This page has been archived and commenting is disabled.

FIRE Burns From Hurricane Sandy - Fear The Insurance Companies, Twice Over - Just Ask the ECB, Greece, Spain & Portugal

Reggie Middleton's picture




 

At the very beginning of the year I was on CNBC commenting on the horrible time the FIRE sector should be expecting. Well, at year end I see FIRE burning amidst all of this Hurricane damage. First reference my warning on the MSM - Reggie Middleton Sets CNBC on F.I.R.E.!!!

No Frames

I then followed this up with You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses! Well, guess what we have in today's headlines?

Insurers Face Tab of up to $20 Billion

Hurricane Sandy may cost the insurance industry up to $20 billion, which would put this week's devastating storm second only to 2005's Hurricane Katrina for insured losses, according to a new damage estimate.  44 min ago

 You see, this is more than just massive property losses for the industry. Remember, how the insurance business model works. Take in premiums, invest them for profits, then take your time paying out any claims. Well, this model only works when you have investment profits and/or underwriting profits. A combination of massive investment losses and underwriting losses, a combined ratio of less than 100 in industry parlance, means...

So, Spain finally gets a bailout, as I pretty much guaranteed in The Economic Bloodstain From Spain's Pain Will Cause European Tears To Rain and The Spain Pain Will Not Wane: Continuing the Contagion Saga. I'd like to draw attention to an excerpt from the afore-linked article...

 we should all see what this means for those insurers on F.I.R.E.?

Untitled_-__euro_insurereUntitled_-__euro_insurereUntitled_-__euro_insurere

Subscriber downloads:

icon Insurer Preliminary Observations (498.08 kB 2011-12-08 10:05:24)

icon Insurer Report_122511 - Professional/Institutional edition (975.49 kB 2011-12-27 11:05:59)

icon Insurer Report_122511 -Retail edition (876.11 kB 2011-12-27 11:04:09)

icon Insurance cos. EU exposure 11-2011 (10.72 kB 2011-11-28 16:20:21)

icon Insurance Cos. Operational Stress (11.92 kB 2011-11-29 10:11:51)

Greece Is Trying To Convince Portugal To Make F.I.R.E. Hot!!!

 I doubt that's the case. In the post Greece's Problem Is Shared By Much Of The EU & Can't Be Solved Through Parlor Tricks, via ZeroHedge, it was noted:

This 'Deposits Related to Margin Calls' line item on the ECB's balance sheet will likely now become the most-watched 'indicator' of stress as we note the dramatic acceleration from an average well under EUR200 million to well over EUR17 billion since the LTRO began. The rapid deterioration in collateral asset quality is extremely worrisome (GGBs? European financial sub debt? Papandreou's Kebab Shop unsecured 2nd lien notes?) as it forces the banks who took the collateralized loans to come up with more 'precious' cash or assets (unwind existing profitable trades such as sovereign carry, delever further by selling assets, or subordinate more of the capital structure via pledging more assets - to cover these collateral shortfalls) or pay-down the loan in part. This could very quickly become a self-fulfilling vicious circle - especially given the leverage in both the ECB and the already-insolvent banks that took LTRO loans that now back the main Italian, Spanish, and Portuguese sovereign bond markets.

Of course, it gets worse... What can't be pawned off to the ECB in exchange for harsh margin calls merely days later has been pushed into insurers. Below is a sensitivity analysis of Generali's (a highly leveraged Italian insurer, subscribers see File Icon Exposure of European insurers to PIIGS) sovereign debt holdings.

image004image004image004

As you can see, Generali is highly leveraged into PIIGS debt, with 400% of its tangible equity exposed. Despite such leveraged exposure, I calculate (off the cuff, not an in depth analysis) that it took a 10% hit to Tangible Equity. Now, that's a lot, but one would assume that it would have been much worse. What saved it? Diversification into Geman bunds, whose yield went negative, thus throwing off a 14% return. Not bad for alleged AAA fixed income. But let's face it, Germany lives in the same roach motel as the rest of the profligate EU, they just rent the penthouse suite! Remember, Germany is not in recession after a rip roaring bull run in its bonds, and I presume the recession should get much deeper since as a net exporter it has to faces its trading partners going broke. Below you see what happens if the bund returns were simply run along the historical trend line (with not extreme bullishness of the last year).

image005image005image005

Companies such as Generali would instantly lose a third of their tangible equity. This is quite conservative, since the profligate states bonds would probably collapse unless the spreads shrink, which is highly doubtful. Below you see what would happen if bunds were to take a 10% loss.

image006image006image006

That's right, a 10% loss in bunds translates into a near 50% loss in tangible equity to this insurer, which would realistically be 60% plus as the rest of the EU portfolio will compress in solidarity. Combine this with the fact that insurers operating results are facing historically unprecedented stress (see You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses!) and it's not hard to imagine marginal insurers seeing equity totally wiped out.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sat, 11/03/2012 - 10:25 | 2943707 Element
Element's picture

Much more useful info there Reggie.

