Lancashire’s $20 billion trigger ILW may offset Sandy losses

Where the final industry loss estimate for hurricane Sandy ends up means more to some companies than others. In particular firms which have reinsurance contracts, industry loss warrants (ILWs) or insurance swaps with a trigger set at the $20 billion level are particularly interested in the next update from Property Claims Services. Lancashire Holdings, a global provider of specialty insurance and reinsurance products, is one of those who could benefit from further loss creep.

Currently the industry loss estimate from PCS stands at $18.75 billion, as of its last update on the 21st January.  The loss reporting agency is expected to publish another update to its Sandy estimate two months later, so around the 20th March.

Given how close the current estimate of $18.75 billion is to the $20 billion level at which a variety of contracts could be triggered, expectation in the market is that the update from PCS will breach that level. If that happens Lancashire is one of those set to benefit as, according to a Reuters article, it has an outstanding $40m ILW contract which is exposed to an industry loss trigger from hurricane Sandy at $20 billion.

Lancashire has reported a $44.5m loss from hurricane Sandy, but that is before this ILW contract is considered. The ILW is for $40m of cover at the $20 billion industry loss trigger and so if the contract pays out Lancashire will reduce its Sandy loss dramatically down to just $4.5m.