Bloomberg News

Swaps on Insurers Slow Rise as Market Sees Sandy Loss Manageable

October 31, 2012

The costs to hedge insurance company debt against losses with credit-default swaps slowed their rise as investors view damages from Hurricane Sandy, the biggest Atlantic storm in history, as manageable.

Reinsurers and insurers including American International Group Inc. (AIG:US) may face insured losses, what insurers are contractually bound to pay, of $7 billion to $15 billion from U.S. onshore properties, AIR Worldwide, a Boston-based risk- modeler, said yesterday. That compares with $45 billion for Hurricane Katrina in 2005 and $85 billion for all of 2008, according to Thomas Walsh, head of fundamental credit research at Barclays Plc.

The New York region is recovering from Sandy, the Atlantic superstorm that killed at least 50 people, sparked a fire that destroyed 111 homes, flooded tunnels of the biggest U.S. transit system and left millions of customers in the Northeast without power. Because private homeowner policies don’t tend to cover flood damage, the estimate depends on what counts as wind damage, and so far aerial footage doesn’t show many missing rooftops, Walsh said.

“A lot of this is flood versus wind and that’s why the damage estimates will stay manageable,” he said in a telephone interview. “If it was the opposite, more wind than flood, we’d be having a different conversation.”

The storm forced the New York Stock Exchange to close for two days, with NYSE Euronext shutting markets across every asset class for the first consecutive closings because of weather since 1888.

Worst Case

The highest estimate of insured losses won’t wipe out the year’s earnings for the companies with between five and 10 percent market share for homeowner and commercial packages in the impacted areas, Walsh said.

JPMorgan Chase & Co. analysts Arun Kumar and Brett Gibson agreed, writing that while the insured losses may top out at a worst-case $20 billion, making Sandy the fourth-most destructive hurricane catastrophe for insurers, the companies are able to absorb it as they may raise capital where needed and statutory capital is at an historic high of $568 billion, according to a note dated today.

Among the companies that wrote the most homeowner’s insurance in the affected areas are State Farm Group, Allstate Corp. (ALL:US), Travelers Cos., Liberty Mutual Group Inc., Chubb Corp. and Erie Insurance Group, according to a report by A.M. Best.

‘Unprecedented Storm’

Credit-default swaps tied to Chubb fell 4 basis points to a mid-price of 54.5 basis points, from 58.5 basis points Oct. 29, as of 3:09 p.m. in New York, according to prices provided by a dealer. Those linked to Travelers’s debt climbed 10 to 77.5 basis points and those on XL Group Plc increased 8 to 108, the data show. Contracts on ACE added 5 basis points to 57.5 basis points. Contracts on Hartford and AIG added 10 basis points each, to 160 and 145 respectively, the data show.

“Sandy was an unprecedented storm in the historical record, and catastrophe models may have a tough time taking its full scope and ferocity into account,” according to David Havens, a credit-desk strategist at RBS Securities Inc.

The $15 billion is “easily manageable by the private insurance industry” especially with about $200 billion of “additional reinsurance capital in Bermuda, Switzerland, London, and Germany available to shoulder some of the loss,” he said.

Whether the damages will result in corporate downgrades is “hard to say at this point,” according to Christopher Grimes, property casualty insurance and reinsurance analyst at Fitch Ratings.

“Most of the losses will be concentrated at the primary insurance company level and have not been passed on to the reinsurance companies, which would be kind of a higher level of loss,” Grimes said in a telephone interview. Only if claims were to reach about $25 billion would losses taken on by insurers be passed along to reinsurers, he said.

“The losses aren’t incredibly high,” he said. “We don’t think there are going to be losses that will get to the point where there’s going to be any material defaults or losses on insurance company bonds at this point.”

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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Companies Mentioned

  • AIG
    (American International Group Inc)
    • $55.09 USD
    • 0.39
    • 0.71%
  • ALL
    (Allstate Corp/The)
    • $58.41 USD
    • 0.33
    • 0.56%
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