The story behind the chemical explosion that rocked China’s Tianjin port last Wednesday continues to evolve amid fears that the public could be at risk from the hundreds of tonnes of sodium cyanide stored at the facility.

More specifically, Monday’s heightened concerns were related to the possibility that rain could interact with the water soluble chemical, releasing deadly hydrogen cyanide gas into the air. “First rain expected today or tonight. Avoid ALL contact with skin,” a text message purported to have originated at the US Embassy in Beijing read. The Embassy would later deny the message’s authenticity, perhaps at the behest of the Politburo which has kicked off the censorship campaign by shutting down hundreds of social media accounts for “spreading blast rumors.”

Despite efforts to preserve order and clamp down on discussion, the anger in China is palpable as citizens demand answers as to how a catastrophe of this magnitude could have happened and as it turns out, not only was Tianjin International Ruihai Logistics storing sodium cyanide in amounts that were orders of magnitude larger than what they were supposed to be storing, but they were apparently doing so without a license. “The company has handled hazardous chemicals during a period without a licence,” an unnamed company official said on Tuesday. Apparently, Ruihai received the licenses it needed to handle the chemicals just two months ago, BBC reports, citing Xinhua.

Meanwhile, it looks as though determining who actually owns Ruihai will be complicated by the fact that in China, it’s not uncommon for front men to hold shares on behalf of a company’s real owners. This is of course an effort to obscure Communist party involvement in some enterprises and as FT reports, “that seems to be the case for Shu Jing and Li Liang, who appear in State Administration of Industry and Commerce records as holding 45 and 55 per cent of Ruihai International Logistics.” “Both Mr Shu and Mr Li told Chinese media they were holding their shares on behalf of someone else,” FT adds, “but would not say who.”

Here’s more from FT:

Licensing to operate a hazardous goods warehouse is not easy to come by, and Ruihai Logistics’ operation seems to have been approved after neighbouring lots had already been auctioned to residential developers.

 

Adding to the speculation, Tianjin’s online corporate registry database was inaccessible for four days after the blasts. When access resumed on Monday, a search for Ruihai Logistics yielded a curious gap.

The company was registered in 2012 but its current legal owners only bought their shares in 2013. The historic list of changes that should have reflected the previous owners did not appear.

 

The records reveal that many Ruihai executives are former employees of Sinochem, the giant state-owned chemicals, fertiliser and iron ore trader that owns the largest hazardous warehouse operation in Tianjin.

You get the idea. And although we’ll likely never know the true extent of the Party’s involvement with the company, local residents are furious, as evidenced by protests near the blast zone on Tuesday morning, which means Beijing must at least pretend to be serious about investigating the incident. In an effort to pacify the country’s censored masses, party mouthpiece The People’s Daily said 10 people, including the head and deputy head of Ruihai had been detained since Thursday. As Reuters reports, Yang Dongliang, head of the State Administration of Work Safety, is also under investigation:

China said on Tuesday it is investigating the head of its work safety regulator who for years allowed companies to operate without a license for dangerous chemicals, days after blasts in a port warehouse storing such material killed 114 people.

 

Yang Dongliang, head of the State Administration of Work Safety, is “currently undergoing investigation” for suspected violations of party discipline and the law, China’s anti-graft watchdog said in a statement on its website.

 

The agency, the Central Commission for Discipline Inspection, did not say that Yang’s behavior was connected to the explosions in the port of Tianjin but the company that operated the chemical warehouse that blew up did not have a license to work with such dangerous materials for more than a year.

While Beijing is busy engineering a smoke screen to appease the locals, thunderstorms are rolling into the area, which, as noted above, is bad news as the hundreds of tons of water soluble sodium cyanide are now exposed to the elements. Here’s Xinhua:

Rains are expected to complicate rescue efforts and may spread pollution at the Tianjin port, which was rocked by warehouse blasts last week. China’s central meteorological authority has predicted a thunder storm over the blast site, where hundreds of tonnes of toxic cyanide still reside. A chemical weapon specialist at the site told Xinhua that rain water may merge with the scattered chemicals, adding to probability for new explosions and spreading toxins.

Indeed, some have observed what’s been described as a “white foam” on the ground.

