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Standard and Poor's says earthquake will erode insurers' earnings, but ratings well supported; warns of rising premiums and reinsurance costs

Standard and Poor's says earthquake will erode insurers' earnings, but ratings well supported; warns of rising premiums and reinsurance costs

See full statement below from Standard and Poor's.

Standard & Poor’s Ratings Services said today that yesterday’s Christchurch earthquake places further downward pressure on the earnings of the general insurers in New Zealand, but the capital strength and extensive reinsurance protection of major general insurers would limit negative rating pressure at this stage.

The scale of the event in terms of loss of life and damage to property in a significant urbanized centre–Christchurch is New Zealand’s second-largest city–is unprecedented for the region in recent times. While still very early to accurately assess, we would expect the insurance loss to far exceed that of the September 2010 Christchurch earthquake, which currently stands at around NZ$5 billion, and add to the general insurers' recent major flood losses in Australia.

Major insurers have already released guidance around exposure to the event and earnings impact, which while modest, does contribute to ongoing lackluster earnings for the sector. Suncorp Group Ltd. (core operating subsidiaries including Vero insurance New Zealand Ltd. rated A+/Stable/--) has advised of reinsurance cover to limit its New Zealand exposure to NZ$60 million, while Insurance Australia Group Ltd. (IAG: core operating subsidiaries including IAG New Zealand Ltd. rated AA-/Stable/--) has advised of reinsurance cover to limit exposure to A$40 million. In both cases, however, the earnings outlook has deteriorated through claims cost and significant cost to reinstate reinsurance cover. Despite earnings pressure, the ratings remain supported by the general insurers' capital strength, reserve adequacy and reinsurance protection, although the frequency and scale of these catastrophe events has eroded some financial flexibility at the current rating level.

Key exposures will be borne by the Earthquake Commission (EQC, AAA/Stable), which will meet the first NZ$1.5 billion of its eligible residential exposure, with substantial reinsurance protection beyond that. Additionally, major global reinsurance players will bear the majority of insured exposure to the event.

In our ongoing assessment of the Australian and New Zealand general insurance industry, Standard & Poor’s will consider the claims cost and reinsurance cost of these events, offset against the material upward premium-rate pressure, especially in personal lines, which may contribute to improved underlying earnings. We will also assess the availability and cost of reinsurance protection in future. Reinsurance capacity has been ample in recent years, but we are now moving from a buyers' to a sellers' market, in view of these catastrophic events. As a result, the cost and availability of reinsurance cover may not be as attractive as before.

And see Moody's statement below:

Moody's Investors Service says there is no immediate rating action on the rated New Zealand or Australian issuers as a consequence of the latest Christchurch earthquake.

Tuesday's earthquake in Christchurch, New Zealand, has tragically claimed some 75 lives, although scores still remain unaccounted for. In addition, thousands have been evacuated, seeing their homes and businesses destroyed. The extensive rescue operations have involved all of the region's emergencies services teams, with national and international emergency teams providing assistance due to the scale of the devastation.

Overall, we believe the immediate consequences of the earthquake -- and likely direct consequences over time to rated issuers -- are clearly negative but do not pose immediate ratings threats. The most likely area where ratings pressure might develop over time would be the banking sector, but would depend on the way in which the New Zealand economy recovers from this event. This will be considered in our pre-existing rating review of the major New Zealand banks.

INSURANCE SECTOR

At this point, reports indicate substantial property damage. As in September 2010, New Zealand's earthquake commission disaster fund will cover the bulk of the damage to domestic properties. Provided they have been insured, claims for amounts in excess of the values insured by the government-sponsored scheme will be covered by private insurers.

"Insurers' exposure to the earthquake will therefore be limited to amounts which exceed the coverage of the government-sponsored scheme and the coverage for commercial properties," says Wing Chew, a Moody's VP-Senior Analyst.

The full extent of the damage and cost to insurers is unclear at this point. There is a possibility that this earthquake may be considered an aftershock and therefore would not constitute a new event. This would have clear, favourable implications for a company like Suncorp (A1/stable) which will likely experience additional losses that could be reinsured in full, if this latest earthquake is considered to be the same event as the one that occurred in September.

