UPDATE: European Reinsurers Plunge On Japan quake

European reinsurance company stocks plunged early Friday on the prospect of them being hit by big losses after a powerful earthquake with a magnitude of 8.9 struck Japan, causing damage in Tokyo, and sending a tsunami hurtling toward the country's northeastern coast.

In Frankfurt at 0850 GMT, shares in Munich Re (MUV2.XE), the world's largest reinsurer, were 4.7% lower at EUR111.30, Hannover Re (HNR1.XE) was down 4.2% at EUR39.13. In Zurich, Swiss Re (RUKN.VX), the second-largest reinsurer worldwide, plunged 5% to CHF50.90. Scor (SCR.FR), a French reinsurer, fell 4% to EUR19.49.

Reinsurance stocks dropped much more than those of primary insurers. That was because reinsurance companies typically act as insurers of last resort for their clients, primary insurers. This means that in the event of a big natural catastrophe they often take the bulk of the losses, as their insurance clients can claim some of their costs back from them.

This year has already seen a higher-than-usual number of costly natural catastrophes. The recent earthquake in Christchurch, New Zealand alone could cost the insurance industry up to $12 billion, Swiss Re estimated.

The Zurich-based company expects its own pre-tax loss from the New Zealand earthquake to be around $800 million. Coming on top of floods in Australia recently, this means the reinsurer has pretty much used up its $1 billion budget for big natural catastrophes little more than two months into 2011.

Swiss Re has market exposure in Japan and investors are worried about big losses, said Georg Marti, an analyst with Zuercher Kantonalbank. Swiss Re said it was too early to comment, while Zurich Financial Services AG (ZURN.VX) said it was too early to provide estimates.

"Swiss Re has already been affected by the disasters in Australia and New Zealand, but it is possible that Japan could cost them even more," Marti said. On the bright side, reinsurers will have a good case for demanding higher premiums from clients in the next renewal round for reinsurance contracts, but in the short term Marti expects the quake to reduce their earnings.

The Japan earthquake immediately cast doubt on Munich Re's ability to maintain its 2011 profit target. It said Thursday it would only achieve its profit goals this year if the cost of disaster claims falls to below the long-term average for the rest of 2011.

The company said Thursday that claims in the first quarter had already used up its annual budget for natural disasters. Munich Re, Allianz SE (AZ) and Hannover Re said it was too early to provide loss estimates.

Munich Re's bill for the earthquake in Christchurch, New Zealand, floods in Brisbane, Australia, and Cyclone Yasi in Australia was $1.5 billion. Hannover Re, a smaller competitor but still one of the world's biggest reinsurers, said recently it expects a maximum net cost of EUR150 million for the earthquake

The Japan quake was originally reported at a magnitude of 7.9 but was later upgraded to 8.9, apparently exceeding the 8.8 quake that struck off Chile in February 2010.

Catlin Group Ltd (CGL.LN) has exposure in Japan but a Catlin spokesman said it was too early to comment. On Thursday it said its exposure to the New Zealand earthquake was $125 million.

Local television reported smoke rising from a Tokyo port building, and fire in the capital's waterfront Odaiba district. There were reports of "numerous" injuries in Miyagi Prefecture, in northeastern Japan where the quake was centered, as a tsunami measured at anywhere from one meter to 4.2 meters hit at various places along the coast.

A tsunami warning included Japan, Russia, Taiwan, Guam, the Northern Marianas, the Marcus Islands and the Wake Islands, while 15 nations and territories were covered by a tsunami watch.

-By Anita Greil, Dow Jones Newswires; +41 43 443 8044 ; anita.greil@dowjones.com

(Michael Arnold, John Revill, William Launder and Vladimir Guevarra contributed to this report.)

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