Reinsurers’ Capital Likely to Remain Strong Despite Hurricane Matthew: S&P

October 7, 2016

While Hurricane Matthew has the potential to erode some of the global reinsurance sector’s excess capital, its overall capital position is not expected to deteriorate below the ‘AAA’ level, according to a report published by S&P Global Ratings.

This would still be the case even if Matthew proves to be a much more severe loss event than Hurricane Katrina, with a return period of 100 years, said the S&P report titled “How Hard Could Hurricane Matthew Hit Reinsurers?”

If Matthew is a 1-in-100-year loss event, at an aggregate level, the industry could see an average reduction in total adjusted capital of about 10 percent, S&P affirmed.

Further, such an extreme loss event could lead to an average reduction in forecasted profit before tax of about 136 percent with an impact on the combined ratio of 19 percent points, the report continued.

On the other hand, if Matthew is a 1-in-50-year loss event, the sector’s pretax profit would fall by an average of about 95 percent, the combined ratio could deteriorate by 13 percentage points and total adjusted capital would drop by about 7 percent, said S&P, adding that about one quarter of rated reinsurers would likely suffer a net operating loss for the year.

Reinsurers judge their risk exposure, in part, by considering the return period of different events – a hurricane of the magnitude and economic impact of Katrina, for example, is considered likely to occur every 35-50 years,” S&P said, explaining that the return period for Hurricane Matthew will not be clear until it has passed and the claims are in.

Capital Sensitivity

The global reinsurance sector maintains a solid capital buffer, said S&P. “At year-end 2015, the industry as a whole had excess capital of approximately $26 billion at the ‘AAA’ level,” the report continued.

When examining the sector’s capital adequacy to include the potential impact of Matthew, S&P analyzed global reinsurers’ exposure to a windstorm hitting the coastal southeast U.S. (including Florida, Georgia, and the Carolinas) at various return periods, from 10 to 100 years, based on data collected from reinsurers as part of its annual survey.

“Based on our stress scenario, we estimate that capital across the sector will still exceed the amount required to maintain a ‘AAA’ rating, even if Matthew turns out to be a 1-in-100-year loss event,” said the report.

“To give this context, in 2015, a Swiss Re Sigma report estimated that 2005’s Hurricane Katrina caused an insured loss of $79.6 billion (indexed to 2015).”

S&P expects resilience to large catastrophe events to vary across the different peer groups. For example, reinsurers operating in the London market as well as mid-sized global reinsurers “are the most exposed to potential changes in capital adequacy,” the report contended.

If Matthew is a larger than a 1-in-20-year loss event, S&P said, it is likely that it would revise its capital adequacy score for these two subgroups downwards.

“In general, for the large global reinsurers, the Bermudians and the property catastrophe and short-tail writers’ capital adequacy, although reduced, would remain redundant, in aggregate, at the ‘AAA’ level.”

If Hurricane Matthew is a severe event, or a 1-in-50-year loss or greater, S&P said it could revise downwards our assessment of capital adequacy for at least 38 percent of the rated reinsurers. “This would weigh on our ratings on these companies unless they have a credible plan to boost their capital positions over the next three years.”

Earnings Impact

For the 21 rated reinsurers, S&P estimated that forecast profit before tax would cover expected losses from Hurricane Matthew’s effect on earnings for all potential return periods.

“We anticipate that property catastrophe and short-tail specialists will experience the most severe effect on earnings,” said the S&P report. “In aggregate, this peer group would likely suffer a net operating loss if Matthew has a return period of 50 years or more. In such a case, we forecast that 24 percent of the total reinsurers we rate would report a net loss.”

Source: S&P Global Ratings

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