Looks Like A Tough Hurricane Season

[Dinar]

4 minutes ago, Thrifty3000 said:

According to a quick google search:

 

- average home value in Florida: $400,000

- average annual cost of insuring a home in Florida: $11,000 (4 to 5 times higher than national average)

 

So, it looks to me like 1 in 40 homes in Florida can be wiped out every year and the insurers will still turn a profit.

 

There are 8 or 9 million houses in Florida, so if 100% were insured the insurance industry could afford to rebuild roughly a quarter million houses every year.

 

(Disclaimer: All my math is back of the envelope and probably wrong.)

Part of the value in the land, so on the one hand, the rebuilding cost is lower.  On the other hand, massive hurricane causes a massive increase in replacement cost due to instantaneous massive demand for labor and materials.  So yes, for one house replacement cost may be x, but for a million it is NOT 1,000,000x but say 2,000,000x.  

[Thrifty3000]

1 hour ago, Dinar said:

Part of the value in the land, so on the one hand, the rebuilding cost is lower.  On the other hand, massive hurricane causes a massive increase in replacement cost due to instantaneous massive demand for labor and materials.  So yes, for one house replacement cost may be x, but for a million it is NOT 1,000,000x but say 2,000,000x.  

Good point! Thanks

[Thrifty3000]

Here is an interesting thesis from an insurance veteran. Sounds like Milton could be the death knell for several key insurers in Florida if losses exceed $100 billion. #hardmarket

https://iansbnr.com/hurricane-milton-the-end-of-the-florida-insurance-experiment/

 

[Thrifty3000]

^ he says 20 years ago he identified a west to east direct hurricane hit on Tampa bay as the top insurance risk in the country. Rounding out his top 3 risks at the time were a hit on New Orleans (prescient) and a hit on Manhattan (Sandy was close but not worst case). Says Tampa’s downtown will likely be 15 to 30 feet under water. Ouch. 

[rogermunibond]

Multiple home insurer failures- calls out PGR with high Tampa exposure - possible failure for Citizens and FHCF

[Dinar]

20 minutes ago, rogermunibond said:

Multiple home insurer failures- calls out PGR with high Tampa exposure - possible failure for Citizens and FHCF

Could you elaborate?  You expect PGR to fail because of its high Tampa exposure?  Do you know what PGR's Tampa exposure is?  Thank you.

[rogermunibond]

It’s all in the link @Thrifty3000 posted above.  
 

I think the author means smaller local home insurers.  PGR among national insurers has most exposure. 

[dartmonkey]

On 9/30/2024 at 3:42 AM, Parsad said:

 

I think that Accuweather estimate is way higher than what the losses will be.  The $5B number someone provided earlier was far too low, but I think this thing is in the $35-50B range of losses. 

 

A ton of water damage occurred which tends to make losses higher.  But over $100B would be excessive as it missed most major cities.  A few degrees this way or that and I could see it hitting the $100B+ number, but we got a bit lucky believe it or not.  It also weakened dramatically as it hit land, but that meant more rain damage and less wind damage. 

 

Cheers!

There are 2 numbers we often see publicized, one of them being the numbers like the above for Helene, which are toal losses, and the other is a much smaller number, which is insured losses.

 

Helene's total number might easily be $50b, but insured losses are currently estimated as being about $6-12b by reputable agencies like Verisk, AON and Moody's. Every catastrophe is different, but a common rule of thumb is that Berkshire gets 3% of insured losses, and Fairfax gets 1%. That would mean we might guess that Fairfax would be on the hook for as much as $120m for Helene, pre-tax, which would be bad, but not awful. As flooding losses increas, the initial $5b estimate will turn out to be too low, but not far too low.

[Dinar]

20 minutes ago, rogermunibond said:

It’s all in the link @Thrifty3000 posted above.  
 

I think the author means smaller local home insurers.  PGR among national insurers has most exposure. 

