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Leverage a growing problem for Katrina exposed carriers

Uncertainty over the ceiling for insured losses arising from Hurricane Katrina remains, as (re)insurers continue to revise estimates upwards.

On Friday (7 October), shares in Bermuda-headquartered GoshawK tumbled after it revealed its gross losses had risen from $99mn to $130mn (see story 6). Its net loss had risen by proportionately greater, more than doubling from $25-30mn to $60mn.

The company also revealed an initial net loss from Rita of $30mn, conceding that it expected a “total loss” to its remaining marine retrocession limits, having burned through the cover.

This leveraging of the impact on net losses as total losses rise has been highlighted by some industry commentators as an emerging pattern for (re)insurers hit by the hurricanes.

Insurance analyst VJ Dowling of Dowling & Partners told Insider Week that more examples are likely to emerge, with primary insurers experiencing the greater impact; as cedants burn through reinsurance coverage, incremental increases in gross losses weigh more heavily on the net figure, with no reinsurance to soften the blow.

Analysts from Morgan Stanley point to other factors suggesting that reinsurers losses in particular are likely to rise, with those who reported early most likely to come back with increased loss estimates.

Equity analyst William Wilt commented: “Evolving information suggests the relationship between ceded and retained losses may be more heavily skewed toward reinsurers than their models had originally contemplated.

“In other cases, the reinsurers may have simply estimate losses too soon – before the enormity and complexity of the loss, coverage issues and legal issues were grasped.”

Wilt noted that few primary insurers have reported both net and gross exposures, drawing a parallel with the lack of disclosure after 9/11.

“The early signs suggest that net-to-gross ratio may be more heavily skewed toward reinsurers than originally anticipated. At a minimum, we were surprised by the relationship,” he said.

Last week saw a number of companies reveal rising loss estimates alongside GoshawK.

On Tuesday (4 October), Lloyd’s insurer Wellington Underwriting plc said it now expected pre-tax net losses from Katrina of $125mn, up from its earlier estimates of $75mn.

Wellington said the revision was caused by higher than first anticipated losses in its property treaty account and the company says it is now assuming a market loss of $50bn which will lead to a $195mn loss on its Lloyd's Syndicate 2020, of which the group has a two thirds share.

It added that it expects to take a $36mn hit on Hurricane Katrina. Like many of its Lloyd's peers, the insurer has abandoned plans to shrink its Lloyd's capacity next year and is forecasting “significantly better rating conditions primarily in the energy, direct property and property treaty reinsurance lines” as a consequence of the losses.

The parent of Wellington’s spun-off reinsurance arm Aspen Re also revealed increases in net losses from Hurricane Katrina, with its estimated exposure more than doubling from the $150mn reported on 8 September to $325-400mn.

On Wednesday (5 October), ratings agency AM Best placed its “A-” financial strength rating of Bermuda- headquartered Aspen Insurance Ltd under review with negative implications as a result.

The ratings agency said the new estimate meant Aspen would suffer “a significant diminution in its risk-adjusted capitalisation” as a result of the hurricane.

It added: “There remains a risk that the company will be unable to re-establish its capitalisation at a level commensurate with its current 'A-' (Excellent) rating.”

AM Best announced on the same day that it had placed the financial strength rating of “A-” (Excellent) and issuer credit rating of “a-” of Bermudian reinsurer Quanta under review.

AM Best's action followed a statement from Quanta that it was looking at retained net losses from hurricanes Katrina and Rita of $40-50mn and $2-8mn, respectively.

In a statement the company said the estimate took into account the receipt of anticipated recoverable amounts under reinsurance and retrocessional agreements and the effects of reinstatement premiums. But the heavy share price fall down to $5.07 (less than half of the 52 week high of $10.25) suggests shareholders – and AM Best - still fear there could be worse news to come from the start-up insurer.

Thursday (6 October) saw US reinsurer Odyssey Re up its pre-tax net losses from Katrina from the $80-100mn it announced on 8 September, to $225mn before tax.

Late on Friday evening, IPC Re became the latest (re)insurer to raise its estimates, from $400-675mn to $650-750mn, at the same time filing a $1.25bn mixed shelf registration.

Meanwhile, the Property Claim Services unit of the Insurance Services Office has released its estimate of insured losses incurred as a result of Hurricane Katrina at approximately $34.4bn, making it the most expensive catastrophe ever for US property/casualty insurance industry.

It added that flooding and wind damage caused by the hurricane was expected to lead to more than 1.6mn claims from policyholders in the states of Alabama, Florida, Georgia, Louisiana, Mississippi and Tennessee.

And catastrophe modelling firm AIR released detailed loss estimates for storm surge and flood damage as a result of Hurricane Katrina of up to $44bn.

Flood damage to the city of New Orleans alone would come in at $22.6bn, it said, while an additional $21.4bn of damage in Louisiana (excluding New Orleans), Mississippi, Alabama, and Florida had been caused by storm surge.

In its Risk Bulletin Katrina report last Monday (3 October), broker Aon suggested: “Part of the difficulty of estimating the insurance industry’s exposure to Katrina is that in terms of losses it was a ‘perfect storm’. The combination of windstorm and flood has led to losses that range from straightforward property, through business interruption (a major component) into liability areas such as environmental impairment and even negligence.”

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