Insurers, Reinsurers Can Handle Hurricane Michael Losses: Fitch
The property/casualty re/insurance industry should be able to absorb the losses from Hurricane Michael, on top of losses from Hurricane Florence, as capital remains very strong, according to Fitch Ratings.
Hurricane Michael will push 2018 closer to a more normal catastrophe loss year, following a relatively benign first half of 2018, Fitch said.
But just as the industry proved resilient following the record catastrophe losses in 2017, individual (re)insurer ratings are unlikely to face adverse impacts solely from Michael, Fitch said.
Hurricane Michael proved to be more of a wind event than flood. The storm’s path contrasts with Florence, which lingered over the Carolinas dumping tremendous rainfall over several days, which created considerable flood losses.
Given its likely higher wind-related losses, Michael’s private insurers will bear a greater burden from Michael than Florence, where most of the significant flooding loss is uninsured or covered by the National Flood Insurance Program (NFIP).
Corelogic provided a pre-landfall insured loss estimate of $2.0 billion to $4.5 billion, of which less than $0.5 billion is expected from storm surge. This estimate also indicated that Michael will be more of a residential ($1.5 billion to $3.0 billion) loss event than commercial ($0.5 billion to $1.5 billion), with the vast majority of loss in Florida and much less in Georgia.
Catastrophe modeling firm Karen Clark & Co. estimates that private insured losses from Michael could approach $8.0 billion.
According to Fitch, insurers should be well positioned to absorb losses of this magnitude. The top five primary personal/commercial lines insurers in Florida based on 2017 direct premiums are: Citizens Property Insurance Corp. Universal Insurance Holdings Inc., State Farm Mutual Insurance Group, Tower Hill Group, and Federated National Insurance Group.
Florida specialty insurers are likely to have considerable gross losses, but typically have considerable external reinsurance. Fitch said these reinsurance programs performed well following the more costly Hurricane Irma event in 2017. As such, Florida specialty writers’ losses from Michael should not exceed reinsurance coverage limits.
While incurred losses from the storm may rise from initial estimates as claims adjusters reach customers, Michael appears likely to generate ultimate losses below the $13.0 billion (2017 dollars) insured loss from Ivan in 2004. While Ivan also hit the Florida panhandle (with somewhat less intensity as a strong category 3), it made landfall in a more populated area near Pensacola Florida and Alabama, west of where Michael struck.
Given the significant use of reinsurance by Florida primary companies, global reinsurers will have exposure to losses from Michael. The top five reinsurers of Florida business in 2017 by assumed premiums (excluding the Florida Hurricane Catastrophe Fund) were Munich Reinsurance, Everest Re, Lloyd’s of London, Tokio Marine, and Allianz SE.
However Fitch said it does not expect the storm to serve as a catalyst for reinsurance rate increases given how muted pricing increases were following the much larger 2017 second half catastrophe loss events.
(Regarding reinsurance pricing going forward, analysts at Morgan Stanley believe Michael and Florence, along with other recent events including lingering loss revisions from Irma and a series of global catastrophes (Typhoons Jebi and Mangkhut, Indonesia earthquake and tsunami) “should support pricing, incrementally.” The recent United Nations Intergovernmental Panel on Climate Change (IPCC) report could also heighten the perception of natural catastrophe risks, Morgan Stanley said.
KBW’s Meyer Shields said that even if CoreLogic’s $2.0-$4.5 billion insured Hurricane Michael loss estimate proves somewhat low, he is confident that most primary insurers can readily absorb their net losses. As for reinsurers, Shields “strongly doubts” that year-to-date industry-wide catastrophe losses will disrupt “orderly and modestly soft January reinsurance renewals.”)
Fitch also said that the Insurance Linked Securities (ILS) market is not expected to be materially exposed to Hurricane Michael. Collateralized reinsurance and ILS funds that participate on lower layer quota share reinsurance or retrocession agreements with cedants that were particularly exposed to the region would be the most likely source of potential modest loss in the ILS market.