Thank you.  I did read the link, but from my knowledge of PGR and the link, I did not see why PGR would fail.  Yes, I think PGR has been trying to cut Florida exposure for a while.  

[Maverick47]

9 hours ago, Thrifty3000 said:

According to a quick google search:

 

- average home value in Florida: $400,000

- average annual cost of insuring a home in Florida: $11,000 (4 to 5 times higher than national average)

 

So, it looks to me like 1 in 40 homes in Florida can be wiped out every year and the insurers will still turn a profit.

 

There are 8 or 9 million houses in Florida, so if 100% were insured the insurance industry could afford to rebuild roughly a quarter million houses every year.

 

(Disclaimer: All my math is back of the envelope and probably wrong.)

 

[Maverick47]

@Thrifty3000  Back of the envelope math is helpful to aggregate the numbers to a state level as you’ve done.  I would just extend the scenario to take into account expenses of the insurance companies, customer acquisition and retention costs, claims adjustment costs, and even the cost to purchase reinsurance from companies like Odyssey of Fairfax and National Indemnity of Berkshire so that the primary companies can stay in business after one or more hurricanes in a given year.

 

First, it would not be unexpected for companies to only be able to pay out 50% of the premiums they collect in a state like Florida.  Their expenses for claims and company management are likely to be near 20% of premiums, and they probably have to pay commission of 10% or more to the agents.  They would probably require a profit load of 10 to 20% to compensate for the risk that they might have to pay many times the premiums they collect in a given year in a bad hurricane year.  They might also have to pay 10 to 20% of premiums to purchase property reinsurance.

 

In a best case view, they might only have 40 to 50% of premiums available to pay all homeowners losses.  Some of the expected losses such as fires, theft and plumbing related water damage will happen every year with or without hurricanes.  And in a total loss of a home, the $400,000 home would need to be rebuilt, but the policy would also pay to replace personal property (contents), damage to outbuildings, fences, sheds, etc, and also pay for loss of use until the home was rebuilt.  In a large catastrophe, rebuilding costs can inflate, making a $400,000 home cost perhaps $100,000 more to replace.  So let’s use close to million for the total loss to a home insured for $400,000, with $300,000 of  personal property, $40,000 of outbuildings, $100,000 for loss of use and another $100,000 for increased building costs also needing to be paid.  The balance to add up to $1 million may be covered by debris removal costs that are also covered, as well as increased costs to rebuild a home to current building codes, since many customers purchase coverage to pay for increased costs associated with these.

 

Maybe half of the state’s loss budget is available for annual hurricanes, with the other half paying for all of the other  causes of loss (fires, theft, water damage, etc).

 

So a company can afford to pay annually perhaps 20 to 25% of premiums for hurricane losses.  With 9 million $400,000 homes paying $11,000 annual premiums, let’s round the collected state premiums  to $10 billion and the industry has a chance to achieve target profitability with annual hurricane losses of 20 to 25% of that, say $2.5 billion in hurricane losses allowable for target profitability to be achieved.

 

Most homes damaged by hurricanes completely are likely to be more expensive homes with ocean views and proximity, so I think it’s fair to say they would cost on average well over $1 million for a total loss, but let’s stick with $1 million.

 

How many homes can $2.5 billion replace in Florida if each home costs the industry $1 million?  

 

Now that we account for coverages beyond the home itself, and subtract annual expenses other than loss dollars alone, as well as losses that happen unrelated to hurricanes, it seems as if the adjusted back of the envelope math says that the industry can afford to replace only 2500 homes per year in Florida as a result of total hurricane losses and still make enough profit to choose to remain in business for the future.

 

If they go 10 years without hurricanes, total hurricane related profit would be $2.5 billion for year or $25 billion in aggregate.  But if in year 11, one or more hurricanes were to destroy only one  half of 1 percent of all homes in the state (1 out of 200) that would be 45,000 homes costing $45 billion to replace, wiping out total profit from almost 20 years of no hurricanes.

