Hurricane Sandy's impact on two dozen states along and near the U.S. Eastern Seaboard may have done more than just damage homes, cars and a large portion of the Jersey shore. Some experts believe the powerful storm also left a mark on what up until that point had been a relatively unscathed 2012 surplus lines market.
An October A.M. Best Co. special report (released the same month Sandy battered the Northeast) noted surplus lines "has a solid chance to produce improved underwriting results because of the sharp decline in catastrophe losses across the property/casualty industry through mid-June of 2012 and with rate increases on certain lines of coverage generating guarded optimism amongst surplus lines insurers."
Sandy's mighty punch, however, may have changed that. And A.M. Best senior financial analyst David Blades believes the greatest impact will fall on surplus lines writers' earnings results.
"Balance sheets will probably be materially weakened," he said. "And definitely from an earnings perspective, income statements and revenues versus expenses will get hit on the side of expenses such that net income and net earnings will be impacted by the storm."
The deadly hurricane flooded streets and subways, cut power to millions of homes and businesses, closed the New York Stock Exchange for two days and snarled traffic in the country's largest city. In late November, AIR Worldwide increased its estimate for Sandy-related insured losses to between $16 billion and $22 billion. Those estimates included wind and storm surge damage to onshore residential, commercial and industrial properties and their contents, automobiles and time element coverage, along with additional living expenses for residential properties and business interruption for commercial properties.
Sandy quickly climbed into the history books. Independent reinsurance brokerage firm Holborn said in a recent report Sandy ranks "in the top three U.S. events ever in nominal dollars and, relative to industry premiums, ranks in the top eight U.S. events over the last 50 years."
As for its toll on surplus lines, "this will likely be fairly typical of a flood or wind event that is going to fall disproportionately on some carriers who have more exposure on some policyholders than others," noted Kevin Kelley, chief executive officer of Ironshore. "That's very typical of what we saw in [Hurricane] Katrina and any other event where flood is a major component of the loss."
While Ironshore hadn't yet finalized its numbers as of December 2012, Kelley anticipates its loss "will be equal to or less than 3% of our shareholder equity.
"That makes us more toward the lighter end of the spectrum," he added. "Some carriers may see 8% to 9% of equity loss. This is clearly something we noticed but our balance sheet can easily absorb."
For specialty commercial lines carrier Alterra Specialty, annual losses will likely total between 25 to 35 points, said Jonathan Hahn, executive vice president and chief underwriting officer of its brokerage division.
"Many companies, however, could likely have anywhere from 20 to 50 loss ratio points on annual results. So this will definitely wipe out their fourth-quarter earnings and, in some cases, their property underwriting profits," he added.
"In the U.S, we don't write many of the Fortune 1000 or very large coverages, but the New Jersey Transits of the world, the Port Authority ... a fair bit of that business is written by our Bermuda insurance force," noted Hahn. "But many other E&S companies in the U.S. write those accounts, so both standard lines and E&S carriers will be impacted by many of the larger losses as well." According to reports, Sandy inflicted an estimated $400 million in damage to the New Jersey Transit system.
Among some of the surplus lines hardest hit by the storm are commercial property lines, said Kelley, "That was especially impacted because it normally includes flood, but often there are sublimits to flood. Therefore, the dominant loss will come from those commercial property policies."
Business interruption coverage on the property side is another "major issue because you had so much power that was lost and companies unable to conduct business," said Blades.
Added Kelley, substantial fine arts losses also arose out of Sandy. Numerous art galleries in New York City's Chelsea neighborhood suffered flood damage from the storm surge.
Restaurants and hotels also were hard hit. For instance, many of New York's 24,000 eateries were flooded, lost power or faced supply issues.
One area particularly battered by the storm was marine losses to yachts and vessels, marinas and piers and cargo, said Kelley. In November, the Boat Owners Association of the United States estimated more than 65,000 recreational boats were damaged or destroyed, causing about $650 million in total damage and making it the single-largest recorded loss.
Until late 2012, "we were all sitting here thinking we got through the hurricane season, but then came Sandy," said Richie Whitt, president and co-chief operating officer at Markel Corp. "It took people by surprise because it was late in the season and people sort of lulled themselves to sleep a bit in the Northeast and the potential for storms to hit there."
For Markel, Sandy-related losses fell between $75 million to $125 million, net of reinsurance and including reinstatement premiums, he said. "That's a sizable number but not outside of what we expected given what Sandy was."