Based on preliminary assessments, Fitch Ratings believes that the global reinsurance industry's strong capitalization can absorb material expected losses from Hurricane Sandy. Furthermore, the rating agency does not anticipate substantive negative rating actions on a broad cross section of global reinsurers as a result of this event.
Based on the initial estimates provided, losses from Sandy would rank near the $13bn 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 $48bn for Hurricane Katrina in 2005 and inflation adjusted $25bn from Hurricane Andrew in 1992. In previously published research reports, Fitch's assessment has been that losses from a single event would need to exceed $60bn 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.
Fitch expects that as industry losses reach $10bn 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 US region. Such over-concentrations resulted in outsized losses for Montpellier Re and PXRE related to Hurricane Katrina. However, Fitch generally views 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 US concentrations will be a key focus of their ongoing analysis of rated reinsurers.
They 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, they 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 January 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, Fitch views a decline in property catastrophe rates at 1st January as less likely; however any significant rate increases should be restricted to the loss affected lines in the Northeast US region.
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