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Hurricane Losses and Forward Looking Insurance Premiums


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http://www.zerohedge.com/news/2017-09-05/barclays-hurricane-irmas-insured-damage-could-be-largest-ever

 

A question for those of you with longer insurance investment experience than I:

 

What is the probability that the losses from Harvey and Irma (if as large as expectedin the above) could be the catalyst needed to reset rates in the insurance market and set up for sound forward pricing?

 

Also, more generally, anyone know what estimated Fairfax exposure is to storm damage in Texas and Florida?

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Working in a P&C insurer, albeit in Scandinavia. Limited experience with US cat events but I've been reading up a bit. From what I've been able to gather it looks like this is less of an insurance event than one might think. Or people estimating are way off.

 

One estimate that claims total claims as low as $6 billion of which most will be paid by primary insurers:

http://www.insurancejournal.com/news/national/2017/08/29/462672.htm. One reason being less than 1 in 5 homes have flood insurance, and many of them are under the federal program.

 

Also, there is a lot of capital chasing yield which is still pushing reinsurance prices lower:

https://www.reuters.com/article/us-reinsurance-pricing/ratings-agencies-see-falling-reinsurance-rates-despite-harvey-idUSKCN1BG1LF

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Working in a P&C insurer, albeit in Scandinavia. Limited experience with US cat events but I've been reading up a bit. From what I've been able to gather it looks like this is less of an insurance event than one might think. Or people estimating are way off.

 

One estimate that claims total claims as low as $6 billion of which most will be paid by primary insurers:

http://www.insurancejournal.com/news/national/2017/08/29/462672.htm. One reason being less than 1 in 5 homes have flood insurance, and many of them are under the federal program.

 

Also, there is a lot of capital chasing yield which is still pushing reinsurance prices lower:

https://www.reuters.com/article/us-reinsurance-pricing/ratings-agencies-see-falling-reinsurance-rates-despite-harvey-idUSKCN1BG1LF

 

I believe you almost can't get flood insurance on the coast outside of FEMA. I actually find that confusing, as you should be able to get insurance on anything at a high enough price, no?  In any event, that leaves a lot of claims for cars, but housing shouldn't be too much (this is me speculating).

 

Lancashire just said their wind insurance won't pay out either, since it is mostly flood as another data point.

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I believe you almost can't get flood insurance on the coast outside of FEMA. I actually find that confusing, as you should be able to get insurance on anything at a high enough price, no?  In any event, that leaves a lot of claims for cars, but housing shouldn't be too much (this is me speculating).

Buffett talks about it a bit here:

. Basically the people who want the insurance are likely to be flooded so it doesn't really work as a financial product. At some point I guess you're just just paying the same amount of the house. If you had a $500k house I'd insure it for $500k, but that doesn't help you much.
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I believe you almost can't get flood insurance on the coast outside of FEMA. I actually find that confusing, as you should be able to get insurance on anything at a high enough price, no?  In any event, that leaves a lot of claims for cars, but housing shouldn't be too much (this is me speculating).

Buffett talks about it a bit here:

. Basically the people who want the insurance are likely to be flooded so it doesn't really work as a financial product. At some point I guess you're just just paying the same amount of the house. If you had a $500k house I'd insure it for $500k, but that doesn't help you much.

 

Yeah, I would think you could still amortize the cost over all the people who want it (i.e., it doesn't happen to every person every year), but the price would probably still be very high.

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As was said Houston appears to be an insurance non event because of the floods...car insurers will be hit though....they are mostly covered....There will be business disruption insurance as well.

 

https://en.m.wikipedia.org/wiki/Hurricane_Matthew

 

Matthew was a category 5 that hit the U.S last year (Irma is a 5) damage to Fairfax was minimal $47m mostly Odyssey Re. People have short memories as the loss of life from Matthew was huge.

 

Fairfax writes a lot of casualty insurance and specialty and Allied appears to be all specialty, Zenith of course is workers comp. If premiums were to rise from Irma which it does not look like they will who knows...you would see Odyssey Re likely enter in a bigger way.