If yesterday's quake is considered a separate occurrence, Suncorp's reinsurance arrangements, which are good to end of June, will limit the cost to NZD60 million, and any loss (as yet undetermined) above the attachment point will be borne by the reinsurers.

This latest earthquake will erode the remaining balance that Suncorp has set aside as an annual allowance for natural disasters and could dampen profits forecast for the second half of 2010/11 financial year.

Most of the exposures of QBE (A3/stable) are likely to be commercial rather than residential, and the net loss from the September earthquake was within their 2010 allowance for major events. In respect of their New Zealand exposures, QBE still has in place a combination of treaty and facultative covers to limit its exposures to large property losses. Under the new treaty arrangements for 2011, QBE's main worldwide catastrophe cover attaches at USD200 million, and the insurer has set aside an annual allowance for losses below the attachment point.

In the case of QBE, the January Queensland and Northern NSW floods and this latest earthquake are well covered by the USD1.5 billion annual allowance for large property losses and catastrophic events.

Given the large number of claims following the September earthquake, additional damage to buildings already earmarked as a total loss may not result in additional claims costs. The costs of this latest earthquake to insurers would mostly be from damage to buildings not affected by last year's quake and additional damage to buildings affected by the September event.

"In light of Suncorp's extensive reinsurance cover and QBE's substantial annual allowance for catastrophic events, we do not anticipate any negative rating action related to the New Zealand earthquake", concludes Chew.

CORPORATE SECTOR

In the corporate and infrastructure sectors, Moody's rates four issuers: Transpower New Zealand Ltd (Aa3/stable); Vector Ltd (Baa1/stable); Telecom Corporation of New Zealand Ltd (A3/stable); and Air New Zealand Ltd (Baa3/stable).

"The earthquake has no immediate impact on the ratings of these four issuers," says Terry Fanous, a Moody's Senior Vice President. "But we will monitor developments to gauge the extent to which the event will cause any ongoing weakness in their underlying performance".

BANKING SECTOR

On the banking side, Moody's ratings on New Zealand's major banks -- ANZ National Bank Limited, ASB Bank Limited, Bank of New Zealand, Westpac New Zealand Limited (Aa2 long-term senior unsecured debt & deposit ratings for all, and satnd-alone bank financial strength ratings of C+ which equate to baseline credit assessments of A2) -- are currently on review for possible downgrade for reasons unrelated to the earthquake losses.

"Given that the major banks' ratings are already on review, the impact of the earthquake alone will not lead to further rating actions at this stage", says Marina Ip, an Assistant Vice President at Moody's Sydney office.

"Our initial estimates suggest that the major banks have a fair degree of flexibility to accommodate earthquake damage-related losses. First, their exposure to Christchurch averages only around 10% of their New Zealand loan portfolios. Second, the major banks have the flexibility to increase provisioning if required, by lowering the dividends paid to their Australian parent banks, which will allow them to retain more profits to reinforce their capital bases", explains Ip.

The previous earthquake (on 4 September 2010) resulted in minimal impact to the major banks' loan portfolios, but the devastation caused by Tuesday's earthquake is far greater, and the and scale of business disruption likely to be far more pronounced.

"From a rating perspective, we remain particularly watchful with regard to the secondary effects of the earthquake on economic activity and the flow-on impact to major bank earnings and asset quality", says Ip. "This will now become part of the issues we are considering in the pre-existing rating review".

(Update adds Moody's statement).

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3 Comments

I wonder: does the issue of whether the event is considered an aftershock or a new event have any potential to draw out or delay claims administration?

Kate, dunno about delaying or drawing the claims out, the insurers are arguing about it already and this article suggests they're ducking for cover, in other words no delay, but zero. http://www.smh.com.au/business/classification-of-quake-worth-billions-in-claims-20110223-1b5p0.html

The experts have been saying that it is on a different fault and is a different earthquake, and will have it's own series of aftershocks. Therefore I believe it should be treated as a sperate event. However I guess anything can be twisted. It was likley caused as a result of the plates movement from the first earthquake, but then again earthquake result  from other plate movements, so you could say all earthquakes have some relation to one another.

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