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Japan Earthquake, Other Catastrophes Likely to Rock Reinsurers' Q1 Profits, Analysts

Source: Dow Jones - Alistair Barr

Posted on 08 Apr 2011

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While the number of business interruption claims after Japan's March 11 earthquake and other recent catastrophes that the industry may have to pay is still up in the air, reinsurers are likely looking at quarter's worth of profit being wiped out.

Jay Gelb, an insurance analyst at Barclays Capital, wrote in a recent note to investors, that "the first quarter 2011 earnings season will likely be the most challenging for the property-casualty insurance sector since after Hurricane Katrina in 2005."

"Most reinsurers are likely to report an operating loss and reduced book values for the most recent quarter due to losses from the New Zealand and Japan earthquakes as well as Australia floods," the analyst added.

Berkshire Hathaway, which has a big reinsurance business run by Ajit Jain, may suffer $1 billion to $2 billion of losses from the Japan quake and tsunami, Gelb estimated. The company holds its annual shareholder meeting at the end of April and will likely release first-quarter results around that time.

Validus Holdings (VR), another reinsurer, said Tuesday that it expects losses of $139 million from the Japan quake. The company added that it will probably report an operating loss for the first quarter. It is due to report results in early May.

"The first quarter of 2011 will go down in the record books as among the worst in global underwriting history," Cliff Gallant and other insurance analysts at Keefe, Bruyette & Woods wrote in a note to investors Thursday.

"Huge unknowns still remain from this devastating event, now nearly a month behind us, in part because the crisis is still occurring," the analysts added.

On Thursday, a 7.1-magnitude quake struck off Japan's northeast coast -- the same region that was ravaged by the larger March 11 temblor.
KBW's Gallant warned that his estimates for first-quarter results will likely be off the mark -- and he said initial loss forecasts by companies in the industry may end up being "materially off," too.

One major source of uncertainty is business-interruption coverage, Gallant and others said this week.

Business interruption, or BI, insurance covers lost profit and operating expenses if a company is forced to shut down because of a disaster that's covered by the firm's property policy, according to the Insurance Information Institute, a group that represents in the industry.

"It's quite significant," said Robert Muir-Wood, chief research officer at catastrophe-modeling firm Risk Management Solutions. "There didn't used to be a lot of business interruption written in Japan. But that changed in recent years."

Finding out exactly how much BI coverage was sold is difficult, partly because it's buried in general commercial-property-insurance policies, he noted.

"There's no central register of this information," Muir-Wood said. "Even the big reinsurers don't have this information separated out."
Still, Muir-Wood reckons BI claims will end up being a big chunk of the losses from commercial insurance policies, he said.

He's been studying the huge quake that hit Chile in February 2010. That disaster caused insured losses of about $8 billion, according to the Insurance Information Institute.

About 20% of the losses from commercial insurance policies were related to business-interruption coverage, according to Muir-Wood's estimate.

For the most valuable industrial facilities, BI accounted for up to 40% of total losses, he added.

Some large pulp mills in Chile had to shut for six months or more after the disaster, Muir-Wood noted.

"The damage wasn't that great, but the stoppages were costly," he said. "High- end industrial facilities often don't suffer a lot of damage, but they can have one important production-line feature that breaks and the whole thing stops."

The bigger exposure from the Japan quake in the U.S. may be from a slightly different type of coverage called contingent business interruption, or CBI, according to Richard Lewis, a partner at the law firm Reed Smith who specializes in securing commercial insurance claims for policyholders.
CBI covers losses if one of a company's important suppliers shuts down after a disaster, halting the flow of parts.

"We've spoken with a number of people in the U.S. who have suppliers in Japan, " Lewis said. "Companies with either customers or suppliers there will have CBI claims."

General Motors (GM) and Ford Motor Co. (F) had to stop some production for a few days after the quake because of a shortage of parts.
More than a third of all flash memory chips are made in Japan. These types of chips go into hot tech products like Apple Inc.'s (AAPL) iPad.

"Mostly electronics, tech and automotive companies have been effected," Lewis said. "We've talked to some pharma clients too."

"Everyone's going to look" to see if they can make a BI or CBI claim, he added. "It's going to take a while to untangle losses."