S&P’s Analysis of Hurricane Season Finds Mounting Losses

September 16, 2008

Following Ike’s march through Texas, S&P noted that the preliminary estimates of insured losses “vary from $6 billion to $18 billion. (These figures include onshore and offshore exposure.)”

Before discussing the possible negative effects on earnings of the recent spate of hurricanes, S&P did offer some good news. It said that “based on these early estimates, we do not expect catastrophe bonds to be triggered.”

However, S&P then pointed out that “Ike is the latest and most severe natural catastrophe in a year of unusually high frequency.” Before Ike Gustav had already caused a lot of damage, followed by Tropical Storm Hanna.

As a result, S&P said that it’s possible “that the accumulated losses from these small to midsize catastrophes could have a material unfavorable effect on earnings. We believe that the aggregate catastrophe losses from these successive storms are earnings events for the industry rather than capital events.

“Prices in the property/casualty lines have continued to soften. Moreover, the financial market disruption has produced dismal investment returns and invested asset write-downs. Collectively, in the short term, these factors could have an adverse impact on the ratings or outlooks on a few outliers.”

According to S&P the current hurricane season “looks somewhat similar to that of 2004, where the primary insurers bore the brunt of the losses relative to reinsurers because these losses generally fell within the deductible/risk retention limits of the primary companies’ property catastrophe reinsurance programs.

“We believe that the magnitude of these events, on a stand-alone basis, is insufficient to have a material effect on pricing trends in either the primary or reinsurance markets. However, if this year’s pattern continues with a succession of storms with aggregate losses in the tens of billions of dollars, this could stabilize pricing in the property catastrophe market.”

S&P added that it “expects losses to emerge in the days and weeks ahead from both personal insurance and commercial insurance coverages, including homeowners multiple peril, commercial multiple peril, and allied lines. We expect losses to be spread among many personal and commercial national and regional carriers as well as their reinsurers.

“At this point, it is possible that the cumulative effects of this year’s catastrophes and other factors will erode the capital of a few insurers to the point that they will need to access the capital markets for replenishment. Insurers in this position will be at a significant disadvantage given conditions in the financial markets, and rating actions might be necessary as a result.”

Source: Standard & Poor’s – www.standardandpoors.com

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