And what people might maybe want to plan for regarding US East coast insurance risk is described within this FSN audio file:

(listen from 9 min 25 secs thru to 11 mins)

http://www.financialsensenewshour.com/broadcast/fsn2012-0825-3.mp3

Note that this prediction was made back on 25th August 2012. i.e. seven significant land-falling mid-Atlantic hurricanes occurred in the mid to late 1950s, within a global weather pattern almost the same as seen for the past couple of years.  

Ignore the cyclicity of that pattern and the reality of two mid-Atlantic hurricane strikes in under two years, at your peril, because historically there could be 4 to 6 more of them to come, if the last global weather cycle like this one is a guide.

Fri, 11/02/2012 - 16:46 | 2942701 Bicycle Repairman
Bicycle Repairman's picture

Also $20B is a low ball figure IMHO.

Sun, 11/04/2012 - 08:41 | 2945874 Bicycle Repairman
Bicycle Repairman's picture

Keep an eye out for more unnecessary bailouts.

Fri, 11/02/2012 - 16:32 | 2942655 rhinoblitzing
rhinoblitzing's picture

RE: Broken Window theory....

Where are the windows manufactured??? Sounds great if we manufactured stuff here - like back in the Good Old Dayz of the USA.. Now you can expect China's GDP numbers to go up as they ship us more toxic drywall and stuff.

RE: Manufacturing Numbers... Thats about all the US Government does these days.... (GDP, NFP, etc...)  Do they count those Labor Census shills workers as Mfg Employees and Government  Workers?

 

Fri, 11/02/2012 - 15:12 | 2942286 IridiumRebel
IridiumRebel's picture

All of these people on the news are bitching about FEMA.....WTF did they expect? "Dah Gubmint aint be da heppin me out?!?!? Where ma gubmint check? Whare ma meals on da wheels?" Hello!!!!!! FEMA will not help you!

Fri, 11/02/2012 - 14:48 | 2942168 Bicycle Repairman
Bicycle Repairman's picture

As pointed out, a favorite insurer tactic is to stall on paying claims and collect extra investment income.  In a ZIRP environment, that tactic is not effective.

In a catastrophe situation, insurers must liquidate a large amount of bonds quickly.  In some cases insurers are allowed to carry bonds on their books at "maturity" value versus market value.  The loss of book value when they sell could be interesting.

Fri, 11/02/2012 - 14:49 | 2942137 Bicycle Repairman
Bicycle Repairman's picture

There have been reports of black mold caused by moisture collecting in people's houses.  I wonder how widespread the phenomenon is and whether or not it will be reimbursable.  If it falls into a gray area and the insurers want to argue, then pile large legal bills onto any reimbursement.

Fri, 11/02/2012 - 14:25 | 2942061 Zero Govt
Zero Govt's picture

Excellent Reggie

Sandy has surely turbocharged your prediction but it was a great call (research) before the storm

any chance you could make your titles more snappy, like replace that sentance on Spain with just 'Spain Pain'

no need to cram half the article into the title me old mate. KISS

Fri, 11/02/2012 - 13:35 | 2941819 dark pools of soros
dark pools of soros's picture

They should say they are broke now ( dig out the real numbers everyone buries these days) and go straight to a bailout.

Hand out end of year bonuses first of course

Fri, 11/02/2012 - 12:39 | 2941578 williambanzai7
williambanzai7's picture

AIG says its too early to assess their exposure to the storm.....

LOL!!!!!!!!

Fri, 11/02/2012 - 14:50 | 2942128 Bicycle Repairman
Bicycle Repairman's picture

It is too early to assess the damages.  One important category of claims is for business interruption.  The claimant gets reimbursed for loss of business due to the storm.  Right now those losses are on-going.  And the estimates of when businesses will resume vary widely.

Fri, 11/02/2012 - 14:52 | 2942193 negative rates
negative rates's picture

This comes on top of a summer of losses where the animals have just come to mkt and have one more week of low prices and its sky is the limit as far as food prices are concerned. And it's a long term fix as the younguns to replace them have yet to be born and raised. it's not just a local problem.

Fri, 11/02/2012 - 14:23 | 2942053 disabledvet
disabledvet's picture

Love your stuff Banzai and Reg is the only other one "on topic" (besides me of course) vis a vis "what's going on." (And that is the only business of the financial media business btw. Not "placing bets on who they're going to kill.") bottom line...I'd love to agree but it's not news that the Federal Reserve is on this thing. Will treasuries sell off because Lower Manhattan/coastal New Jersey have been wiped off the map? Sure. Materially so? I think that's dubious at best. Will there be HUNDREDS OF BILLIONS in damage claims made because of this storm? Yep. Will they be paid out? Yep. But this is no victory for the City or the economy as a whole. This only enflames the attagonists and despairs our friends. The damage this Mayorolity has done to New York simply defies belief. It will take decades to repair the damage.

Do NOT follow this link or you will be banned from the site!