Can Property & Casualty Insurers Overcome Wildfire Woes?

Zacks Equity Research

Camp Fire in Butte County, CA that broke out on Tuesday is said to be the deadliest wildfire in history, per CalFire. About 12,000 propeties have been destroyed by the blaze. There have been 63 casualties so far while 631 people are missing. Wildfires in California have wreaked havoc on properties and led to casualties in the past too.  

Per preliminary estimates from Moody’s released in Insurance Journal, losses from the ongoing fires in Northern and Southern California could hover around $6.8 billion, lower than $12.5 billion in insured losses from last year’s wildfires

California is already bearing the brunt of Hill Fire in Ventura County, Nurse Fire in Solano County and Woolsey Fire in southern California that broke out in early November. Per A.M. Best, 2018 losses will be at record levels for California.

Insurers like American International Group, Inc. AIG, The Travelers Companies, Inc. TRV, The Allstate Corporation ALL having exposure in California will have to suffer the impact of the catastrophic events. Per a report by ARTEMIS, excluding the November wildfires, U.S. wildfire industry losses have already cost the insurance and reinsurance industry about $1.78 billion in 2018.

Following the back-to-back wildfires, property and casualty insurance pricing in California could see an uptick.

Insurance Industry Continues to Bear the Brunt

The U.S. property and casualty insurance industry suffered net underwriting loss of $29.3 billion in 2017, wider than $5.5 billion loss incurred in 2016 according to A.M. Best. Unprecedented landfall of hurricanes, Harvey, Irma, Jose and Maria together made 2017 the costliest year in terms of catastrophe loss.

The first half of this year was marked by California mudslide, northeast winter storms, rain storms in the United States and Canada. Swiss Re estimated economic losses in the first half to total $36 billion, a drop from $64 million incurred in the year-ago period and much below the 10-year average of $125 billion. Per ISO, a Verisk business, and the Property Casualty Insurers Association of America, private U.S. property and casualty insurers’ net income more than doubled to $34 billion in first-half 2018 from $15.5 billion in the year-ago period.

Nonetheless, the third quarter of a year, which generally bears the brunt of catastrophes, suffered due to hurricanes Lane and Florence, Typhoon Jebi among others. Per National Hurricane Center's projected track, Florence could be the costliest storm ever to hit the nation. Catastrophe modeller Risk Management Solutions estimated insured losses in the range of $15-$20 billion, stemming from Hurricane Florence.

Colorado State University has predicted a below-normal season this year with a total of 12 named storms, five hurricanes and one major hurricane.

Apart from California wildfire, Hurricane Michael is also expected to take a toll on insurers in the fourth quarter. Insurers RLI Corp. RLI estimates cat loss between $22 million and $27 million, net of reinsurance while AXIS Capital Holdings Limited AXS expects preliminary cat loss between $100 million and $120 million, net of estimated recoveries from reinsurance and retrocessional covers and including the impact of estimated reinstatement premiums for fourth-quarter 2018.

Improved Pricing Comes as a Breather

After witnessing 19 back-to-back quarters of soft pricing market, insurers started to increase prices from the fourth quarter of 2017. Per Insurance Marketplace Realities 2018 by Willis Towers Watson, property insurance rates are estimated to rise 20-25% for catastrophe-exposed risks with recent losses. Per excerpts from Insurance Marketplace Realities 2019 by Willis Towers Watson, rates are expected to increase in the low single-digit to low double-digit ranges across most insurance lines in 2019, except for U.S. workers compensation and international liability programs.

Property and casualty insurers are also taking reinsurance covers to safeguard their profitability.

Insurers Seem Poised to Weather Cat Loss

The insurance industry boasts huge surplus capital. Per ISO and the Property Casualty Insurers Association of America, private U.S. property/casualty insurers saw investment gains push the industry’s surplus to a new all-time-high of $752.5 billion in 2017, up 7.4% year over year.

Improving interest rate environment is also a boon for the insurance industry. Fed Chairman Jerome Powell stated that the economy has strengthened and unemployment level remains low with inflation rate of the Fed’s 2% target, influencing the central bank to continue to implement rate hikes. With the 25-basis point (bps) hike in rate in September, the interest rate now stands at 2.25%. Post the FOMC meeting in November, investors expect Fed to hike rate by another 25 bps in its December meeting that would lead to four hikes in 2018 with expectation of three in 2019 and two in 2020.

Improving rate environment, rate hikes driving premiums, all-time high capital level, lower taxes and prudent underwriting are expected to help insurers post solid results. Per S&P Global Market Intelligence, combined ratio — a measure of underwriting profitability — is estimated to be 99% for 2018, an improvement of 450 bps year over year.

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