Moody’s Investors Service said Monday that of the six catastrophe bonds it has rated, the currently estmated damages from Hurricane Sandy are credit negative only for bondholders of Combine Re Ltd Series 2012. This deal is a catastrophe bond that was underwritten by Swiss Reinsurance Co. in March 2012.
Early loss estimates catastrophe modeling firm EQECAT showed that damages for the insurance industry will fall in the range of the $5 billion to $10 billion ; and AIR Worldwide's estimated insured industry loss to onshore U.S. property exposures could fall between $7billion and $15 billion.
At the higher end of loss estimates for Hurricane Sandy, it is likely that Combine Re, Series 2012, a $200 million indemnity cat bond issued for COUNTRY Mutual Insurance Co. and North Carolina Farm Bureau Mutual will use up additional protective subordination and, in the worst case, could result in losses on the cat bond.
The rating agency said that, under the worst-case scenario, the net losses for this event would exceed the first-loss layer that absorbs net losses before the rated tranches do.
“Three other events this year have already amassed losses for Combine Re under COUNTRY Mutual Insurance Co.’s book of business and have eroded the first layer of loss protection to investors,” said analysts in the report. “As a result, the attachment level for ultimate net losses of COUNTRY Mutual Insurance Co. has fallen to $189.7 million from $300 million.”
Moody’s said in the report that the other five cat bonds it rated with exposure to hurricane risk, all cover losses “only to the extent the attachment point is less than the loss on any single qualifying event.”
In other words, the report explained, only a very large and devastating hurricane would lead to bondholder losses. Such storm only happens once every 250 years on average, according to Moody’s. Hurricane Sandy, on the other hand, is an example of a lower loss and more frequent event that happens once every 10 or 20 years.
It is unclear how losses will be classified by the Swiss Re cat bond. Moody’s said that because of the hybrid nature of the storm, which combined a hurricane in the Atlantic with a winter storm; losses could qualify as a covered hurricane event or as a covered severe thunderstorm or winter storm.
A hurricane event means that losses are subject to a $200 million hurricane per-event limit while there is no limit for the latter cases, explained Moody’s in the report.
Among the cat bonds rated by Moody’s are GlobeCat, EOS Wind, Vega Capital Series 2010-I, Successor X Series 2012-1 and Mythen Re.
In terms of the Sandy's effect on the overall market, Citigroup Global Markets analysts said in report last week that even though Hurricane Sandy has made the market more curious regarding this asset class, it is still comparatively small and not well-distributed or actively traded.
Both Fitch Ratings and Moody’s are confident that the loss estimates will be readily absorbed by the insurance industry. Moody’s investors on a conference call on Friday said that it was unlikely, based on the early estimates, that losses would meaningfully
Fitch said in a report today that the reinsurance industry's strong capitalization means it can readily absorb material expected losses from Hurricane Sandy.
The Public School Employees' Retirement System is one investor that has reinsurance investments that could potentially have exposure to damages from the recent hurricane. As of September 2012, PSERS investment in the reinsurance market amounted to approximately $375 million, or less than 1 percent of the fund's total assets.
Performance on PSERS reinsurance investments were estimated to be up over 7% for the 9 months ended September 30, 2012, according to Evelyn Tatkovski, press secretary at PSERS. Although Tatkovski believes that it is still too soon to tell what the exact impact of the storm will be on PSERS' reinsurance investments, “early indications are that the investor’s reinsurance investments did not incur material losses.”
The optimisim is down to the fact that even at the high end of loss estimates for Sandy, it would still come in less than the $48 billion recorded for Hurricane Katrina in 2005 and inflation adjusted $25 billion from Hurricane Andrew in 1992, according to Fitch.
The ratings agency added, that losses from a single event would need to exceed $60 billion to trigger an expectation of widespread future downgrades.
Paul Schultz, CEO of Aon Benfield Securities, said that bonds with potential exposure were marked down at the time of the event to reflect the uncertainty of loss. "We are closely monitoring the loss estimates to better understand potential loss of principal on cat bonds; but at this time it is simply too early to have a definitive view on losses to any specific bond," he said.