The latest from the wires and the FT’s live blog is that the death toll is “set to exceed 1,000″ and that aftershocks of magnitude 6.6 and 5.8 have been detected in northern Japan.
A “nuclear emergency” remains in place. As the FT reports on Friday, Japanese officials are considering whether and how to reduce pressure in reactors in the Fukushima Daiichi facility. Reuters reports that the Japanese government has warned there could be a “small radiation leak.” It’s unclear yet whether this was due to engineers’ efforts to reduce pressure and heat in the facility.
Oil prices have slumped as the world’s third largest importer of crude oil suffers an immediate drop in demand, and due to a relatively subdued “Day of Rage” in Saudi Arabia.
But as energy analysts from IHS Global Insight said on Friday: “The expectation among some traders is that [closures of] refiners and power generators could also increase oil product purchases from elsewhere, pushing up oil product demand and prices.”
So there are expectations of demand returning, but there is confusion over when and how much, exactly. In a note out Friday afternoon, Nomura points out that after the Kobe earthquake, the Japanese government implemented an emergency budget: public spending and public investment contributed to GDP growth by 0.3 per cent in Q2 1995 and by 0.5 per cent in Q3 1995.
At this point it’s too early to tell the level of response — as Gwen Robinson reported for FT Alphaville from Tokyo, the Bank of Japan will, as planned, be meeting on Monday.
As for the impact on financials, we’re still musing on memories of how the Kobe earthquake catalysed the failure of Nick Leeson’s options trades, but that’s for another day. It’s the reinsurance business that’s been in the spotlight today.
FT Alphaville reported earlier that S&P wasn’t (at the time) changing the rating on six catastrophe bonds exposed to the risk of a Japanese earthquake.
The Artemis blog, which covers the cat bond and disaster insurance industry, has a more detailed list of the bonds it thinks are in play:
As you can see, for example, three of these cat bonds were issued by reinsurer Swiss Re and two through Munich Re. (Some readers were asking for more background to cat bonds — we recommend the Artemis blog and this 2007 NYT article by Michael Lewis.)
At close of business, Munich Re, Swiss Re and Hannover Re between 3.5 to 5.3 percent, with volumes between 364.4 to 412.7 of their 90-day average, reports Reuters. As Doug Cliggott of Credit Suisse told us during Friday morning’s US markets live, the US has a tiny market cap of reinsurance companies — most are Bermuda-based.
And as analysts from Jefferies explain in the Post Online, insurance losses, even in London, are expected to be significant but (relatively) small.
“Household incurred losses are likely to be limited. Insurance take-up rates are low and many homes will not be covered. About 10% of households actually elect for supplementary earthquake cover and coverage is only for a fraction of the property value.
“This explains the wide divergence between the 1995 Kobe earthquake that incurred $100bn of economic losses (original value) but only $3bn of insured losses.
“Overall insured losses appear significant but manageable at this stage. We are working on an industry loss in the region of $10bn. This compares with a one in 250-year event of around $50bn for a Japanese earthquake. On this basis, we would expect around a 5% impact on most reinsurer and Lloyd’s company balance sheets.”
The FT reports Friday that analysts at Collins Stewart have assessed which companies on Lloyd’s have the greatest exposure:
Analysts at Collins Stewart said that of the London companies, Catlin and Hardy looked to have the highest exposure at 16 per cent of net asset value. Lancashire had 15 per cent, Novae 11 per cent and Hiscox 9 per cent. “Unhelpfully, neither Amlin nor Beazley give any disclosure on Japanese earthquake exposure.”
But we won’t know for sure until more details on loss levels emerge — in other words, as Munich Re chief executive said on Friday:
“It is absolutely impossible to give you any clue of what that would mean to us.”
Related links:
Japan damage hits reinsurers – FT
Japan earthquake live blog – FT