Cost to insurers could be billions
Damages from Texas hurricane could end up near high end of estimates
JONATHAN RATNER
It appears that damages from hurricane Harvey could end up near the higher end of estimates prior to the storm hitting land, but the insurance industry should still be able to manage the losses.
After making landfall on Friday near Corpus Christi, Texas, the storm continues to bring catastrophic amounts of flooding to the state’s coast, including the Houston and Galveston area.
With more rain and flooding expected for another week, J.P. Morgan estimates that Harvey could result in US$10 billion to US$20 billion of losses for the insurance industry.
That would make it one of the top 10 most costly hurricanes to hit the U.S.
Industry sources expected the loss could be anywhere from US$5 billion to US$20 billion prior to landfall.
The last hurricane to make landfall in Texas was hurricane Ike in 2008. It made landfall as a Category 2 storm in the highlypopulated area of Galveston and caused US$13 billion of insured damage.
However, as J.P. Morgan analyst Sarah DeWitt pointed out, Ike was a weaker storm and did not stall like Harvey. Ike was, however, significantly larger with hurricane force winds that extended 200 km from the centre, and tropical storm force winds that extended 400 km.
DeWitt estimates that Harvey could result in losses that amount to slightly less than a quarter’s worth of earnings for much of commercial insurance and reinsurance industry. The analyst said that would make it an earnings event, not one requiring additional capital to be raised.
P r o p e r t y a n d c a s u a l t y (re)insurers with the most exposure include Validus Holdings Ltd., RenaissanceRe Holdings Ltd., Everest Re Group Ltd., XL Group Ltd., Arch Capital Group Ltd., Travelers Companies Inc., Chubb Ltd., Allstate Corp., and Progressive Corp.
P&C insurance stocks rallied on Friday after catastrophe modeling firms predicted insured losses could be in low single digits.
“However, this was based on wind-only losses; Harvey appears to be more of a flood event and we think the loss estimates are misunderstood,” the analyst said.
Flooding is not covered under homeowner’s insurance, however it is covered under commercial insurance, and could therefore result in meaningful losses for the commercial reinsurers and insurers.
The storm did push gasoline futures prices up seven per cent to more than two-year highs, as roughly a tenth of U.S. refinery capacity was knocked out. If more rain continues the flooding, things could get worse, yet oil prices declined as demand for U.S. oil will be negatively impacted by the reduction in gasoline refineries.
“The impact on Q3 economic growth will depend on the length of the shutdowns and damage to the energy infrastructure in the region, said BMO Capital Markets economist Sal Guatieri.
While the flooding is causing much hardship, the economic impact could be more fleeting as lost production will be made up for in coming quarters due to the rebuild and repair work that is likely to occur.
Citigroup equity strategist Tobias Levkovich noted that in 2012, hurricane Sandy required that nearly 250,000 damaged cars and light trucks be replaced in the U.S. Northeast, in addition to home renovations, new appliances, furniture, infrastructure replacement, etc.
“Thus, we understand the struggle that Texas will have to overcome but the GDP (and S&P 500 EPS) impact will probably be far more minimal,” Levkovich said.
“We do think that investors may use Harvey as another reason to stay away from U.S. equities,” he added, noting that the storm probably won’t be the event that forces share prices lower.
“While the images from hurricane Harvey are heart wrenching, we still believe that there is upside to U.S. equities over the next 12-15 months with sentiment and valuation being key factors in our mindset alongside earnings growth,” Levkovich said.