By Myles Neligan and Ben Berkowitz
LONDON/NEW YORK (Reuters)- Insurance stocks fell for a second day on Monday as experts estimated that the Japanese earthquake could cost the industry nearly $35 billion, making it one of the most expensive disasters ever.
The Stoxx 600 European Insurance Share Index was down 2 percent at 1610 GMT (12:10 p.m. EDT), underperforming the wider market, and extending a 1.7 percent drop on Friday. The U.S. S&P insurance index was down almost 1.6 percent at midday, also underperforming the wider market, which was down 1.2 percent.
Aflac Inc, the largest foreign insurer in Japan, said it was fully operational there, but its shares still slumped 4.1 percent at midday on Monday. Shares of American International Group Inc, the largest property insurer in Japan, also fell.
Risk modeling agency AIR Worldwide on Sunday said the earthquake, which struck northeastern Japan on Friday, could result in an insured loss of between $14.6 billion and $34.6 billion, not counting losses from the tsunami that followed the 8.9-magnitude quake.
The upper end of the estimate would make Friday's earthquake the second-costliest natural disaster for insurers since Hurricane Katrina devastated United States in 2005, costing insurers $71 billion.
The $35 billion estimate, which covers the earthquake and related fires, will presumably increase when damage from the tsunami added in. Estimates of the overall cost of the multiple disasters exceeded $170 billion on Monday.
"Given the nature of the destruction, combined with the ongoing recovery efforts and evacuation areas, it will take some time to estimate the damage," reinsurer Swiss Re said.
Risk modelers RMS and Eqecat, which along with AIR produce scientific estimates of the impact of natural disasters, are expected to issue their initial research in the next few days.
Shares of Swiss Re and rival reinsurers Munich Re, and Hannover Re fell furthest in Europe on Monday, posting declines of 3.2 percent to 4.5 percent. Together the three have lost 3.1 billion euros ($4.3 billion) in market value since Friday.
Insurers said they did not expect to absorb the cost of earthquake-related damage to a nuclear power facility 240 kilometers north of Tokyo that has stirred fears of a leak of radioactive material across the region.
"Any impacts due to major accidents in Japanese nuclear power plants will not significantly affect the private insurance industry," Munich Re said.
Chaucer, one of the world's biggest insurers of nuclear risk, said it did not expect any big claims because the Japanese Nuclear Act of 1961 absolves nuclear plant operators of liability from damage caused by major natural disasters.
Shares of Chaucer, currently in takeover talks with private equity tycoon Guy Hands and other suitors, were up 2.8 percent, partly reversing an 8.5 percent fall on Friday.
Some analysts said the disaster, combined with heavy losses already suffered this year from floods in Australia and last month's New Zealand earthquake, could push up global insurance prices, boosting insurers' shares.
"In our view the loss will be so large that it will probably provide the trigger to ensure a re-rating of the non-life sector," Panmure Gordon analyst Barrie Cornes wrote in a note, estimating the event could cost insurers in excess of $60 billion.
Shares in the sector have been under pressure due to persistently weak global insurance prices, reflecting stiff competition between well-capitalized insurers. A big loss would erode insurers' capital, forcing them to charge more to recoup big payouts to customers.
Last year, analysts polled by Reuters said a natural catastrophe would need to cause an insured loss of more than $40 billion to lift prices across the market.
The overall impact of the latest disaster on insurers will be mitigated by the Japanese state's role in absorbing earthquake-related damage to households.
The hit will also be limited by a low take-up of insurance by Japanese households and businesses relative to Western countries, and by limited use of reinsurance by domestic Japanese companies.
These factors limited the financial impact on insurers after the 1995 Kobe earthquake to about $3 billion, a small fraction of the overall economic loss of $100 billion.
Jefferies International analyst James Shuck estimated the latest earthquake would generate a more moderate insured loss of between $10 billion and $20 billion, helping to prevent further price falls, but not enough to push them higher.
"We expect some overall stability to global insurance pricing but not enough to turn the market as a whole," he said.
Falls in the share prices of Lloyd's of London insurers on Friday suggested investors were anticipating a $10 billion loss, but this implicit loss expectation has since increased, according to analyst Tom Dorner at Oriel Securities said.
"Based on the very limited information we have, I'd fall into the camp of those who say the losses are going to be more modest than horrendous," he said.
The earthquake is likely to slow some share buyback plans at large reinsurers but will not create capital problems for an industry already awash in excess funds, Barclays Capital said in a note.
"At this early stage, we believe the impact of this event combined with recent New Zealand earthquakes and Australia flood losses should be an earnings event for most reinsurers rather than a capital constraining issue," analyst Jay Gelb said in a note.
Gelb said his research with the industry led him to believe the total insured loss would be closer to the low end of AIR Worldwide's range, with the hit for the reinsurance industry topping out around $10 billion.
Ratings agency Fitch said it did not expect major downgrades to insurers' credit ratings as a result of the earthquake but warned that some reinsurers could miss current earnings expectations.
(Additional reporting by Katie Reid in Zurich, Maria Aspan in New York, and Rachel Chitra and Tanya Agarwal in Bangalore; Editing by Hans Peters and Steve Orlofsky)