Fitch Ratings: Reinsurer Downgrade Risks Grow

September 27, 2017

Following the devastation caused by Hurricane Maria, 2017 catastrophe losses for the global insurance and reinsurance sectors will exceed $100 billion and could reach close to $190 billion on a pretax basis, Fitch Ratings says.

According to Fitch, losses on this scale, which at the upper end would be the highest on record in a single year, could “weaken capital at some [re]insurers and increase the risk of rating downgrades.”

“Upper-end loss estimates for Hurricane Maria alone are USD85 billion, according to figures published by AIR Worldwide on Monday. This comes on top of USD50 billion in upper-end expected losses from Hurricane Irma, USD25 billion from Hurricane Harvey, USD3 billion from Mexico earthquakes and over USD20 billion in first-half catastrophic losses from various other events,” Fitch said.

“These estimates compare to total statutory capital of the U.S. property casualty industry of over USD700 billion and total global reinsurance capital of approximately USD600 billion. The latter figure includes Berkshire Hathaway and alternative capital sources. There is some overlap in the two capital figures.

“Given the magnitude of the Maria-estimated losses, we now believe that 2017 catastrophe losses will constitute a capital event for a number of [re]insurance companies, as opposed to just an earnings event. However, the industry’s very strong capital levels going into this year greatly limit any risks to solvency.

“As a result, we believe there is heightened risk that combined loss concentrations to these events for several [re]insurers will result in a capital decline for full-year 2017. In some cases, this could result in ratings downgrades if not addressed through capital raises or other mitigating actions.

“Within our ratings coverage, global reinsurers are likely the most exposed to these events, as Fitch’s ratings coverage of local Puerto Rican insurers, as well as Florida specialty companies, is limited. However, some larger diversified primary insurers in the U.S. and select players globally will report material catastrophe losses.

“We have not yet identified any specific [re]insurance companies with disproportionate combined or individual exposures but will continue to gather fuller exposure information as it becomes available. The greatest threat to ratings would be in cases where losses materially exceeded a [re]insurer’s modeled estimates, which could indicate some weaknesses in risk management processes.

“If any rating actions are ultimately taken, they likely would not come until after [re]insurers are able to compile actual loss information. However, if our analysis of exposure data and modeled estimates, especially for Puerto Rico, highlight individual cases where there is significant risk, we would expect to put such companies’ ratings on Rating Watch until more definitive information is available.”

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