Even an extreme $40 billion scenario for property/casualty insurance industry losses from Hurricane Sandy would not drive material rating changes for insurers, analysts at Fitch Ratings said today.

In a report providing a sensitivity analysis of the event for 10 individual insurers with the largest potential exposure to the event—under both $20 billion and $40 billion direct insurance loss scenarios—Fitch reveals that applicable catastrophe reinsurance would kick to significantly soften the blow to surplus for several large companies.

Before reinsurance, direct losses estimated by Fitch for Allstate Insurance Group, Liberty Mutual Group and Erie Insurance Group under a $40 billion industry loss scenario, based on their market shares in impacted personal and commercial lines and states, would exceed 20 percent of surplus, according to a table in the report.

But while the severe-loss scenario would put Allstate’s direct losses at $3.6 billion, the actual net retention for the group—after reinsurance—is $500 million, or roughly 3 percent of surplus. Similarly, Liberty and Erie have $650 million and $350 million retentions.

During a teleconference presented in conjunction with the report, Fitch Analyst and Senior Director Brian Schneider noted that the industrywide $40-billion scenario would approach Katrina loss levels, and does not represent an actual Fitch forecast of direct insured losses.

“The range of loss scenarios was done for purposes of sensitivity analysis only,” Schneider emphasized.

“As insured losses expand, insurers’ catastrophe reinsurance protection will offset the significant direct losses,” he said.

“Overall, Fitch does not anticipate material rating action on a broad cross-section of insurers as a result of losses from Hurricane Sandy,” he said, noting that the insurance lines affected by the storm “are generally dominated by larger insurers with significant financial strength” and that ratings already contemplate catastrophe losses.

James Auden, managing director, noted that Fitch focused mostly on the high-end catastrophe modeler estimates of $20 billion in direct losses to analyze the storm impact on individual insurers and the industry. But given the high degree of uncertainty, the rating agency also looked that the remote $40 billion scenario.

Contributing to the uncertainty, he said, are unique claims challenges, such as storm surge in New York, New Jersey and Connecticut, “creating questions of whether losses are wind or flood,” and flooding in commercial business centers like lower Manhattan complicating the picture for business interruption losses.

Home, Business Detail

Fitch’s written report describes the homeowners and commercial business insurance coverage considerations in detail.

For the industry, Auden said that a $20 billion insurance loss would represent less than 4 percent of industry surplus on a direct basis. The report notes that after reinsurance, the impact is reduced to 2.7 percent of surplus.

“Capital adequacy measures were strong for the industry previously, and would not be substantially different at year-end 2012 from the prior year,” he said.

Turning to profit and pricing impacts, Auden said the industry was exhibiting “sharp profit improvement” through nine months as a result of premium rate increases for nearly all segments and lower catastrophe losses.

Sandy losses of $20 billion would push Fitch’s full-year combined ratio forecast up to 104, three points above a previous estimate of 101. It would rise to 107 under the $40 billion remote scenario, with more losses ceded to reinsurers outside the United States, Auden said. “Capital could shrink modestly” under that higher-loss scenario, he said.

“Looking forward, the experience from Sandy may help sustain insurance pricing momentum that is expected to continue into 2013,” he said, adding that if 2013 is an average catastrophe year, it could come in at about a breakeven (100) combined ratio given those price levels.

That would put underwriting profits for next year below those achieved in the prior hard market, he said, echoing a conclusion in the report that Hurricane Sandy is not likely to tip the balance to a hard property market or change market underwriting capacity. Still, the prospective underwriting profit picture for an average catastrophe year “would represent a significant improvement from the recent past.”

“The industry’s capital resiliency to withstand a stress loss scenario combined with our profit expectations contribute to Fitch’s continued stable rating outlook for the U.S. property/casualty sector,” the firm said.

The special report, “Hurricane Sandy: Sensitivity Analysis of Insured Loss Scenarios,” is available to Fitch subscribers.