And as for the forecast, well, things don’t look promising:

Finally, the first estimates of the damage are beginning to trickle in and while we won’t know the full extent of the human toll for quite sometime (if ever), Fitch puts the financial impact of the blasts for Chinese insurance companies at between $1-$1.5 billion. For anyone out there who’s long (or looking to get short) the Chinese P&C space, here’s Deutsche Bank’s take:

Based on reported data, PICC was the largest P&C player in Tianjin with 28% market share in 2014, followed by Ping An at 23%, CPIC at 12% and Taiping at 5%. Tianjin is a relatively small market for listed insurers, accounted for 1.2% of 2014 premiums for PICC, 1.8% for Ping An, 1.4% for CPIC and 4.1% for Taiping.

 

We note that it may be too early to assess ultimate losses from this event as it generally takes time for all claims to be filed. However, assuming losses are shared based on their respective market share in Tianjin, we estimate that every Rmb1bn ultimate loss, PICC’s 2015E combined ratio could increase by 12bps, Ping An by 18bps, CPIC by 14bps, and Taiping by 32bps and PICC’s 2015E net profit would decline by 1.6%, Ping An by 0.5%, CPIC by 0.8% and Taiping by 1.2%.

 

We maintain our relatively cautious stance on Chinese P&C insurers as we expect underwriting profitability to be under pressure in the next 6-12 months amidst auto premium deregulation, potential increase in competition from online players and a tougher comp in 2H15E. 

It also looks as though the government could be on the hook for tens of millions of yuan in insurance claims for injuries and deaths. The full Fitch statement is below.

And meanwhile:

Tianjin city sells 376m yuan of 3-yr bonds at 3.38%.

 

China’s Tianjin Sells 1.46b Yuan Special Bonds in Placement.

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Full statement from Fitch

The insured losses from a series of explosions at a chemical warehouse in Tianjin on 12 August are likely to be material for Chinese insurance companies, potentially exceeding USD1bn-1.5bn, says Fitch Ratings. The high insurance penetration rate in this area could make the blasts one of the most costly catastrophe claims for the Chinese insurance sector in the last few years. While the incident is still developing, Fitch expects the number of reported insurance claims cases to surge further in the coming few weeks.

Fitch believes that claims from the blasts are likely to undermine the financial performance of some regional players and those property and casualty insurers with high risk accumulation in the affected areas. That said, it is too early to determine the exact impact that this incident will have on the credit strength of the Chinese insurance sector as a whole.

According to the China Insurance Regulatory Commission, non-life insurance premiums from Tianjin city amounted to CNY11bn (USD1.7bn) in 2014. As such, should insured losses come in at the high end of the initial USD1-1.5bn estimate, they would represent about 88% of total direct premiums written in Tianjin or roughly 5.4% of aggregated shareholder capital for the six most active issuers at end-2014. PICC Property and Casualty Company, Ping An Property & Casualty Insurance Company of China, China Pacific Property Insurance, China Continent Property & Casualty Insurance, Sunshine Property & Casualty Insurance and Taiping General Insurance are the most active insurers in the region, accounting for more than 77% of the non-life segment as measured by direct premiums written. 

Claims from the blasts could be shared with both local and international reinsurers, which could mitigate the direct impact on the Chinese insurance sector. While insurers could recover a portion of their property claims from their reinsurers, their exposure, the amount of retention and the number of reinstatements under the catastrophe reinsurance program are likely to determine the degree of severity to which they are affected. Fitch estimates that the overall risk cession ratios of major non-life players active in the Tianjin region range from 10% to 15%.

Chinese media have reported that more than 8,000 vehicles were destroyed by the explosions. Claims from motor insurance could impair insurers’ margins and capital if their reinsurance protection is marginal and the degree of risk accumulation within the affected region is significant. Aside from motor excess of loss treaties, in which the reinsurers indemnify the ceding companies for losses that exceed a specified limit, it is common for Chinese insurers to use quota share reinsurance treaties to mitigate their solvency strain due to the strong growth in recent years from the motor insurance book of business.

The majority of claims will come from motor, cargo, liability and property insurance. However, medical and life insurance claims are also likely to be substantial. Victims of death and injuries are covered by a government-supported accident insurance plan for the Tianjin region, in addition to their own medical and life insurance policies. Each injured person who is insured by the government plan can claim compensation of between CNY20,000 and CNY35,000, depending on the extent of injuries while compensation of CNY50,000 will be paid in the event of death.


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