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Even After Last Year’s Terrible Hurricanes, Insurers Are in Solid Shape

Even After Last Year’s Terrible Hurricanes, Insurers Are in Solid Shape

Healthy capital levels position underwriters well for the coming hurricane season

Disasters including Hurricane Harvey made last year one of the costliest ever for insurers.
Disasters including Hurricane Harvey made last year one of the costliest ever for insurers.PHOTO: JOE RAEDLE/GETTY IMAGES

Major Atlantic Ocean hurricanes, California wildfires and Mexico earthquakes made 2017 one of the costliest years ever for insurers. But even that slate of disasters wasn’t enough to dent insurers’ fat capital cushions.

The U.S. property-casualty industry held $752.5 billion in surplus at the end of 2017, a 7.4% increase from the year before, according toVerisk Analytics VRSK 1.13% ’ ISO and the Property Casualty Insurers Association of America. Global reinsurance capital stood at $605 billion, 2% higher than the prior year, according to Aon PLC’s reinsurance brokers.

All that capital positions these industries—and their policyholders—well for any hurricanes in the next few months of the often make-or-break Atlantic season, even if third- and fourth-quarter earnings are wiped out. Capital is the money that insurers have on hand that isn’t required to back existing obligations.

For primary insurers selling policies to individuals and businesses, the reinsurance helps further. Reinsurers essentially act as insurers for other insurance companies, paying the cost of claims on policies issued by primary insurers once they reach contractual, designated levels. Global reinsurance companies bore much of the financial costs from Hurricane Irma in Florida last year.

“If you look back toward the events last year…and think about the implications for capital, for many companies—and that would include insurers and reinsurers—it was simply an earnings event for the year,” said Paul Schultz, chief executive of Aon Securities. “The losses…didn’t really cut into their capital base.”

For the year, global insured catastrophe losses were about 160% higher than the average of $51 billion for such losses from 2000 to 2016, according to Wells Fargo Securities. Private-sector insurers’ and reinsurers’ payments on claims are estimated at $124 billion to $134 billion.

Those losses pushed net income at private U.S. property-casualty insurers down to $36.1 billion, compared with $42.9 billion in 2016, according to PCI and ISO. Helping offset some of the pain from the disasters, insurers posted steady returns on their investment portfolios and solid results in many product lines that weren’t exposed to the storms.

Big car and home insurer Allstate Corp. , for instance, posted net profit of $3.07 billion for the year, even as catastrophe losses reached $3.23 billion. Its bottom line benefited from premium growth and other improvements in the company’s car-insurance operations, among other factors.

Damaged boats in Key West after Hurricane Irma hit the Florida Keys last September.
Damaged boats in Key West after Hurricane Irma hit the Florida Keys last September.PHOTO: MIKE STOCKER/ZUMA PRESS

Also helping keep capital so robust is the simple fact that pension funds, hedge funds and other big investors continue to deploy money into the industry through “catastrophe bonds” and other reinsurance vehicles. With interest rates remaining low globally since the 2008 financial crisis, many yield-hungry investors are buying these securities in search of better returns than traditional fixed-income holdings.

Outside investors added another $8 billion last year, bringing the total of so-called alternative capital to $89 billion at the end of 2017, according to Aon Securities.

Outstanding cat bonds and other insurance-linked securities totaled $32.8 billion as of March 31, representing growth of about $1.8 billion since the end of 2017, according to Wells Fargo Securities. Sophisticated investors buy these high-yielding securities with the understanding that they could lose some or all of their principal to help pay claims if a specified type of disaster occurs in a designated region. Cat-bond issuance in the first quarter was $4.24 billion, or about $2.4 billion above the 10-year first-quarter average, Wells Fargo said.

The continued appetite was “part of the reason that reinsurance rates probably didn’t climb as much as a lot of market participants thought it would,” said James Lynch, chief actuary at the trade group Insurance Information Institute.

Some executives and analysts last fall predicted that premium rates on property catastrophe reinsurance in hurricane-prone areas would rise up to 20%. But premium rates increased much more modestly, analysts and brokers say.

For instance, the risk-adjusted Florida Property-Catastrophe Rate-on-Line Index, which shows the reinsurance rate for the region and is one of the indexes reflective of the marketplace, rose 1.2% this year, as calculated by brokerage firm JLT Re.

Outside of the hurricanes, wildfires and other disasters, a lot of things went right for primary insurers to explain their improved fortunes.

The industry’s capital declined in 2017 from the second quarter to the third, but “earnings and investment income throughout the rest of the year helped the industry reach higher capital levels” than at the start of the year, according to Elyse Greenspan, an insurance-stock analyst with Wells Fargo Securities.

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