Since most of the property and casualty insurers, adversely affected by the Hurricane Sandy, have provided their initial loss estimates for the fourth quarter of 2012, we can fairly classify the loss caused by the storm as an earnings event rather than a capital event.
By earnings event we mean that the losses due to Sandy will hit insurers’ fourth quarter earnings, but will not significantly erode their capital position. Insuers such as Allstate Corporation (ALL), Chubb Corp. (CB), The Travelers Companies Inc. (TRV), ACE Ltd. (ACE), Progressive Corp. (PGR), XL Group plc (XL) and Tower Group Inc. (TWGP), who had high exposure to the Sandy-affected areas, suffered losses to the extent of 0.9%–2.0% of their shareholders’ equity. In total, loss from Sandy is pegged at approximately 3.9% of the available industry surplus.
Despite being known as the third most expensive hurricane in the U.S. history in terms of insured losses, with up to $25 billion in claims paid, ranking only behind 2005’s Hurricane Katrina ($48.7 billion) and 1992’s Hurricane Andrew ($25.6 billion), Sandy has failed to qualify as “catalyst” for improving insurance pricing. However, it can impact the insurance and reinsurance prices in some of the affected areas – Northeast/MidAtlantic.
While the record cat loss in 2011 caused industry underwriting loss of $36.5 billion and induced pricing to improve in many non-life insurance segments, a broad-based hardening of rates was nowhere to be seen. Further, lack of substantial losses in 2012 has narrowed underwriting losses to $7 billion in the first half of 2012 from an underwriting loss of $24.1 billion a year ago. The combined ratio – a key measure of losses and other underwriting expenses per dollar of premium – improved to 102.2% in the first-half 2012 from 110.5% in 2011.
Owing to surplus capital, carriers have been increasing share repurchases and dividend payments. Going forward, the continuing low interest rate through 2014, which will keep investment income under pressure along with drying up of excess reserve release, will drain the capital position of the insurers, forcing them to recheck their pricing policy.
Currently, the prices have stopped softening and these have yet to witness a change across the regions as well as business lines. Moreover, the magnitude of price rise remains small. A thorough study of the insurance market points toward a typically mature soft market cycle, but this cycle is likely to take more time to reverse fully.
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