over 1%.

Meanwhile Moody’s are quoted as saying: “In a big economy like Japan, the impact of a natural disaster can be absorbed economically by the government and private insurance, so there will be no impact on government’s finances and therefore Japan’s sovereign rating.”

Credit Suisse have said that this catastrophe on top of the heavy losses already experienced this year in Australia and New Zealand means that it is likely that 2011 will be another year of above average catastrophe losses and likely to lead to earnings downgrades for reinsurers in 2011.

Post Magazine report that the quake could cost the insurance industry $10 billion in insured losses. Analysts at Jefferies have estimated that impact to reinsurer balance sheets could be as much as 5%. As with many natural disasters, the early estimates such as this can often end up being increased.

Reports are emerging that the Japanese government have declared a state of emergency at one of the nuclear power stations in the country. Four power stations were shut down due to the earthquake, some automatically, and cooling systems kick in to cool down rectors. One of the nuclear power stations, Tohoku Electric Power Co’s Onagawa facility, has said that the cooling system is not working as expected. There is no sign of a radioactive leak at this time. More from MSNBC.

In a further update on the nuclear reactor situation MSNBC says that more than 2,800 residents near the power station have been told to evacuate. Still no sign of a leak, but officials are for obvious reasons being cautious as they have not yet managed to cool the reactor core.

An article in the UK’s Guardian newspaper quotes a Banco Espirito analyst as saying that insurers could face a loss of up to $50 billion from this event. That seems high, but with damage reports still coming in it is far too early to say how high.

We’ve listed the catastrophe bond transactions which could be exposed to losses from this earthquake here.

Standard & Poor’s have made an announcement regarding the ratings on six exposed cat bonds.

Here’s the best location map we’ve found for this earthquake, from the USGS.

Japan earthquake location

The location of the Japan earthquake

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