S&P expects Sandy to qualify as covered loss on aggregate catastrophe bonds


Rating agency Standard & Poor’s has published its first update on the impact of hurricane Sandy to the insurance, reinsurance and catastrophe bond sector. Generally, S&P said that partly due to the strong earnings the sector has had so far in 2012, they expect Sandy will only have a limited impact on the ratings of U.S. property/casualty insurers, global reinsurers, and also on certain catastrophe bonds.

Losses from Sandy are expected to hit re/insurers fourth quarter earnings, according to S&P, but it will be largely offset by the strong capital bases and earnings that have been built up during the year so far. S&P also noted that they don’t expect the event to affect premium rates materially in loss-affected lines. We believe that the January renewals will be the telling time for reinsurance premiums following on from Sandy and any rise there will likely drive any premium increases from insurers.

S&P agree with loss estimates that Sandy will be a more impactful event than Irene. Because the loss estimates are higher than Irene, S&P expect primary insurers and reinsurers to share the losses from Sandy, unlike with Irene where the primary market bore the brunt of it. S&P also note that business interruption and contingent business interruption could exacerbate losses, we wrote about this scenario in an earlier article here.

Interestingly, S&P only expect Sandy to be consistent with a one-in-10 year to one-in-20 year insured loss saying that such a loss would not threaten the annual earnings or capital of many reinsurers in such a strong year. Even if losses from Sandy prove to be at or above the high-end of the currently estimated range, S&P still anticipate that reinsurers will be able to manage the impact. This is interesting as almost everyone we’ve spoken with believes Sandy was more like a 1-in-35 to 1-in-50 year event, it will be interesting to see how this plays out.

On catastrophe bonds, S&P said that they rate a limited number of catastrophe bonds which have classes of notes that are exposed to the states in Sandy’s path. Due to the attachment points on the per-occurrence cat bonds exposed to this event, S&P do not expect Sandy to cause a loss on any of those notes, this is in line with our thoughts from the other day here. Also in line with the markets current sentiment, S&P said that Sandy will likely qualify as a covered loss event that will be included in the loss calculation for some of the annual aggregate cat bonds which are exposed.

So now it will be a waiting game while indemnity loss estimates and an insurance industry loss total are calculated before we will understand which bonds (if any) are impaired with qualifying losses from Sandy. We expect S&P will place any cat bonds which are thought to be seriously at risk on a creditwatch with negative implications once the loss is better understood, that will be the first step taken. Then, if losses do indeed turn out to be high enough there may be rating downgrades to follow as well.

S&P close their update by saying:

In our view, based on current industry loss estimates, the effect on ratings for the P/C (re)insurers and affected catastrophe bonds should be minimal. However, we recognize that these loss estimates could, and probably will, change and that uncertainty about the business interruption and contingent business interruption claim amounts is very high. We will continue to monitor the situation, and will comment and take action as appropriate.

We’ll keep you updated as this develops.

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