 

Now consider that a direct category 5 hurricane hit on Miami could cost the industry $160 billion or more and that single event could wipe out 64 hurricane free years of profits and you might begin to gain an appreciation why most national and multi state insurance companies are reluctant to write much business in the state, and why the state run carrier of last resort (Citizens Insurance) has the largest market share in the state with more than 1 million of the total 9 million homes in the state insured.

 

 

 

 

 

Edited October 9 by Maverick47
Spelling correction.

[UK]

https://www.barrons.com/articles/insurance-stocks-hurricane-milton-8eb294bf

 

It is possible that the storm could inflict $50 billion to $100 billion of losses on the insurance industry if it makes a direct hit on Tampa. Computer models indicate that could happen later this week, leaving insurers to face what has long been considered one of the worst potential scenarios for the industry.

Miami and Tampa/St. Petersburg are the two biggest metro areas in the state. Lloyd’s outlined a scenario earlier this year for a hurricane strike on Pinellas County, where St. Petersburg is located, that could result in insured losses of $134 billion.

Pegging potential losses is difficult at this stage. But in a tweet Tuesday, Enki Research said that while the economic impact will depend on the exact course of the storm, most estimates cluster around $60-$75 billion, with some as high as $150 billion. If the storm strikes south of Tampa, as models say is possible, losses could be lower.

So why are the stocks higher Tuesday? They were hit hard Monday: Reinsurers Everest Group and RenaissanceRe Holdings fell about 9% and primary insurers Chubb , Allstate , Progressive and Travelers were off 3% to 4%. 

The stocks have arguably priced in sizable losses. Some 36 stocks covered by KBW analyst Meyer Shields lost a collective $50 billion of market value.

 The selloff also could have reflected profit-taking after what has been a strong year for P&C insurance stocks. Many were up 30% or more before trading began on Monday.

Tuesday afternoon, reinsurers Everest Group was up 0.7% to $375.32; RenaissanceRe was 3.7% higher at $263.28; and Arch Capital gained 2% to $109.94. Among primary insurers, Chubb was 1% higher at $280, while Allstate was up 0.7% at $182.59. Berkshire Hathaway , which has a large P&C business, was little changed at $679,584, based on its Class A shares.

Investors may be taking comfort from leading insurers’ strong capital positions, anticipating that property insurance rates, particularly for reinsurers, could be stronger than previously expected. Another potential positive is that the storm has been downgraded to Category 4 from Category 5, though it remains potentially devastating. It could be a Category 3 storm when it hits the Florida coast.

Big primary insurers have been reducing their exposure to the Florida homeowners market due to storm risk, mitigating their potential losses. Because national companies are pulling out of Florida, the largest homeowners’ insurer in the state is the state-run Citizen’s Property Insurance, with a roughly 20% market share.

Reinsurers took some of the biggest hits Monday because they provide insurance to primary carriers like Chubb, Travelers, and Allstate, which deal directly with insurance customers. They tend to have more catastrophe risk than the primary carriers. 

“Coming out of hurricane season, reinsurance stocks tend to do better,” says Chai Gohil, the global insurance analyst at Neuberger Berman. 

He says that the next key date for reinsurance renewals is Jan. 1. The thinking now, he said, is that property rates could be flat to up in the mid single digits, rather than falling in the mid to high single digits, as had been expected until recently.

Gohil says investors have been looking at disclosures by reinsurers about what the industry calls probable maximum loss from a catastrophe with a 1% chance of happening in a given year. Investors calculated that loss for some reinsurers Monday and figured that the stocks might have overreacted.

Everest, for instance, pegs its Southeast hurricane PML at about 8.4% of equity, or close to $30 a share. Its stock fell about $35 on Monday.

Neuberger owns stock in companies that it views as some of the strongest insurers, including Berkshire, Chubb, and auto specialist Progressive.

Gohil says that one risk for insurers is that there tends to be a large variance between “eventual losses” from a storm and modeled estimates.

