2018 Losses With Michael Still An Earnings Event, Pricing To Be Unfazed: S&P

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Includes: GLRE, HVRRF, HVRRY, SSREF, SSREY, TPRE
by: Steve Evans

All of the catastrophe-related loss activity witnessed around the globe so far in 2018, including this week's impacts from hurricane Michael, will still be absorbed by the combined earnings of insurance and reinsurance firms, according to Standard & Poor's.

S&P expects that hurricane Michael will be an earnings event, rather than a capital event, for exposed primary insurers and reinsurance firms.

Even though Michael came on the heels of a string of global catastrophe events in the third quarter, S&P says, "We believe that the combined earnings for the U.S. insurance and the global reinsurance sectors will absorb the total year-to-date catastrophe losses, including those from Hurricane Michael."

S&P's prediction, of Michael only being an earnings event, is based on an expected insured loss impact of up to $4.5 billion for the storm.

This will be based on the top-end of the wind and storm surge insured loss estimate that Corelogic gave, however as we noted this was based on pre-landfall experience and may not have factored in all the damage along the path inland as hurricane Michael maintained its strength for much longer than had been anticipated.

But even with another few billion dollars of losses added to that, it is still likely that hurricane Michael will be largely an earnings event, rather than capital, we would suggest. As we wrote October 11, despite being a tremendously intense hurricane Michael is unlikely to move the market.

S&P comments on third-quarter catastrophe activity, saying, "The third quarter of 2018 incurred many man-made and natural catastrophes that we predict will hurt re/insurers' operating earnings. We believe the third quarter will be difficult for re/insurers because we've already seen some of these companies pre-announce their preliminary third quarter catastrophe estimates."

However, on a combined basis, the industry is able to absorb these impacts as well as hurricane Michael, S&P says, although the rating agency does note that there could be outliers, and says "The losses may exceed re/insurers' 2018 catastrophe budgets."

"We expect reinsurers to be exposed to losses from Hurricane Michael because Florida's insurance market is heavily reinsured and the storm could trigger reinsurance aggregate limits," S&P continued, but added that reinsurers operating in the state of Florida "retrocede a significant portion of Florida catastrophe risk to the alternative capital market."

With insurance providers in Florida well reinsured and their reinsurance programs kicking in low-down, while global reinsurers active in Florida are also heavy users of retrocession and collateralized protection, the impacts of Michael will be well-diversified throughout the global reinsurance capital base (traditional and alternative).

As a result, even should Michael prove to be a higher loss than expected, it is still unlikely to be market-moving.

S&P says that it expects that even after all of 2018's global catastrophe loss activity is taken into account (so far) the rating agency expects that reinsurance pricing will remain unfazed at the next renewals in January 2019.

"It's too early to quantify the January 2019 reinsurance pricing renewals, but if 2017 is any indication, year-to-date catastrophes will not likely change the fizzling of the reinsurance pricing momentum the industry saw earlier this year," S&P explained.

But the firm did add that, "Hurricane Michael may provide some support for rate increases demanded by primary insurers."

There may also be a case for some negotiations over reinsurance renewal pricing for exposed Floridian primary insurers, who may bear a disproportionate share of the loss and if they suffer from ongoing assignment of benefit AOB issues, as was seen with Irma, their reinsurers may want to renegotiate terms when it comes time to renew these programs.

This is an example of a more localised reinsurance cycle, which in the softened market is a more realistic expectation of how the market will react to future losses, on a more localised, individual and loss experience dependent basis.

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