Swiss Re Estimates $1.2 Billion Pre-Tax Loss From Japan Disasters

Published on March 21, 2011

Based on recent reports, the economic damage caused by the earthquake and tsunami in Japan could range from $122 to $235 billion.  However, only a small percentage of total economic damages are likely to be insured.  Estimates vary, but according to a World Bank study quoted in The Wall Street Journal, only $14 to $33 billion of the losses are likely to be covered by private insurance.

Due to the nature of the disaster, reinsurance firms did not immediately disclose estimates of losses due to the earthquake and tsunami.  However, loss estimates are now beginning to emerge with Swiss Re reporting projected claims costs of $1.2 billion net of retrocession and before taxes.  The company emphasizes that a great deal of uncertainty remains due to the difficult conditions that still exist in the hard hit areas of Japan.

Insurance Coverage Limited to Specific Risks

Swiss Re notes that Japanese government run insurance programs covering earthquake and tsunami risk for residential properties are not reinsured in the international market but coverage for fires following earthquakes are usually protected by reinsurance.  Commercial and industrial coverage is typically reinsured.  All coverage for nuclear facilities excludes damages caused by earthquakes, tsunamis and their aftermath and Swiss Re believes that the unfolding disaster at the Fukushima nuclear plant is “unlikely to result in a significant direct loss for the Property & Casualty insurance industry.”

Swiss Re’s loss estimate is based primarily on modeled estimates rather than an examination of specific losses and the company expects that reconciling modeled losses to the estimates of ceding insurance companies and to original policyholder losses could take several months.

Berkshire’s Quota-Share Exposure:  Approximately $300 million

Berkshire Hathaway has a 20 percent quota-share reinsurance contract with Swiss Re covering “substantially all of Swiss Re’s property/casualty risks incepting from January 1, 2008 and running through December 31, 2012” according to Berkshire’s 2010 10-K.  Swiss Re may have retrocession agreements with other reinsurers but the company’s 2010 annual report (pdf) lists Berkshire as its “most significant single counterparty”.

If we assume that Swiss Re’s only significant retrocession agreement is with Berkshire, then we could infer that Swiss Re’s pre-tax loss estimate prior to the effect of the agreement was $1.5 billion and that Berkshire’s share is $300 million.  However, this figure is obviously subject to significant revisions in the coming weeks and months as actual damages are reconciled with rough estimates from Swiss Re’s models.

Berkshire is likely to have additional exposure to the disaster through its General Re and Berkshire Hathaway Reinsurance subsidiaries.  The company has yet to provide loss estimates.  Berkshire also owns a 10.5 percent minority stake in Munich Re which is believed to have significant exposure to Japan.  Munich Re has not provided loss estimates.

Disclosure:  Long Berkshire Hathaway.

Swiss Re Estimates $1.2 Billion Pre-Tax Loss From Japan Disasters
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