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Sandy Aftermath: Fear The Insurance Companies!

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    November 4, 2012

    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.!!!

    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.?


    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.


    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).


    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.


    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.

    Images: Flickr (licence/attribution)

    About The Author

    Reggie Middleton is an entrepreneurial investor who guides a small team of independent analysts to uncover truths, seldom if, ever published in the mainstream media or Wall Street analysts reports. Since the inception of his BoomBustBlog, he has established an outstanding track record