Hurricane Michael, which struck Florida and the surrounding U.S states as a Category 4 storm yesterday, will be an “earnings event rather than a capital event for both the U.S primary insurance and global reinsurance sectors,” according to a report by S&P Global.
Michael battered the states of Florida, Alabama and Georgia with sustained wind speeds of up to 155mph, and initial estimates by catastrophe modelling firm CoreLogic put insured losses at between $2 billion and $4.5 billion.
The loss will follow a fairly benign H1 for catastrophe losses, which totalled around $20 billion for 2018, down from $30 billion during the same period in 2017, according to a recent Swiss Re Sigma report.
Nonetheless, S&P expects Hurricane Michael to produce difficulties for some re/insurers, who have already incurred losses from many man-made and natural catastrophes over the third quarter of 2018.
S&P believes that the combined earnings for the U.S insurance and global reinsurance sectors will absorb the total year-to-date catastrophe losses, including those from Hurricane Michael, although the losses may exceed re/insurers’ 2018 catastrophe budgets.
This is unlikely to give any momentum to the muted reinsurance pricing environment at January 2019 renewals, S&P said, although it may provide some support for the rate increases demanded by primary insurers.
Additionally, while the individual impact of Michael will vary by company, credit risk profiles in the re/insurance sector are likely to remain mostly unchanged, resulting in minimal negative rating actions.
Florida is the largest property catastrophe market in the world, and while many reinsurers now retrocede a significant portion of their exposure to the alternative capital markets, reinsurers are still likely to be exposed as Hurricane Michael looks set to trigger aggregate limits.
CoreLogic recently estimated that 57,000 homes on the Florida Gulf Coast could be potentially at risk from Hurricane Michael, with the collective reconstruction cost value totalling $13.4 billion.
S&P also felt that the Florida Hurricane Catastrophe Fund (FHCH) is well capitalised and ready to deal with Michael, as it currently has an estimated fund balance of approximately $14 billion and $2.2 billion available in pre-event bond proceeds from outstanding Series 2013A and Series 2016A debt.
The FHCF could use a portion of pre-event bond proceeds, issue post-event bond, or levy emergency assessments if needed to help pay claims or rebuild its capacity for the next hurricane season, the report said.
For 2018, the FHCH also renewed a $1 billion layer of reinsurance protection through both traditional reinsurance and insurance-linked securities (ILS) at an attachment point of $10.5 billion.
All admitted insurers writing residential property insurance in Florida are required to obtain FHCH coverage, which reimburses them for part of their hurricane losses under residential policies up to a maximum obligation of $17 billion.