“In case of Katrina, Irma – the losses were 20-30% higher, partly due to higher demand surge, and increased litigation activity. We will likely see the same as Milton is on the heels of Helene, so stocks may react negatively with further adverse revision of loss estimates,” he wrote Monday.

Florida passed legislation last year to curb what had been rampant insurance fraud involving so-called assignment of benefits, which allowed third parties to act on behalf of homeowners and make claims against insurers. Unscrupulous contractors, for instance, would repair roofs and then make huge damage claims to insurers. The effectiveness of that litigation could be tested by Milton. 

The exodus of big insurers from Florida has left a void that has been filled by smaller public companies and private ones like Tower Hill.

The smaller public insurers with Florida exposure, including

American Coastal Insurance , Heritage Insurance, and Universal Insurance were hit hard Monday. They suffered some of the biggest losses in the sector.

Universal was up 3.8% Tuesday to $17.54 after falling 19% Monday, while American Coastal gained 1% to $9.60 after dropping 15%. Universal has the No. 2 market share in homeowners’ insurance in Florida while American Coastal is the No. 1 provider of commercial residential insurance in the state.

Both are tiny relative to national players like Allstate and Travelers, with market values of about $500 million each.

[Jaygo]

could Fairfax handle 1 billion in losses in Florida this year? I only ask since helene, milton and a possible SE florida cane 10 days out seems like a lot of losses in a short span, especially since we have just bough ZZZ and bauer.

[Dinar]

I think a crucial question is what will happen to catastrophe bonds.  If the losses on them are high, you may or may not see a lot of buyers pulling out of that market in January.

[TwoCitiesCapital]

16 hours ago, Thrifty3000 said:

Here is an interesting thesis from an insurance veteran. Sounds like Milton could be the death knell for several key insurers in Florida if losses exceed $100 billion. #hardmarket

https://iansbnr.com/hurricane-milton-the-end-of-the-florida-insurance-experiment/

 

 

Would it extend a hard market? Or would the industry simply leave the state as it doesn't make economic sense to insure the risk of having to rebuild multiple large cities every 10 years? 

 

At some point either the insurance availability, or costs, have to reflect the uneconomic nature of the activity. The industry can leave the state OR raise premiums to a level that make sense leaving only millionaires the ability to afford property anywhere near a coast line. 

Edited October 9 by TwoCitiesCapital

[Thrifty3000]

Milton's impact area and trajectory across Florida are shaping up pretty similarly to Hurricane Ian in 2022. Ian was very powerful, only 2 MPH short of being a category 5, and made landfall south of Tampa - heading west to east. It sounds like insurance industry losses for Ian ended up in the neighborhood of $50 billion. At the time, Fairfax estimated their Hurricane Ian losses would be in the neighborhood of $560 million. Fairfax ended up fairing rather well despite the Hurricane Ian setback.

Edited October 9 by Thrifty3000

[SharperDingaan]

30 minutes ago, Dinar said:

I think a crucial question is what will happen to catastrophe bonds.  If the losses on them are high, you may or may not see a lot of buyers pulling out of that market in January.

 

Oddly, I looked at these before deciding on a straight forward swing-trade. Mechanics aside, they looked an awful lot like the insurance version of the CDO/CDO Squared that contributed to the 2007 Great Financial Crises. Our takeaway was that if grey swans were to suddenly change colour, we would be hard pressed to have done better.  

 

Big insurer sells the risk to fund X (smart), fund X (smart) sells it to investors spread across the world (diversified contagion). Everything working as advertised as long as there is manageable concentration amongst the investors, and the underlying investments maintain liquidity .... yet the more reinsurance in the cover, the less liquidity, as the potential claim becomes progressively less expected. Snowball to hell ....

 

SD

[Parsad]

1 hour ago, Jaygo said:

could Fairfax handle 1 billion in losses in Florida this year? I only ask since helene, milton and a possible SE florida cane 10 days out seems like a lot of losses in a short span, especially since we have just bough ZZZ and bauer.

