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Will Hurricane Florence Rattle Property & Casualty Insurers?

Sapna Bagaria

After being blessed by a quieter catastrophe period, the second half of the year seems to be a different one for the insurers, with Hurricane Florence nearing Carolina coast as a Category 4 storm.   

Several companies are trying to escape the calamity that Hurricane Florence might bring along by shutting shops and factories. As reported by Insurance Journal, among many other companies, Smithfield Foods Inc. , J.C. Penney , Nucor Corp.’s , Pfizer  and Boeing Co.  have suspended operations and shut facilities in the region.

But there is no respite for insurance companies.  Because of the very nature of  their  business operations, which binds them to make good the claims to be brought about by an unforeseen event (as per prior contract between the insurance company and the insured), cannot escape the commitment, if they have exposure to the affected region. The only savior for the insurance companies can be the intensity of the catastrophe. If the magnitude is lower, insurers can pull it off with lesser claim costs.

Intensity of Hurricane Florence

Insurance Journal in one of its news mentioned that Hurricane Florence could become the most powerful storm to hit the area in more than 60 years if its intensity continues. Per AccuWeather, the potential total cost of the storm can be $30 billion.

According to catastrophe modeler Risk Management Solutions, Hurricane Florence may lead to $15 billion to $20 billion in covered losses from wind and coastal storm surge.

Bryan Wood, a meteorologist and storm-damage analyst for Assurant Inc., said that Hurricane Florence will hamper businesses even after it degrades from hurricane status.

Insurers Grim

Pessimism that huge claim costs will dent underwriting profits of the insurers sent shares tumbling down for Allstate Corp. ALL, Travelers Cos. TRV, The Hartford Financial Services Group, Inc. HIG and American International Group, Inc. AIG.

Per Morgan Stanley, Allstate, Berkshire Hathaway and Travelers have a market share of 6.9%, 5.6% and 4.3%, respectively, in the Carolinas and Virginia, an area where the hurricane is expected to create havoc.

Along with insurers, reinsurers (they act as insurers for the insurers in exchange for some premium) will also get caught up in the grind mill, as insurers cede their business to reinsurers to save themselves from the risk. The reinsurers, therefore, are liable to make good the losses sustained by insurers to the extent agreed between them.  Thus, indirectly, reinsurers will also have to bear the brunt of Hurricane Florence.

According to Citigroup analyst James Naklicki in North Carolina, Travelers is estimated to lose about $42 million for each $1 billion in insured losses, followed by Allstate at $37 million, Chubb at $25 million and Progressive at $21 million. Moreover, North Carolina has the highest property and casualty insured premiums of the three states at $16 billion, followed by Virginia at $13.6 billion, and South Carolina at $9.5 billion.

A Benign First Half

In the first quarter, there was the California mudslide, in the next quarter, there were the northeast winter storms followed by a few cat events like rain storms in the United States and Canada. Notably, the third quarter was also a quiet one, just before the incidence of Hurricane Florence. In August, however, Hurricane Lane in Hawaii stormed through but its magnitude weakened to classify it as a Category 3 Hurricane and therefore it is not expected to cause high loss.

Year to date, the Property and Casualty industry has gained 7% compared with the Zacks Composite S&P 500 Index’s gain of 7.7%.    

A Devastating 2017

In 2017, the U.S. property and casualty insurance industry suffered net underwriting loss of $29.3 billion, wider than $5.5 billion loss incurred in 2016 according to A.M. Best. A series of destructive hurricanes had induced disappointing results.

Willis Re report says that the insured loss estimates from major natural catastrophes in 2017 was about $143 billion, the highest since the annual market losses of $120 billion was observed in 2011. And U.S. insurers faced most of the challenges in 2017.

Will Surplus Capital Absorb the Shock?

The Property Casualty industry boasts surplus capital. According to ISO, a Verisk business, and the Property Casualty Insurers Association of America (PCI), private U.S. property/casualty insurers saw investment gains push the industry’s surplus to a new all-time-high of $752.5 billion in 2017, up 7.4% year over year. This war chest should equip the industry to absorb insured losses from Hurricane Florence, without letting it impact underwriting gains.

Losses May Lead to Firming of Insurance Rates

While on the face of it, catastrophe loss looks devastating, it plays a catalyst in raising insurance pricing. Generally post cat losses, the most affected insurance lines witness an increase in premium rates, which is good for insurers.

To put it in perspective, after suffering high cat loss in 2017, Commercial insurance prices saw a spike for the third quarter in a row. The rate hike started in the fourth quarter of 2017.

This is a welcome development after the industry saw soft market conditions for many years prior to 2017.

Soft market conditions are not very profitable for insurers as insurance pricing and profitability remains low. Because of huge surplus, stiff competition exists, which leads to relaxation of underwriting discipline. This doesn’t bode well for insurers’ profitability.

On the other hand, a hard market is one where insurance rates are rising, there is less competition and it is favorable  to make profits for an insurance company.

Rising Interest Rates Another Positive

The increase in Fed funds rates is another positive for the insurance industry, which had been suffering from low returns on its investment portfolio due to near zero interest rates for a prolonged period. With last month’s rate hike, Fed funds rate stand at 2% now. There is expectation of two more rate hikes for the rest of 2018. For 2019, interest rate is estimated to be 3.1%, up from 2.9% projected at its May FOMC meeting, and reach 3.4% at 2020 end. These trends bode well for insurers’ investment income. The industry’s investment income increased by 5.2% in 2017 and the uptrend should continue.

To sum up, we believe that increase in investment income coupled with growth in premium  from rate hike, should more than offset the loss from catastrophes, leading to an overall profitable scenario for the insurers.

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