General Insurance Article - 2012 strong earnings to cushion Sandy blow for (re)insurers

 Based on preliminary insured loss estimates, Standard & Poor's Ratings Services expects Hurricane Sandy to have a limited impact on the ratings on U.S. property/casualty (P/C) insurers, global reinsurers, and certain catastrophe bonds. Although we anticipate that losses from this event will affect (re)insurers' fourth-quarter earnings in 2012, for most (re)insurers the hit will be offset by strong capital bases and strong earnings through the first three quarters of 2012. The event is unlikely to materially affect premium rates in loss-affected lines, in our opinion.
 Modeling agencies have reported early insured loss estimates of around $5 billion-$15 billion. It is widely expected that Hurricane Sandy will inflict more severe losses than Hurricane Irene, which struck the U.S. East Coast in August 2011, and cost the industry $4 billion-$5 billion. Because the initial loss estimates are higher, we expect primary and reinsurance players to share the insured losses from Sandy; by contrast, the primary market bore the brunt of the Hurricane Irene loss event.
 The area affected by Hurricane Sandy is one of the largest on record. While rainfall is expected to result in less flood damage than Hurricane Irene, the industry could see higher loss amounts than it experienced after
 Irene because Sandy triggered flooding from record storm surge levels. In addition, Sandy hit the metropolitan New York area more directly and it merged with a winter storm in the Eastern U.S., leading to heavy snowfall and more potential damage from fallen trees. In addition, claims stemming from business interruption and contingent business interruption could be material due to widespread power-outages and the closure of public transportation systems along the Eastern seaboard.
 In our view, the impact on primary insurers could be more material--the proportion of their retained losses are typically higher at the lower industry loss levels. Some of the primary insurers that are heavily exposed to Sandy are also quite concentrated in the region. These companies might be at risk of having their 2012 earnings depleted, and could even see their capital eroded.
 In our view, reinsurers have benefited from a more-benign loss year than their primary counterparts. Based on current estimates, they are less exposed to material losses from this hurricane. We continue to view the sector as strongly capitalized, and most reinsurers have reported very strong operating results thus far in 2012. Based on survey data submitted to us by reinsurers, we consider that some companies are more heavily exposed to windstorm risk in the U.S. Northeast than others. However, the same data indicates that the average reinsurer would need to experience an insured loss event in that region that was considered between one-in-50 years and one-in-100 years to put 5%-10% of its total adjusted capital at risk. Despite the large area affected by the storm, we expect Sandy to be more consistent with a one-in-10 year to one-in-20 year insured loss. 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 estimated range, we still anticipate that reinsurers will be able to manage the impact.
 We do not expect a loss of this size to have a material effect on premium rates in the U.S., especially in the catastrophe-exposed lines of business, which are already near historical peaks. Certain regions or lines of
 business could be affected slightly, and this loss could reduce the pressure to cut rates in loss-affected lines, but we do not view this as a material, rate-changing event.
 We currently rate a limited number of catastrophe bonds in which various classes are exposed to the states in
 Sandy's path. Due to the attachment points on the per-occurrence bonds exposed to this event, we do not expect Sandy to cause a loss on these notes. However, it will likely qualify as a covered loss event that will be
 included in the loss calculation for the annual aggregate bonds.
 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.

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