As the implications of Hurricane Katrina start to crystallize, the insurance sector is emerging as one of the hardest hit industries, while the RMBS and non-mortgage ABS sectors have not withstood sharp significant losses as well. Katrina-induced losses to the insurance sector were the steepest in history, more than those suffered from 9/11, Hurricane Andrew or the 1994 Northridge earthquake in California, according to Laura Porter, an analyst at Fitch Ratings.
Interestingly, the reinsurance industry was so tapped out by the end of last year that catastrophe bond issuance spiked, as insurance companies searched for other ways to protect themselves.
The rating agency held a conference call late last week to discuss updated loss statistics and the future outlook for regions affected by Hurricane Katrina. While the insurance business is emerging as possibly the hardest hit corporate sector so far, losses to the residential and commercial mortgage sectors are still largely unclear. For example, a significant number of homes within designated areas will need to be raised some three feet off the ground thanks to new federal flood insurance guidelines released April 12 that govern how high homes must be above ground to receive future coverage. Some see that requirement as yet another expense burdening a number of already cash strapped New Orleans homeowners.
Additional expenses, such as higher interest rates, rising gas prices, slower home price appreciation and storm-related insurance premiums "could potentially be the ingredient pushing the consumer - especially in the subprime sector - over the edge," said Kevin D'Albert, a non-mortgage ABS analyst at Fitch. So far though, none of the non-mortgage related ABS sectors has shown damage from Hurricane Katrina, he said. The rating agency has not seen, and does not expect to see, an impact on ratings or collateral performance for non-mortgage related ABS sectors - including credit cards, autos and student loans, he said. Companies such as credit card issuer American Express Co. in 1Q earnings reports are posting positive results from smaller-than-expected costs associated with the Hurricane. American Express added $98 million to its income in the quarter, in part because of lower Katrina-related costs than it had expected.
The RMBS sector didn't sustain much of a blow from the devastation in the Gulf Coast region because mortgages in the states affected - Louisiana, Mississippi and Alabama - comprise a miniscule portion of the market in both size and number. In fact, the total dollar amount of all mortgages originated in those three states last year amounts to less than $900 million - equal to the amount one would expect on a single jumbo mortgage deal, according to UBS. The total number of subprime loans outstanding in the region amounts to $6.9 million, about 1.9% of all currently outstanding subprime; prime and alt-A amount to about
$4 million, about 1.37% of outstanding.
In a worst-case scenario, RMBS pools with relatively high exposure to Gulf Coast area properties could face a 25 to 100 basis point collateral loss - a depletion in cash flows that would result in downgrades and potential defaults in lower parts of the capital structure, according to Fitch. While there was an immediate increase in mortgage delinquencies in designated areas following the hurricane, a number of servicers feel it is still too soon to tally the full effect of missed mortgage payments, said Fitch analyst Grant Bailey.
For both the residential and commercial mortgage sectors, the amount of storm damage from certain factors such as mold remains in question. So far though, no CMBS classes have been placed on rating watch negative. And while expectations were that the initial increase in CMBS delinquencies following damage caused by the hurricanes would result in a rise in CMBS downgrades, delinquencies in the related areas have since declined by more than 50%, according to Standard and Poor's. "The initial concern that many of the properties affected by the hurricanes would have nominal realizable values as a result of moderate to extensive damage and inadequate insurance coverage never materialized," the rating agency wrote earlier this month.
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