A quarter of reinsurers face operating loss if Matthew is 1-in-50-year event

Hurricane Matthew will represent a real test of reinsurers’ exposures and resilience as it has the potential to erode some of the global reinsurance sector's excess capital, according to a report by S&P Global Market Intelligence.

Hurricane Matthew has passed through Haiti, the Dominican Republic, and Cuba and is currently passing through the Bahamas on course to hit the central east coast of Florida with category 4 strength on the Saffir Simpson Hurricane Wind Scale.

Matthew has already caused significant economic losses and more than 100 deaths in the Caribbean. In particular, Haiti has suffered its largest catastrophe-related losses since the earthquake in 2010.

Nevertheless, S&P analysts do not expect the reinsurance sector's overall capital position to deteriorate below the triple-A level (where it stood at the end of 2015 with an estimated redundant capital adequacy of $26 billion) even if Matthew proves to be a much more severe loss event than Hurricane Katrina, with a return period of 100 years.

Reinsurers judge their risk exposure, in part, by considering the return period of different events – a hurricane of the magnitude and economic impact of Katrina, for example, is considered likely to occur every 35-50 years.

The return period for Hurricane Matthew will not be clear until it has passed and the claims are in but, S&P says, if Matthew proves to be at least a 1-in-20-year loss event, earnings, capital adequacy, and ratings will come under pressure at some of the more exposed reinsurers.

For the London market players and the mid-sized global reinsurers, capital adequacy is likely to change by one category on an aggregate basis if Matthew is larger than a 1-in-20-year loss event, the rating agency said.

If Matthew turns out to be a 1-in-50-year loss event, the sector's pre-tax profit would fall by an average of about 95%, and its combined ratio could deteriorate by 13 percentage points. About one quarter of rated reinsurers would likely suffer a net operating loss for the year, according to the analysts.

As Matthew moves parallel to East Coast, potential financial impact on the US property/casualty industry could be huge, according to AM Best.

Hurricane Matthew is running nearly parallel with Florida’s Atlantic coastline over the next few days.

Even if the hurricane does not make landfall, its trajectory along the coast is expected to cause severe property damage along the east coast and potentially states north of Florida as well.

Matthew follows Hurricane Hermine, which made landfall as a Category 1 hurricane in the Florida panhandle area, causing heavy flooding and river swelling in a modestly populated area with relatively low insured losses.