Ratings agency Moody’s has published some additional insight on the impact of hurricane Sandy on reinsurers in their latest CreditOutlook report today. The article discusses the insight gained from a number of reinsurers earnings announcements and what they have said about the potential impact Sandy will have on their fourth quarter earnings. Moody’s says that the general sentiment is that hurricane Sandy will hurt Q4 earnings, but will not significantly impair capital, which they say is credit positive.
Moody’s has analysed some of the catastrophe model data and this corroborates the reinsurers assessment that generally they are underweight in the U.S. northeast, when compared to the southeast or Florida. This analysis suggests that reinsurers are likely to take less than 25% of the insurance industry loss from hurricane Sandy.
Moody’s are working on the assumption that Sandy is closer to a 50 year return period storm than a 100 year return period in extent of damages and losses. Under that scenario, says Moody’s, reinsurers would lose roughly one fiscal quarter’s worth of earnings, although some might lose more, some less they note, based on the modeling data they have received from companies. Moody’s analysis showed that a 1-in-50 year southeast (Florida) hurricane event is generally 2X to 7X a 1-in-50 year event in the northeast or mid-atlantic region, although there are a few outliers or scenarios that could be much worse. The multiple decreases as the event moves up towards a 1-in-100 year hurricane. If you get up to a 1-in-250 year hurricane then the losses are almost comparable between Florida and the northeast.
Moody’s also looked at how much of an insurance industry loss gets passed on to reinsurers under different hurricane event return periods. In a northeast 1-in-50 year event 16% of losses are passed onto reinsurers, in a 1-in-100 year northeast hurricane 29% could be passed on, compare that to Florida where Moody’s says the percentages are 44% and 47% respectively and it shows that the reinsurance impact should be much lighter for a northeast storm. The data from Moodys’ can be seen below.
Of course there are risks to these assumptions, as Moody’s notes. They are working towards the upper end of the current estimated industry loss range provided by risk modelling firms, which means they are assuming Sandy will be close to a $20 billion industry loss event. If insured losses creep above that range, Moody’s note, then reinsurers will take more of the loss as is the nature of excess-of-loss reinsurance.
As we wrote yesterday, and this information perhaps came out after Moody’s had written their article as it doesn’t mention the world’s largest reinsurer, Munich Re has estimated a loss in the mid three digit million Euro range. That’s interesting as it’s a good bit higher than Munich Re at first estimated their loss from hurricane Katrina, and that loss estimate rose significantly over time. What that means for Sandy is very hard to predict but it is likely that Munich Re are perhaps estimating towards the upper end of the industry loss range as well. As we all know, the industry loss does stand a good chance of creeping higher over time as business interruption and contingent business interruption losses feed into it and the full extent of damage claims becomes clearer.
Moody’s analysis has included losses which are transferred to the capital markets in the table above including any losses that would be paid by capital market investors thanks to catastrophe bonds or other forms of collateralized reinsurance products. Moody’s notes that cat bonds issued by insurers such as Travelers, Chubb, The Hartford and Liberty Mutual would all lessen the potential impact to reinsurers should they be triggered by a storm like Sandy or more severe.
Finally, Moody’s notes that reinsurers who reinsure more commercial business, rather than homeowner’s business, will suffer a greater loss from hurricane Sandy. So, while Moody’s expect most reinsurers to lose roughly one fiscal quarter’s earnings from Sandy, those that write mostly commercial lines reinsurance, particularly for large excess and surplus lines property insurers, will likely lose more than that.