Irma Analysis: Insurer Financial Stress Unlikely If Early Loss Estimates Hold
Before Hurricane Irma made landfall in south Florida on Sunday morning, analysts were assessing the potential damage to property/casualty insurer and reinsurance balance sheets and earnings.
On Friday, Fitch Ratings noted that if Irma were to produce insured losses greater than $75 billion, or if another significant hurricane struck Florida following Irma, some insurers and reinsurers participating in the Florida market "could experience notable financial strain."
AIR's estimates includes wind and storm surge damage to onshore residential, commercial, and industrial properties and their contents, automobiles, and time element coverage. They do not include losses paid out by the National Flood Insurance Program, losses to uninsured properties, losses to inland marine, marine cargo and hull and pleasure boats, and losses to infrastructure.
Meanwhile, however, AIR Worldwide released a revised set of estimates falling short of Fitch's extreme scenarios on Sept. 11, putting potential industry insured losses that might result from Hurricane Irma's wind and storm surge in the United States in the $20 billion to $40 billion range. The range of estimates is based on the National Hurricane Center's Sunday, Sept. 10, 5:00 p.m. EDT forecast advisory for Irma.
On Saturday, AIR Worldwide had released a wider range of estimates based on an earlier NHC forecast. But even that range—$15 billion to $50 billion for U.S. wind and storm surge insured losses and another $5 billion to $15 billion for the Caribbean, with a high-end of $65 for both regions combined—still fell below the more dangerous scenarios that Fitch said would drive financial stress.
At those levels, the market is well-equipped to handle the losses, Fitch said.
But the big question prior to landfall as a Category 4 in the Florida Keys was whether such estimates would hold with projected paths having changed from the east coast to the west coast of the state several times late last week. Even as the storm weakened to the Category 2 and headed north on Sunday, it spawned tornados and power outages along the way with the potential for 15 foot storm surges in some areas further complicating forecasts.
Midday on Sunday, another catastrophe modeling firm, RMS, forecast a 10 percent chance of insured wind losses from Irma exceeding $60 billion. The estimate, based on a range of the storm's possible west coast tracks indicated by RMS's proprietary HWind forecast product, does not include contributions from storm surge nor post-event loss amplification (PLA).
According to an RMS blog item by hurricane expert Tom Sabbatelli, the range of possible scenarios feature some that have storm surge contributions to the insured loss of up to 30 percent and PLA inflating insured loss by up to 15 percent.
Fitch, assessing the extreme $75 billion scenario it posited on Friday, or back-to-back hits from two major storms, said that specialist property writers could endure the most severe financial strain if those should come to pass, followed by some segments of the global reinsurance market. Significant reinsurance losses could also impact catastrophe bonds and collateralized reinsurance structures, Fitch said.
Separately, Standard & Poor's, in a report titled, "No Respite For Re/Insurers as Hurricane Irma Prepares To Give A Big Jolt," noted that unlike insured losses from Hurricane Harvey, Irma losses would result in a capital event for insurers and reinsurers.
"Strong capitalization will help mitigate the impact, but Irma will likely stress-test not only the re/insurers but also the staying power of third-party capital," said S&P Global credit analyst Hardeep Manku. "Regional pricing is also likely to harden, but the impact on global re/insurance pricing is debatable," Manku added.
According to S&P, 13 natural catastrophe bonds could be at risk of triggering or incurring a reduction in the retention layer from Hurricane Irma.
In a separate report, analysts from Assured Research constructed a probable maximum loss curve using data found in the Florida Hurricane Cat Fund (FHCF) 2017 ratemaking report that was filed with Florida regulators earlier this year. While gross losses of just over $70 billion represent a 1-in-250 year event on their Florida PML curve, or a 0.4 percent probability, Irma losses could be higher, they stated, referencing AIR estimates of a repeat Hurricane Andrew veering slightly off course. On the anniversary of Andrew, AIR had noted that a reimagined Andrew landfall closer to Miami would produce $138 billion in losses.
"But let's remember that Hurricane Andrew crossed the state and exited Florida after its (near) Miami entrance," the Assured Research report says, noting that weather models weren't predicting a similar exit for Irma—making losses over the 1-in-250 $70 billion threshold seem entirely possible.
Likewise, Fitch noted that the projected path and severity of Irma creates the potential for economic and insured losses to significantly exceed those experienced in Andrew, which created nearly $25 billion (adjusted to 2016 dollars) of insured losses. Fitch cited a Swiss Re projection, taking into account Florida's population and coastal property exposure growth since 1992, putting insured losses at $50 billion to $60 billion today for a path following Andrew's track. Move that track 20 miles north, with a direct hit on Miami and insured losses might range be three-times higher—$180 billion on the high-end of Swiss Re's range.
Both Fitch and Assured Research listed some of the insurers and reinsurers most exposed to Irma losses, with FHCF leading the pack of reinsurers.
Assured Research, summing the assumed reinsurance premiums for reinsurers covering 40 percent of the primary homeowners insurance market, found the FHCF has a 20 percent share of the reinsurance exposure, followed by Everest Re (with 10 percent) and Lloyd's (with about 7.5 percent). The report includes a graph ranking exposures for 21 reinsurers.
Fitch noted that both of Florida's state-sponsored entities—FHCF, on the reinsurance side, and Citizen's on the primary side, are well-positioned to absorb their shares of Irma losses.
FHCF "has a record fund balance of approximately $14.9 billion available to meet claims in the 2017-2018 contract year. These funds combined with proceeds available from past pre-event bond issuance exceed FHCF's coverage limit of $17 billion in 2017," Fitch said.
As for Citizen's, depopulation efforts at Citizens have reduced exposures from a peak size over $500 billion in 2011 to $116 billion, as of July 31, 2017, Fitch said.
"Both entities have accumulated exceptional levels of liquidity over the course of 12 years with minimal hurricane activity. Moreover, Fitch's ratings on the debt of Citizens and FHCF are based on the entities' ability to assess a vast resource base as needed, rather than on their existing levels of liquidity."
The depopulation of Citizens, and a shift of primary insurance exposures away from national writers like State Farm and Allstate, has left Florida property specialists holding roughly a 64 percent share of the Florida homeowners insurance market by Fitch's estimate as of year-end 2016.
Notable specialists include publicly traded companies: Universal Insurance Group, Heritage Insurance Group, Federated National Insurance Company, United Insurance Holdings Group, and HCI Group, which together have a market share in Florida of approximately 25 percent. Although Fitch does not rate these companies, the rating agency believes that "most Florida homeowners' specialists reinsurance programs provide an ability to absorb losses from events up to approximately 1-in-100-years.
"Losses above such levels could go 'over the top' of catastrophe reinsurance programs, Fitch said, also noting the questionable ability of these specialist to be raise capital following large loss events."
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