Floods to hit RSA and Aviva harder than Direct Line, says UBS

UBS has estimated net losses of £150m to £308m from storms Desmond, Eva and Frank at RSA Insurance, Direct Line and Aviva, equivalent to 3%, 2% and 1% of market caps respectively.

The bank noted that KPMG has put the economic cost at £5bn and insured losses at £1.5bn from the first two of the three December storms.

“Given elevated water levels, we assume a further £1bn potential loss from the third storm (albeit this carries a high degree of uncertainty),” said UBS.

It said all three insurers have reinsurance protection but at varying levels and with different ‘hours clauses’.

This refers to the period of time during which separate weather events are considered a single claim for the purposes of retention.

“The third storm is interesting as it hit beyond the hours clauses at RSA and Aviva, meaning that the retention layer will be incurred again,” said the bank.

UBS pointed out that after the December 2013 storms, which saw multiple weather events over a number of weeks, the average ‘hours clause’ on reinsurance contracts increased from 168 (7 days) to 504 hours (21 days).

It noted that storm Desmond started on 6 December, with Eva on 25 December and Frank on the 30th, meaning the third storm began 24 days after the first one.

UBS said that while Direct Line has a 30-day hours clause, RSA and Aviva both have the industry average of 21 days.

“Consequently, we expect these companies to incur double retention layers.”

At 1010 GMT, RSA shares were down 2.9% to 414.20p, while Aviva was 3.6% lower at 497.40p and Direct Line was down 2.7% at 396.70p.