2011 catastrophe losses leave insurers vulnerable to hurricane season, says Fitch

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Fitch Ratings have published an interesting report which analyses the potential effects that a major landfalling U.S. hurricane could have on some of the larger insurance companies and the industry as a whole. After the catastrophic, and loss filled first few months of 2011 insurers are going to find that any major loss event caused by the Atlantic storm season could put a material strain on their capital base.

Despite the high losses caused by events such as the New Zealand earthquake, Australia floods and storms, Japanese earthquake and tsunami and now the U.S. tornadoes and flooding insurers are generally considered to be well capitalised despite some having exhausted their catastrophe budget for 2011. They seem to have plenty in reserve. Some re/insurers have been capital raising of late and we’ve seen the formation of a couple of new sidecar facilities (by Lancashire and Alterra), but there hasn’t been a rush to acquire capital that some might have predicted.

The forecast is for an active hurricane season with a higher potential for landfall than last season, as generally the jet stream conditions which seemed to steer storms away from the U.S. last year are now more akin to normal suggesting landfall may be more likely. Fitch’s report looks at the potential impact any storm could have on the top 10 insurers by direct written premium for 18 coastal states of the U.S. in both personal and commercial property insurance. The report also looks at the predictions from some of the main forecasters, the recent changes to hurricane risk models, commercial property rates and the state of the Florida market.

Conclusions are scant but essentially Fitch suggests that some insurers are in a precarious position having suffered major losses and a large dent to their catastrophe provisions already this year.

Some suggest we could see more capital raising attempts in the next few weeks but with hurricane season due to start on the 1st June we don’t expect to see any major rush to issue catastrophe bonds, sidecars or capital raising financing. If the hurricane season causes any major losses we could see an acceleration in all of these towards the end of the year.

You can access the report, Hurricane Season 2011: A Desk Reference for Insurance Investors, on the Fitch Ratings website if you have a login.

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