 

Berkshire has not written any cat insurance in over 6 years...Geico will be hit badly though.

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There are a few private options but I'm not sure how the pricing compares to NFIP/FEMA.  Brokers offer flood policies through Lloyds of London syndicates as well as AIG.

 

http://www.privatemarketflood.com

http://www.lexingtoninsurance.com/insights-innovations/current-product-releases/private-market-flood-insurance

 

The National Flood Insurance Program will only cover a residence for a maximum of $250k building and $100k contents. 

 

It is important to note that most the insurance policies that most businesses purchase do usually cover flood, in addition to business interruption and other claims.  So auto and commercial insurance generally pay out on flood events.

 

I believe you almost can't get flood insurance on the coast outside of FEMA. I actually find that confusing, as you should be able to get insurance on anything at a high enough price, no?  In any event, that leaves a lot of claims for cars, but housing shouldn't be too much (this is me speculating).

Buffett talks about it a bit here:

. Basically the people who want the insurance are likely to be flooded so it doesn't really work as a financial product. At some point I guess you're just just paying the same amount of the house. If you had a $500k house I'd insure it for $500k, but that doesn't help you much.

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Fairfax discloses in 2016 Annual report that Odyssey Re did not renew a large quota share reinsurance contract on Florida property so they ceded the reinsurance shared contract for Florida on June 1 2015 as their partner wanted to take all of the risk. They had earned premiums of $71m for 2015 and had to return $17m of unearned premiums on this contract. They also disclose they wrote less higher margin Cat insurance in 2016 because premium rates were too low.

 

If any more hurricanes make landfall anywhere Fairfax will certainly be hit..they paid out $225m last year on events you did not hear about (not including Matthew$47m or the fires in Fort Mcmurray$49m) and made excellent returns at their insurance companies.

 

If the insurance market is to be hit and premiums rise Fairfax will most certainly benefit...this is a lot different position than they were in 10 years ago.

 

 

 

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Matthew was a category 5 that hit the U.S last year (Irma is a 5) damage to Fairfax was minimal $47m mostly Odyssey Re. People have short memories as the loss of life from Matthew was huge.

 

 

Matthew did not make landfall as a 5.  It skirted the coast as a 2 and 3 before making landfall as a 1.  The damage was minimal compared to what a direct hit from a Cat 5 on South Florida would cause.  Total Matthew damage was around $10 billion, while 100-yr South FL estimates are up to $250 billion.  Nearly all reinsurers would impacted significantly. 

 

Most of the public reinsurers disclose their estimated max losses for various cat events in investor presentations.  http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Njc1ODA0fENoaWxkSUQ9MzgzOTI4fFR5cGU9MQ==&t=1

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there's $2.1 Trillion of insured personal residential property in Florida. The state insures about 5% of that (Citizens). Annual gross premiums are about $10B / year.

 

State Farm Florida has the largest share.

 

Then there are the small balance sheet guys who arbitrage the premiums versus the cost of reinsurance. For example, Universal, Heritage, and United are the primary insurers for about 13% of Florida. That's $276 Billion of risk where the primary insurers have equity of $600 million. they can do this because they buy re-insurance.

 

EDIT: At one time Odyssey Re was UVE's largest re-insurer I should re-confirm thisUniversal's largest reinsurer is Odyssey Re (Fairfax) for example. UVE has the highest share of new business also.

 

A real Cat 5 hitting Palm Beach, Broward, or Miami Dade or any other high RE value high population place would cause $100B+ and the industry would lose many years of premium. Those losses will be borne by the re-insurance industry, cat bond holders, and eventually the government. The free lunch is being eaten by the likes of UVE and UIHC and HCI who make ridiculous ROE's writing puts on large swaths of Florida and then buying puts from the re-insurance industry. They have not been tested administratively by a large cat 5 making landfall in their areas of concentration. They'll be fine from a balance sheet standpoint as they seem very hedged.

 

But the re-insurance industry is in for a hurting if this thing really hits.

