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Japan's Government Likely to Incur Majority of Losses

Source: NY Times - Mary Williams Walsh

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Posted on 16 Mar 2011

In addition to the estimated $35 billion in insurance claims from last week’s earthquake in Japan, the financial losses in the country will probably fall most heavily on its government once it tallies the damage from the tsunami and the nuclear disaster.

Japanese insurance companies, global insurers and reinsurers, hedge funds and other investors in catastrophe bonds are all expected to bear a portion of the losses that seem likely to exceed $100 billion. Total damage from the 1995 earthquake in Kobe, Japan, was estimated at $100 billion, according to the Insurance Information Institute, but only about $3 billion of that was covered by insurance.

The greatest uncertainty surrounds contamination from the nuclear accident prompted by the earthquake and tsunami.

Operators of nuclear plants in Japan are required to buy liability insurance through the Japan Atomic Energy Insurance Pool, an industry group. But they are required to buy coverage of only about $2.2 billion for liabilities, and the pool does not sell the utilities coverage for earthquake damage or business interruptions, suggesting it will again be up to the Japanese government to bear the brunt of those costs.

The stocks of some United States life and health insurers with operations in Japan sank on Tuesday, as investors responded to Prime Minister Naoto Kan’s warnings that the risk of radiation exposure had worsened.

The biggest loser was Aflac, which sells a popular line of cancer insurance in Japan, as well as other life and health coverage. Its stock fell 9.2 percent when the American markets opened Tuesday, before regaining somewhat and closing at $50.89, down 5.58 percent from Monday’s closing price of $53.90. About 75 percent of Aflac’s revenue came from Japan last year.

“The market is looking at everything that’s exposed to Japan, and we’re part of that,” said an Aflac spokeswoman, Laura Kane. She said the company was not expecting a flood of claims and had not changed its financial projections because of the trouble in Japan.

Shares of Hartford Financial Services fell 4.55 percent on Tuesday. The shares of MetLife and Prudential Financial, which acquired Japanese life insurance when they bought subsidiaries of the American International Group, fell about 3 percent and 2 percent, respectively.

Business insurers that operate globally, like ACE, Chartis, Allianz and Zurich, have a relatively small toehold in Japan, and therefore small exposure.

About 90 percent of the property and casualty business in Japan is written by three big domestic insurance groups, the MS&AD Insurance Group, the Tokio Marine Group and the NKSJ Group.

The Japanese insurers jointly own a reinsurer, the Japan Earthquake Reinsurance Company, which in turn is backstopped by the Japanese government.

“A meaningful portion of the losses will flow to the global reinsurance industry,” said Kenji Kawada, senior analyst for Moody’s Japan K.K. He cited Munich Re, Swiss Re, Scor, Hannover Re, Berkshire Hathaway, PartnerRe and Everest Re as the largest reinsurers and therefore the likeliest to suffer.

Moody’s said ratings for all of the major reinsurers were stable, and many reinsurance analysts said they saw one bright spot in the disaster: prices for reinsurance have been declining for several years, and while the earthquake will hurt the results of companies for one quarter, it might spur new demand and higher prices.

Reinsurance contracts are often renewed in April, and Keefe, Bruyette & Woods issued a report on Tuesday suggesting that losses from the earthquakes in Japan and, recently, New Zealand would lead to firmer prices on California earthquake and Florida hurricane insurance.

The big global reinsurers had packaged some Japanese earthquake risks into a type of security known as catastrophe bonds, or cat bonds. Cat bonds are sold to syndicates of institutional investors that expect a high return on the understanding that they will lose some or all of their principal if the covered disaster occurs.

Cat bonds are set off only by events that are specified in great detail in advance. Moody’s said it had identified four rated bonds linked to some form of earthquake coverage in Japan.

The initial estimate, by AIR Worldwide, of insured losses from the earthquake was very narrow. Issued on Sunday, that estimate, of $15 billion to $35 billion, included only damage caused by the earthquake and the subsequent fires, not the tsunami, landslides or nuclear accidents.

An AIR Worldwide spokesman, Kevin Long, said on Tuesday that the company had already counted about $24 billion worth of insured commercial and residential properties within two miles of the coast in the affected areas.

As the company works on financial models of all the disasters, the value of some of those properties will be added, he said. The company expects to revise its estimate early next week.

The initial estimate included the cost of physical damage to houses and their contents, farms and commercial property, as well as insured business-interruption losses.

The company’s estimates will never include a multitude of losses that are not insured: cars swept away, damaged property, buckled roads and weakened bridges, and something called “demand surge” — the spike in materials prices and labor costs that often comes with large-scale rebuilding after a catastrophe.

The uninsured losses may turn out to be the greatest losses of all.

Until now, the most destructive earthquake in terms of property damage was the one that struck Northridge, Calif., in January 1994, when insurers paid out $15.3 billion, or $22.5 billion in today’s dollars. Sixty-one people died.

The quake with the biggest death toll struck just after Christmas in 2004 off the western coast of Indonesia, which also set off a gigantic wave. About 220,000 people died in that tsunami, by far the most since the Insurance Information Institute began tracking earthquake statistics in 1980.

“What makes today’s natural disaster so extraordinary is that four of the five costliest earthquakes and tsunamis in the past 30 years have occurred within the past 13 months,” said Robert Hartwig, president of the institute, citing two big quakes in New Zealand and one in Chile along with the disaster in Japan.


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