Reinsurers to Absorb Sandy Losses; Storm Could Cause Loss for Combine Re Cat Bond

Reinsurers should be able to absorb losses from Superstorm Sandy without a negative ratings impact, says Fitch Ratings. 

Meanwhile, Moody’s Investors Service says the storm could, in a worst-case scenario, cause losses for the Combine Re catastrophe bond.

Regarding reinsurers, Fitch says, “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.”

Fitch says that as industry losses eclipse $10 billion, reinsurers will see a greater share. But assuming losses fall within estimates from Eqecat ($10 billion to $20 billion) and AIR Worldwide ($7 billion to $15 billion), Fitch predicts that the storm will not be a “market-changing event that would cause reinsurance pricing to increase significantly at the Jan. 1 renewals.”

Fitch notes that, before Sandy, reinsurance-renewal rates were expected to range from down-5 percent to up-5 percent at Jan 1. Given the storm, Fitch believes a decline in property-catastrophe rates is less likely. But any significant rate increases, the ratings agency adds, “should be restricted to the loss-affected lines in the Northeast U.S. region.

Regarding the Combine Re cat bond, Moody’s says if losses end up being at the high end of current estimates, they will exceed the first loss layer that absorbs net losses before the rated tranches kick in. Moody’s says Combine Re is a $200 million indemnity cat bond issued by Swiss Re in March for the benefit of COUNTRY Mutual Insurance Company and North Carolina Farm Bureau Mutual Insurance. 

"The property losses will cause Combine Re to use up additional protective subordination and, in the worst case, will result in losses on the cat bond," says the ratings agency.

Moody’s notes that the cat bond covers against several perils in specific regions of the US, including severe thunderstorms, hurricanes, earthquakes and winter storms, but it excludes hurricanes in Florida. 

As such, Moody’s says the hybrid nature of Sandy could influence what type of covered event the storm will be: hurricane, severe storm or winter storm. “In the former case, losses owing to this event are subject to a $200 million hurricane per-event limit, while there is no limit for the latter cases,” says Moody’s. 

The ratings agency says there will be no effect on other cat bonds. “Unlike Combine Re, the other five cat bonds we rate with exposure to hurricane risk (GlobeCat, EOS Wind, Vega Capital Series 2010-I, Successor X Series 2012-1 and Mythen Re) all cover losses only to the extent the attachment point is less than the loss on any single qualifying event. As a result, only very large and devastating hurricanes can trigger losses to investors, events that happen once every 250 years on average.”

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