Hurricane Laura could exhaust re/insurer cat budgets: Credit Suisse

Should hurricane Laura generate a low double-digit billion dollar industry loss, of around $12 billion or higher, the looming storm, on top of other recent loss activity, would likely use up re/insurers quarterly catastrophe budgets, analysts said today.

Hurricane Laura is now moving across the Gulf of Mexico and is expected to intensify into a major Category 3 or stronger hurricane by the time it approaches the Gulf Coast of the United States.

Any shift further west in hurricane Laura’s track towards a Houston, Texas region landfall could elevate the ultimate insurance and reinsurance market loss significantly and such a scenario would drain the remaining budgets for losses of many in the P&C re/insurance space it seems.

The Credit Suisse equity analyst team explained that between losses from hurricane Isaias, severe storms across the midwest United States in August including the impactful derecho event, the ongoing California wildfire situation, the port explosion in Beirut, Lebanon and now what looks likely to be a relatively significant hurricane loss on the Gulf Coast, the industry may be draining its resources.

“We estimate 2Q catastrophe loads will come close to being exhausted post hurricane Laura, especially if the storm drifts west and touches Houston, a geography with higher insured property levels,” the analysts wrote in their latest update on the property and casualty insurance and reinsurance sector today.

Forecast models continue to show hurricane Laura shifting west for landfall, with Houston firmly in the cone of a number of respected models, including the ECMWF ensembles.

Hence, a more costly landfalling event cannot be discounted at this time and hurricane Laura poses perhaps the biggest threat of the hurricane season so far in this respect.

Credit Suisse’s analysts note that reinsurance markets have pricing power right now, that should help them to recover their losses in 2021.

On the other hand, the P&C insurance carriers don’t have so much pricing power at their disposal right now, partly due to the profitability of personal auto at this time, which is often bundled with homeowners coverage.

“We do not expect near-term competitive dynamics to push personal auto & home pricing into positive territory (recall, over 50% of home insurance premiums are bundled with auto) so long as hurricane Laura’s industry wide loss level is a manageable earnings (vs. capital) event under $25 billion,” the analysts continued.

“Reinsurers on the other hand and to a lesser extent, commercial-centric insurers, will likely see 2Q catastrophe losses as another sore spot solidifying their need for more pricing in order to lift profits levels from uncertainties related to competing alternative reinsurance capital, social inflation, COVID-19 losses and low interest rates,” they wrote.

Hurricane Laura’s impending approach to the Gulf Coast over the coming days is set to be characterised by uncertainty and also the discussion of big loss numbers, as every major storm at this time of year tends to be.

CoreLogic said today that its data suggests that the potential storm surge from hurricane Laura threatens as many as 431,810 homes representing nearly $88.63 billion in reconstruction cost value, based on the August 25th morning forecast cone of uncertainty.

CoreLogic’s estimate is based on a Category 3 landfall using the cone of uncertainty from this morning’s forecast.

Given there is every chance that cone shifts a little further west, away from the wetlands of Louisiana and more towards Houston, according to many forecast models, while the cone will narrow as greater certainty in the landfall location comes to light, the potential storm surge exposure levels are likely to remain high.

The latest update from the NHC now forecasts a storm surge of up to 13 feet for the areas most heavily impacted by hurricane Laura, that’s up on the maximum guidance of 11 feet made in the earlier forecasts that CoreLogic’s data will have come from.

Things are moving rapidly with hurricane Laura, but a clearer picture of the potential for industry losses should be available tomorrow when we see how much the storm can intensify overnight.

Modelled intensity guidance for tropical storm Laura can be seen below (from TropicalTidbits.com), demonstrating the wide range in model determination from a Cat 4 hurricane Laura to barely a Cat 1:

We’ll keep you updated and you can track the tropics over at our dedicated 2020 Atlantic hurricane season page.