 

https://www.citizensfla.com/documents/20702/93160/20160331+Market+Share+Report/ab841adc-d5fb-45ca-bff6-8dbd15d5cac5

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FHCF

 

UPCIC’s third-party reinsurance program supplements the FHCF coverage we are required to purchase every year. The limit and retention of the FHCF coverage we receive each year is subject to upward or downward adjustment based on, among other things, submitted exposures to the FHCF by all participants. As of June 1, 2017, we estimate our FHCF coverage includes a maximum provisional limit of 90% of $1,930 million, or $1,737 million, in excess of $595 million. The estimated premium that UPCIC plans to cede to the FHCF for the 2017 hurricane season is $116.6 million.

 

Coverage purchased from third-party reinsurers, as described above, adjusts to provide coverage for certain losses not otherwise covered by the FHCF. The FHCF coverage cannot be reinstated once exhausted, but it does provide coverage for multiple events. The FHCF coverage extends only to losses to our Florida portfolio due to a land falling hurricane.

 

The third-party reinsurance we purchase for UPCIC is therefore net of FHCF recovery. When our FHCF and third-party reinsurance coverages are taken together, UPCIC has reinsurance coverage of up to $2,650 million for the first event, as illustrated by the graphic below. Should a catastrophic event occur, we would retain up to $35 million pre-tax for each catastrophic event, and would also be responsible for any additional losses that exceed our top layer of coverage.

 

And that scary sentence right there is why a company with $1.3B of assets and $400mm of equity should not insure 8% of the residential property value of Florida. $2.6B of losses for a single event is not impossible given their market share ($127B of insured value).

 

this is not how I understood things originally. if UVE (and other similarly miniscule insurers) own the tail risk, that sucks for Floridians / the government.

 

 

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At onetime Berkshire was by far the biggest cat insurer in America...then rates fell for years and Warren Buffett says they have pulled out of the market because of price drops. It is likely that the insurance that is there now is in weak hands that have driven down prices. I agree for Floridians and the U.S government this could be really bad not unlike Houston.

 

If you see prices rise to sufficient levels you will see Berkshire and others enter the market in a big way.

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“Management” of the P+C underwriting cycle is fascinating.

 

This topic is what introduced me to investing in the late 90’s and to a certain company based in Toronto that was in the difficult process of absorbing excesses of yesteryears.

 

It is not of question of if. Hard markets do come and opportunistic players can dominate over the complete cycle. Raises the issue of timing and the value of dry powder.

 

For those interested:

 

https://www.casact.org/pubs/forum/90spforum/90sp063.pdf

 

https://www.casact.org/pubs/forum/93sforum/93sf377.pdf

 

http://media.genre.com/documents/chairmanuwcycles1503-en.pdf

 

The first two references are dated but perhaps their substance resides in the fact that they are still relevant.

 

Those who can’t stand fancy mathematical models will be rekindled by the cycle description coming from Paul Ingrey, an underwriting cycle master who was instrumental with Arch and who lent a hand to Canadian cousins during the “transition” period.

 

Another interesting thing is that even rating agencies are pro-cyclical in a way.

 

Then, who can you turn to, but yourself?

 

The crowd thing. Tough.

 

Science and Art.

 

Enjoy the ride.

 

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Insurance Insider has a brief note on Reinsurers with Florida exposure.  If I had to bet, this storm is going to track east and make landfall up the east coast in South Carolina or thereabouts.  Florida could still receive a direct hit but my bet it turns north sooner.

 

From Ins. Insider:

------------

Nephila and Everest biggest Florida cat treaty writers

Fiona Robertson

 

Nephila, Everest Re and RenaissanceRe were among the leading reinsurers of some of the top Florida insurers last year, according to data collated by sister publication Trading Risk.

 

Reinsurers of the biggest Floridian cedants will bear the brunt of the loss from Hurricane Irma, which looks increasingly likely to make landfall in the Sunshine State as a major storm.

