A report published by Standard & Poor’s suggests that reinsurers have a material cushion before losses from hurricane Sandy become a capital event. Despite continued uncertainty around the final amount of insured losses from the storm, S&P believe that the reinsurance sector’s strong capital base and strong earnings this year will enable it to withstand losses far above the current range of estimates. S&P estimates that losses would need to exceed $50 billion to materially erode the reinsurance sectors capital base.
S&P expect reinsurers to have the ability to effectively replace the losses from Sandy through earnings and their strong capital base, but S&P note that should their expectations on capital regeneration not be met ratings on some individual reinsurers could come under pressure. On the whole though, S&P expect Sandy to be an earnings event for the reinsurance sector, impacting Q4 in the main, and so should have limited impact on ratings of global reinsurers.
S&P notes the uncertainty around flood coverage, business interruption or contingent business interruption and also the official designation of hurricane or post-tropical storm and the impact that has on deductibles. These factors combined with the never before witnessed impacts of the storm such as the storm surge effects mean that producing a final industry loss amount is likely to be a protracted and difficult task.
Based on their own survey data collected from reinsurers, S&P says that hurricane Sandy is in line with a a loss event that would occur more than once in every ten years, based on the current loss estimates. If you narrow the definition of loss event to only include northeast U.S. wind events then Sandy is more akin to a modelled catastrophe event with a return period around the 50 year mark. The frequency of an event like this would be even lower if the data was taken on a single loss event basis, compared to the annual aggregate that S&P used for their analysis.
Based on the collected survey data, S&P believe that the reinsurance sector has adequate capital to absorb the losses from Sandy, even if the estimates deteriorate. They estimate that industry losses would need to be around $50 billion before any material erosion of the reinsurance sector’s capital became apparent. S&P define “material erosion” as 5%-10% of capital after earnings.
Of course, some reinsurers have better capital positions than others and some may be much more exposed to the event as well. Hence S&P said that they will monitor loss estimates as each company reports them, but at this stage they expect minimal ratings impact for reinsurers.
You can access this report if you subscribe to Standard & Poor’s Global Credit Portal here.