As hurricane Harvey continues to bear down on the Texas coastline, currently packing 110 mph winds as a strong Category 2, almost Category 3 storm, analysts at J.P. Morgan have taken a look at the exposure in the region and estimated that as much as 50% of an insurance industry loss could end up covered by reinsurance.
Our sister site ReinsuranceNe.ws reported earlier that should hurricane Harvey turn into a particularly large loss the percentage could even be higher, according to the analysts.
Loss estimates are notoriously difficult to make and for reinsurance arrangements, including exposed collateralized reinsurance layers, ILS transactions, or even catastrophe bonds, to take such a large share of the industry exposure Harvey would have to impact areas of particularly high insurance density and be a major storm by landfall, we’d imagine.
J.P. Morgan said that it would typically expect around 50% of the insurance industry loss from a hurricane like Harvey to be paid for by reinsurance capital providers.
Swiss Re and Munich Re have the highest exposure of the major four reinsurance firms, at 10%, of which 90% will be retained by each, while Hannover Re is 6% exposed with a 75% retention, and SCOR estimated to be 4% exposed, with a 75% retention.
ReinsuranceNe.ws explains J.P. Morgan’s thinking:
J.P. Morgan analysts combined the potential net loss for Europe’s big four players, and then compared this to its full-year 2017 expected net income and book value estimates.
The analysis shows that a $5 billion insured loss total may result in an average impact to net income of 7% for the four reinsurers, increasing to 13% of net income with a $10 billion loss. Should Harvey drive insured losses of $20 billion, the impact to net income would be an average of 27% for the group, rising further still to 40% of net income in the event of a $40 billion insured loss.
However, these major four reinsurance firms have large catastrophe budgets remaining, after a relatively benign start to the year.
J.P. Morgan says that even a $10 billion industry loss event due to hurricane Harvey, “would be unlikely to exhaust the remaining natural catastrophe budgets across the sector, with a larger loss of $20bn-30bn required to cause an overrun.”
But whatever the final industry loss impact from Harvey, J.P. Morgan said that it is more likely to be an earnings event, rather than a significant drain on reinsurance sector capital.
Analysts at KBW also opined, saying that, “Depending on the storm’s strength at landfall, reinsurers could also face some exposure, particularly from regional cedents with lower reinsurance attachment points. Potentially-exposed reinsurers include Arch Capital, AXIS Capital, Everest Re, RenaissanceRe, Validus, and XL.”
KBW warned that even if hurricane Harvey is just an earnings event it could still make it difficult for some re/insurers to meet future earnings estimates, highlighting that with profitability under pressure it may not take a lot to tip some reinsurers into the red.
But whatever happens, the industry remains so well capitalised and the ILS market remains ready to deploy more capital quickly into the space, meaning that the is likely, “enough capital both within the industry and on the immediate sidelines to preclude significant post-event rate increases,” KBW said.
Important to note, as ever, that until Harvey has struck and the losses can be counted, any estimate is only that and given the rain and flood threat, plus the uncertainty over how long Harvey will meander over the region, it’s very difficult to put any figures to this storm at this time.