 

Yes, quite easily actually.  They have 2.3B in the holding company, so no worries there.  And they have excess statutory capital in the insurance businesses, so they would be able to absorb the hit without any real slowdown in insurance growth.  Now if there was also an 8.0 earthquake in San Francisco or Los Angeles, that would be worrisome!  But they are built to withstand a 5.0 hurricane hitting Miami, an 8.0 earthquake in Los Angeles and a 50% drop in the stock market...all in the same year.

 

Cheers! 

[Thrifty3000]

Some stats on home destruction/damage in Florida from a couple recent storms...

 

Hurricane Ian:

• Homes Destroyed: 5,000
• Homes Damaged: 30,000

 

Hurricane Michael:

• Damaged or destroyed approximately 60,000 structures

 

If you contrast those numbers against 9 million total homes in Florida, it seems there's plenty of opportunity to spread the risk.

Edited October 9 by Thrifty3000

[Viking]

12 minutes ago, Parsad said:

 

Yes, quite easily actually.  They have 2.3B in the holding company, so no worries there.  And they have excess statutory capital in the insurance businesses, so they would be able to absorb the hit without any real slowdown in insurance growth.  Now if there was also an 8.0 earthquake in San Francisco or Los Angeles, that would be worrisome!  But they are built to withstand a 5.0 hurricane hitting Miami, an 8.0 earthquake in Los Angeles and a 50% drop in the stock market...all in the same year.

 

Cheers! 

Fairfax is earning about $600 million in interest income/dividends each quarter. The Stelco sale is expected to close in Q4. Their insurance subs have started dividending significant amounts to Fairfax. 
 

My guess is catastrophes like Milton will be a short term headwind to earnings (Q4) and a medium term tailwind to earnings (extend the hard market in reinsurance another year or two). 
 

Fairfax has been cutting back on its catastrophe exposure in recent years. 
 

One of the worst thing that could happen to Fairfax is a soft market. No hurricane losses over a couple of years would likely bring one on.

Edited October 9 by Viking

[rogermunibond]

Hurricane Ian - $65B in insured losses according to this SwissRe article

 

https://www.swissre.com/risk-knowledge/mitigating-climate-risk/hurricane-ian-revisited.html

[Thrifty3000]

If Florida has 9 million homes and Fairfax insures approximately 1% of them then I'm going to assume FFH is insuring maybe 90,000 homes in the state.

 

FFH just needs to be sure they're spreadin' them suckers out. Piece of cake. Haha

[A_Hamilton]

16 minutes ago, Thrifty3000 said:

If Florida has 9 million homes and Fairfax insures approximately 1% of them then I'm going to assume FFH is insuring maybe 90,000 homes in the state.

 

FFH just needs to be sure they're spreadin' them suckers out. Piece of cake. Haha

That's not how it works. FFH would be taking excess of loss on homeowners (they've gotten out of quota share / 1st dollar of loss there). Thus, if an insurer wants to lay off any losses over say $25 million, up to $200 million, FFH might have reinsured exposure with a maximum loss of $175 million. It is more complicated than this as usually there are many program participants, but this is the approximate way to think about it.

 

Also, storm hitting Tampa (or any metro area) directly implies greater losses for FFH than not as they have a lot of commercial business where they would also take loss (for instance, business interruption). 

[Jaygo]

1 hour ago, Parsad said:

 

Yes, quite easily actually.  They have 2.3B in the holding company, so no worries there.  And they have excess statutory capital in the insurance businesses, so they would be able to absorb the hit without any real slowdown in insurance growth.  Now if there was also an 8.0 earthquake in San Francisco or Los Angeles, that would be worrisome!  But they are built to withstand a 5.0 hurricane hitting Miami, an 8.0 earthquake in Los Angeles and a 50% drop in the stock market...all in the same year.

 

Cheers! 

Thank you 

[ValueMaven]

Fairfax has been selling off - yet most of the manager reinsurance companies have bounced back a bit over the last day or two.  Any reason why?