Tokyo, March 14, 2011 -- Moody's Japan K.K. says that insurance and reinsurance
companies, both in Japan and around the world, will sustain
heavy losses following last Friday's huge and tragic earthquake
in Japan, and this will in turn result in negative credit implications
for the two sectors.`
"The ultimate amount of insured losses from this event, as
well as the market participants that will bear them, will depend
on the types of coverage provided (residential earthquake risks are covered
by a government reinsurance program, while commercial risks are
not), the amount of reinsurance purchased, and the structure
of reinsurance programs," says James Eck, a Vice President
and Senior Credit Officer in New York, and Kenji Kawada, a
Vice President and Senior Analyst in Tokyo.
"An additional wildcard is the potential for business-interruption
losses, which are influenced by damage to power and transportation
infrastructure. We believe that estimating claims will be a protracted
process, as the size and scope of the event will place significant
strain on insurers' claims adjustment resources. Moreover,
aftershocks could last for weeks, causing additional insured losses,"
add the two analysts.
On 11 March, a massive 9.0 magnitude earthquake struck off
the coast of northeast Japan, approximately 130 km east of Sendai
and 373 km northeast of Tokyo. The quake, the largest ever
recorded in Japan, triggered a powerful tsunami with waves up to
10 meters high in the hardest-hit prefecture of Miyagi, resulting
in more than 10,000 deaths and missing persons, and causing
vast destruction to property and infrastructure.
Eck and Kawada made their comments in conjunction with the release of
an article they authored in this week's Moody's Weekly Credit
Opinion and also published separately as a special comment. It
is entitled, "Massive Japanese Earthquake Negatively Impacts Insurers
and Reinsurers."
Even though it is still too early to estimate the full extent of the damage,
the two analysts identify those market participants and sectors most affected
as being Japanese domestic insurers; Japan Earthquake Reinsurance
Co., Ltd; international insurers; global reinsurers/Lloyd's
market; retrocessionaires; and catastrophe bonds.
With Japanese domestic insurers, the non-life sector is highly
concentrated, with three groups -- MS&AD Insurance
Group (insurance financial strength rating, or IFSR, Aa3,
stable for Mitsui Sumitomo Insurance; and A1, stable for Aioi
Nissay Dowa Insurance), Tokio Marine Group (IFSR Aa2, stable),
and NKSJ Group (IFSR Aa3, stable) -- accounting for
nearly 90% of the Japanese market.
Japan Earthquake Reinsurance Co., Ltd (JER), joint-owned
by private P&C insurance companies, assumes residential earthquake
exposure from domestic insurers, and provides up to Yen5.5
trillion ($66.9 billion) in claims-paying capacity.
Losses above Yen115 billion ($1.4 billion) are shared
with domestic insurers and the Japanese government at various levels of
co-participation as loss levels increase beyond the JER's
first layer retention. The company's maximum exposure is
approximately Yen606 billion ($7.4 billion).
With international Insurers, the largest global players --
including ACE Limited (IFSR Aa3, stable), Chartis (IFSR A1,
stable), Allianz (IFSR Aa3 stable), and Zurich (IFSR Aa3 stable)
-- write commercial lines business in Japan, but have
only a small market share. These companies also utilize reinsurance
to manage exposures.
Moody's further believes that a meaningful portion of losses will
flow to the global reinsurance industry (including various Lloyd's
syndicates), as catastrophe reinsurance covering Japanese earthquakes
is a large market.
Moody's expects the largest global reinsurance players --
including Munich Re (IFSR Aa3, stable), Swiss Re (IFSR A1,
stable), SCOR (IFSR A2, positive), Hannover Re (not
rated), Berkshire Hathaway (IFSR Aa1, stable), PartnerRe
(IFSR Aa3, stable), and Everest Re (IFSR Aa3, stable)
-- to report the highest losses on a nominal basis.
Moody's further notes that as the supply of retrocession coverage
(where one reinsurer buys coverage from another reinsurer) has increased
over the past couple of years, prices have come down, encouraging
some reinsurers to buy more protection from retrocessionaires.
This coverage is often bought on a collateralized basis from privately
held reinsurers and hedge funds.
In this case, given the magnitude of Japan's catastrophe,
it is possible that attachment points for such coverages could be breached,
resulting in losses being passed to the retrocession market.
Finally, Moody's notes that 10 catastrophe bonds outstanding
-- with approximately $1.7 billion in par
value -- include Japanese earthquake risk as a covered peril.
Most of these bonds were sponsored by global reinsurance companies to
hedge their risks, including Munich Re, Swiss Re, SCOR,
Flagstone Re (IFSR A3, negative), and Platinum Underwriters
(not rated).
These bonds are typically exposed to losses beyond a certain triggering
threshold, which can include actual insured losses sustained from
an event or a parametric trigger, where the reinsurance payout is
based on the location, magnitude, and depth of an earthquake.
The Moody's report says that this event could stabilize reinsurance
pricing in the months ahead as reinsurers' capital (and capacity)
has been reduced by a string of catastrophic events during the past six
months, including two earthquakes in New Zealand, floods and
Cyclone Yasi in Australia, and now, the largest Japanese earthquake
since record keeping began.
The report is entitled, "Massive Japanese Earthquake Negatively Impacts
Insurers and Reinsurers." It can be found in the latest Moody's
Weekly Credit Opinion and as a separate special comment. Both are
available on www.moodys.com
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Tokyo
Kenji Kawada
Vice President - Senior Analyst
Financial Institutions Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
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New York
James Eck
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
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Moody's Japan K.K.
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Moody's sees heavy insurer/reinsurer losses after Japan quake