‘Tis the season to review insurance risk to hurricane damage
admin | September 14, 2018
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
By the time readers see this piece, the first storm of the season will have hit the US east coast and better estimates of insurable damage will be circulating. At the time of this writing it seems as though the insurable losses will be quite manageable as Florence has been downgraded from Category 4 (on the verge of being a Category 5), to being a Category 2 by the time it hits the shores of the Carolinas. This change has materially reduced the potential size of economic losses in the area and reduces expected claims against insurers. Exhibit 1 summarizes relative exposure across insurance companies to claims in North and South Carolina based on regulatory disclosures as of June 30, 2018.
Exhibit 1: Top 15 insurance exposures in NC and SC
Source: SNL Financial and Amherst Pierpont
Hurricane Florence does not look likely to drive large losses for any of the above insurance companies. As the storm has weakened, less wind damage is likely to occur. Unfortunately, home owners and businesses could be faced with upwards of 4 feet of rain fall before the storm system passes. This limits insurable losses since flooding is typically not covered in home or small business policies. Another mitigating factor for loss absorption is the improving efficiency with which property and casualty (P&C) companies off-load risk to reinsurance companies. Even with the large insurable losses from the 2017 hurricanes, the burden fell more heavily on the reinsurance segment than the front-line P&C insurers. Companies like Aspen Insurance (AHL: Baa1 neg/BBB+ neg/BBB) and Validus Holdings paid out on large claims in Texas and Puerto Rico. Both companies suffered subsequent negative ratings pressures, with Validus sold to AIG in July, and Aspen recently bought by private equity firm Apollo Global Management.
In most cases during storm season, spreads for P&C firms widen with each approaching storm by 3-10 bp, but then rally back to pre-storm levels once the losses can be better estimated. More importantly for the P&C firms, each passing season that insurable events that occur presents an opportunity to reprice policy premiums, which is a positive consideration for the industry. With such positive pricing powers in a captive market, we think it supports a “buy the dip” approach with each approaching storm.
Lastly, as we look beyond Florence and consider which P&C companies could still face losses in the Gulf coast and the lower Atlantic coast, please refer to the following table as a guide, and not a predictor of losses.
Exhibit 2: P&C exposure, geographies include AL, FL, GA, LA, MS, NC, SC, TX
Source: SNL Financial and Amherst Pierpont
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