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Fitch: Reinsurers Well Positioned to Withstand Sandy Losses

Posted on 06 Nov 2012 by Neilson

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Fitch on SandyBased on preliminary assessments, Fitch Ratings believes that the global reinsurance industry's strong capitalization can absorb material expected losses from Hurricane Sandy. Furthermore, we do not anticipate substantive negative rating actions on a broad cross section of global reinsurers as a result of this event.

However, due to the scale and complexity of the event, the ultimate level of insured losses remains highly uncertain. As such, we will continue to monitor developments related to Sandy for any potential rating implications to reinsurers.

Insured industry losses from Hurricane Sandy are estimated by catastrophe modeler EQECAT, Inc. to be in the range of $10 billion to $20 billion. This is somewhat higher than AIR Worldwide's estimated insured industry loss to onshore U.S. property exposures of near $10 billion, with a likely uncertainty interval of $7 billion to $15 billion. However, catastrophe modeler Risk Management Solutions (RMS) has thus far refrained from providing an industry loss estimate, stating that the still developing information on the event, and its unique nature, would make any estimate at this time potentially unreliable. Early estimates of hurricane losses are often revised upward as more information becomes available.

Based on the initial estimates provided, losses from Sandy would rank near the $13 billion insured losses from Hurricane Ike in 2008, the last hurricane to significantly affect the reinsurance industry. However, the estimated Sandy losses would be less than the record $48 billion for Hurricane Katrina in 2005 and inflation adjusted $25 billion from Hurricane Andrew in 1992. In previously published research reports, our assessment has been that losses from a single event would need to exceed $60 billion to likely trigger a reinsurance sector outlook revision to Negative from Stable. A change in sector outlook to Negative would flag an expectation of widespread future downgrades.

We expect that as industry losses reach $10 billion and higher, the reinsurance industry will receive a greater share of losses. Reinsurers with large quota-share programs in the region could also incur moderate losses at the lower end of the range of industry losses. There is also the potential that some reinsurers could have a higher concentration in the Northeast U.S. region. Such overconcentrations resulted in outsized losses for Montpellier Re and PXRE related to Hurricane Katrina. However, we generally view reinsurers as having a diversified exposure, and would expect any such concentration risk related to Sandy to be outside expectations. An updated review of current Northeast U.S. concentrations will be a key focus of our ongoing analysis of rated reinsurers.

We view the reinsurance sector's capital position as solid, as a lower level of catastrophe losses posted thus far in 2012 have allowed companies to recover from the record catastrophe losses in 2011. With the added losses from Hurricane Sandy, the industry will likely continue to exercise caution with regard to capital management activity. As a result, we expect share repurchase activity to remain muted until reinsurers have a better indication of actual losses.

If the current loss estimates from EQECAT and AIR are consistent with actual losses, the storm is not likely to be a market-changing event that would cause reinsurance pricing to increase significantly at the Jan. 1 renewals. Prior to Sandy, rate changes were anticipated to trend moderately in the range of down 5% to up 5%, with reinsurer capital strengthened from below-average catastrophe losses. With the additional losses from Sandy, we view a decline in property catastrophe rates at Jan. 1 as less likely; however any significant rate increases should be restricted to the loss affected lines in the Northeast U.S. region.