Carnival Cruise Line Disaster Stings Insurers and Reinsurers

Carnival Cruise Line Disaster Stings Insurers and Reinsurers

On 13 January, the cruise ship Costa Concordia, owned by a subsidiary of Carnival Corporation & plc (A3 stable), ran aground and capsized off the island of Giglio, Italy, resulting in the deaths of 13 passengers with another 20 passengers still missing. While the cause of the accident is still under investigation, the insurance and reinsurance markets are bracing for loss claims that could ultimately reach $1 billion. Following the very heavy loss burden for insurers and reinsurers from an industry-estimated $108 billion of claims from worldwide catastrophic events in 2011,7 the Costa Concordia disaster marks the first major insured loss of 2012, and will result in a drag on first-quarter 2012 earnings for affected firms, a moderate credit negative.

Insured losses from the cruise ship accident are likely to arise from four factors: marine hull insurance, which covers damage to the vessel and whose coverage is an industry-estimated €405 million ($513 million); liability insurance claims from passengers; costs associated with recovery of the wreck; and possible environmental liability claims related to any fuel spillage that occurs. Since the marine insurance market is widely syndicated, the losses will be spread widely among primary insurers that write marine business, insurance syndicates operating at Lloyd’s of London, and global reinsurers. The claims burden could fall more heavily on reinsurers because primary insurers and Lloyd’s syndicates generally carry significant reinsurance coverage on their marine hull and liability risks with relatively low deductibles.

To date, only a couple of firms have publicly commented on potential exposure to the Costa Concordia loss, offering only vague loss estimates given the uncertainty of potential liability claims. Munich Re (financial strength Aa3 stable) has stated that it expects to incur losses in the “mid-double–digit, million euro range,” while Hannover Re (unrated) has stated it believes its share of the loss will be greater than €10 million.
We expect the Costa Concordia losses to be minor in the context of both core earnings power and capital for insurance and reinsurance companies, but the earnings drag from this loss event will impede capital growth for affected firms and contribute to the perception among investors that the reinsurance sector cannot earn its cost of capital. Price-to-book valuations in the reinsurance sector remain well below book value for most firms, a situation that has persisted for more than three years. We continue to believe that the low equity valuations characteristic of the reinsurance sector reduce financial flexibility and increase risk for policyholders and other creditors.