 

Nephila cut back its exposure compared to 2015, but the Bermudian asset manager still captured just over $200mn of premium ceded by 10 leading Florida insurers last year (see chart).

 

This gave it a roughly 8 percent share of the $2.51bn of total premiums ceded by the peer group, including premiums written by Nephila's fronting partner Allianz Risk Transfer.

 

Everest Re was close behind, assuming $196mn of premiums.

 

The study covered 10 top standalone writers of personal and commercial residential insurance business within Florida last year, according to Florida Office of Insurance Regulation (FLOIR) data.

 

These were: Universal Property & Casualty, Citizens Property Insurance, Heritage Property & Casualty, Federated National, Homeowners Choice Property & Casualty, Security First, United Property & Casualty, People's Trust, First Protective and American Integrity.

 

The peer group did not include nationwide player USAA and State Farm, which is known to be a large writer in Florida but no longer discloses market share data to the FLOIR.

 

RenaissanceRe-managed entities, including its DaVinci Re sidecar and Lloyd's syndicate, were a more distant fourth behind the leading reinsurers, on $65mn of assumed premium.

 

This put it behind investors in the various Everglades Re cat bonds, although the insurance-linked securities instruments that were on risk last year have since expired.

 

Clustering above $50mn of premiums were PartnerRe, Aeolus, Validus entities including its AlphaCat platform and fronting carrier Tokio Millennium.

 

Other top-15 writers included Sompo International and its Blue Water platform, Markel, MS Amlin and Chubb Tempest Re.

 

Both Swiss Re and Munich Re were underweight, with the former assuming $30.0mn of premiums from the top 10 cedants and the latter just $1.1mn.

 

Hannover Re was also underweight compared to its broader market share in the cat market with $23.1mn of assumed premiums.

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"In 2015 OdysseyRe did not renew a significant property quota share reinsurance contract covering risks in Florida following the cedent’s decision to retain all the risk associated with that contract. Consequently on June 1, 2015, OdysseyRe returned the remaining unearned premium associated with this contract to the cedent, which decreased each of gross premiums written and net premiums written by $17.8 in 2015. Net premiums earned associated with that contract during 2015 was $71.7 prior to cancellation. Excluding the impact of the cancellation of this contract, gross premiums written, net premiums written and net premiums earned decreased by 1.7%, 0.6% and 2.7% in 2016, principally reflecting decreases in the Latin America and London Market divisions. Net premiums written and net premiums earned in 2016 also reflected the impact of additional purchases of property catastrophe excess of loss reinsurance at favourable pricing, which is expected to significantly mitigate the impact of small to medium-sized catastrophe events on OdysseyRe’s U.S. and international operations."

 

 

 

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At onetime Berkshire was by far the biggest cat insurer in America...then rates fell for years and Warren Buffett says they have pulled out of the market because of price drops. It is likely that the insurance that is there now is in weak hands that have driven down prices. I agree for Floridians and the U.S government this could be really bad not unlike Houston.

 

If you see prices rise to sufficient levels you will see Berkshire and others enter the market in a big way.

 

Interesting, I'd missed that. Berkshire went from 0% of my companys (scandinavian) reinsurance program to being the single largest (10%) provider last renewal. So they seem to have an opinion on where specifically prices are too low. They might be the smart money in this area.

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Thought it would be worth sharing the below article, written by Michael Lewis for the Times after Katrina. A little long, but some very interesting insights.

 

Mainly talks about the creation of catastrophe bonds and how the pricing works (on a very high level of course).

 

http://www.nytimes.com/2007/08/26/magazine/26neworleans-t.html?pagewanted=print

 

Hope you enjoy!

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Thought it would be worth sharing the below article, written by Michael Lewis for the Times after Katrina. A little long, but some very interesting insights.

 

Mainly talks about the creation of catastrophe bonds and how the pricing works (on a very high level of course).

 

http://www.nytimes.com/2007/08/26/magazine/26neworleans-t.html?pagewanted=print

 

Hope you enjoy!

 

 

Great article.  Thanks for posting. 

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