How Much Harvey Damage Can Insurers Face Before They Crack?

Hurricane Harvey has unleashed unparalleled devastation on southwest Texas, flooding Houston, the fourth largest city in the US, and many towns along the Gulf coast from Galveston, to Port Lavaca and beyond. But even Harvey’s 130 mph winds aren’t strong enough to threaten the ironclad balance sheets of America’s largest insurers, which have amassed a “fatter-than-ever” capital cushion capable of absorbing any payouts related to what looks to be, by several measures, one of the worst hurricane in US history, according to the Wall Street Journal. Insurers have benefited from years of moderate damages from natural disasters in the US, which have kept payouts to a minimum.  

“The damage from the Category 4 storm, which hit the Texas coast on Friday, is far from being tallied. It is the first major hurricane to make landfall in the U.S. in more than a decade, and torrential rain will continue this week to cause widespread flooding.


Harvey’s timing is good for insurers and insurance customers from one perspective: Personal and commercial insurers have record levels of capital, the money they have on hand that isn’t required to back obligations. With insurers’ overall strong capital position, Harvey is unlikely to cause extensive damage to the industry’s financial strength, though it could hurt quarterly earnings for those carriers with blocks of business in hard-hit areas.”

Residential flooding typically isn’t covered by private-sector insurers; instead, it’s the responsibility of the US government’s National Flood Insurance Program. Because of this, Bloomberg estimates that insurers will llikely only pay out claims equal to about one-third of the storm's total cost. The NFIP also sells coverage to small businesses and people who are renters, according to WSJ. Early RMS estimates for wind losses, which would typically be covered by both personal and commercial policies, are in the low-single-digit billions.

It would take $100 billion or more of losses during a 12-month period to seriously threaten insurers’ balance sheets, according to WSJ. Hurricane Katrina in 2005, the costliest hurricane in US history, caused nearly $50 billion in insured losses in 2016 dollars. By comparison, US property-and-casualty insurers had $709 billion in surplus in the first quarter of the year, a record high, according to trade group the Insurance Information Institute. According to WSJ, that means the industry had $1 in surplus for every 75 cents of net premiums.

“‘You would need to see a significant level of insured losses to have an impact on the excess capital of the industry [and] have a material impact on the pricing environment,’ said Elyse Greenspan, an analyst at Wells Fargo Securities last week.”

While the damage in Houston looks to be extensive, the storm missed other population centers in southwest Texas that would've lead to an "extremely high level of losses," according to an analyst roundup published by Bloomberg:

First, here's Wells Fargo:

  • Insurers "dodged what could have been an extremely high level of losses," as Harvey hit a less populated area that’s less insured than some large Texas cities, though flooding may add to losses for commercial lines insurers.
  • Initial insured loss estimates have been around $1b-$6b, though this doesn’t include flooding; estimates may be increased since many were made when Harvey was a category 3, but they will still likely be below those from Hurricane Ike, which led to $14.1b of losses.
  • For there to be a "significant breach of reinsurance attachment points," there would likely need to be mid-single digit billions of insured losses; impacted reinsurers could include ACGL, AXS, RE, RNR, VR, SREN VX, MUV2 GY, HNR1 GY, SCR FP.
  • There would need to be substantial insured losses for the industry’s pricing trajectory to change.

Meyer Shields of KBW said damages will likely be higher than the low-single-digit-billions that insurers had anticipated as of Friday.

  • Insured losses will likely be higher than the low-single-digit billion dollar estimates from Friday, with flooding generating substantial losses for insurers covering personal and commercial auto and commercial property.
  • Harvey’s upgrade to a category 4 on Friday "highlights the significant uncertainty inherent in hurricane modeling"; Friday’s "relief rally" was premature.
  • Watch losses at primary carriers including ALL, PGR, BRK/A, TRV, CB, AIG, HIG, and AFSI; watch losses at reinsurers including ACGL, AXS, RE, RNR, VR, and XL.

Morgan Stanley's Kai Pan, said shares of P&C insurers might face pressure in the near term as nervous investors dump shares rather than countenance the uncertainty while final damage totals are being tallied.

  • P&C insurers may be pressured in the near-term given loss uncertainty; extensive flooding may cause more insured losses than wind causes, impacting commercial insurers more than personal insurers.
  • HIG and TRV are the top Texas commercial insurers, while ALL, BRK/B and PGR are the biggest personal insurers; impacted reinsurers may include AXS, RE, RNR and XL.
  • Insurance carrier stocks usually underperform immediately after major catastrophes but outperform 3-6 months afterward as loss estimates come in and rates stabilize; insurance brokers typically outperform immediately after catastrophes.

Sandler O'Neil analyst Paul Newsome said Allstate and Travelers could see a bottom-line impact of between 10 and 40 cents a share.

  • ALL may see 20c-39c per share in losses; TRV may see 10c-20c; CB may see 4c-8c; PGR may see 2c-4c; AIG may see 1c-2c; MET may see 1c.
  • These estimates don’t include any offsetting reinsurance coverage; Sandler’s 3Q estimates generally include elevated catastrophe losses.
  • XL, NAVG and CB may have large additional losses from their reinsurance operations; EMCI and CINF losses may be surprising, as they have small reinsurance operations with unusually big exposure.
  • Initial stock declines are often reversed over time, and investors should use short-term pullbacks to invest insurance stocks they already find attractive; Sandler still has buy ratings on ALL, CB, PGR, AIG, and MET.

Finally, RBC's Mark Dwelle cautioned that the final tally of damages could be higher than expected, noting that initial damage estimates for Hurricane Katrina were $10-$15 billion, when the final total was $70 billion.

  • Final damages may vary widely from initial estimates; initial loss estimates after Hurricane Katrina were $10b-15b, and the final number was $70b.
  • At this stage, it’s impossible to reliably estimate insured losses, but most insurers will likely be impacted; all major auto insurers will face losses since they cover flooding, and reinsurers will likely face meaningful losses.
  • Watch losses at ALL, PGR, TRV, AIG, CB, XL.
  • $2b-$6b seems reasonable for wind losses; $10b may be a "good starting point" for flood losses.
  • Harvey isn’t likely to be "significant price firming event."
  • BRO may be a "winner," as it manages flood claims for the U.S. National Flood Program.

According to Bloomberg's Lisa Abramowicz, natural disasters caused approximately $210 billion of economic losses worldwide last year and only 26% was insured.

After climbing on Friday, shares of property and casualty providers lead the S&P supercomposite insurance index lower on Monday. Travelers was down as much as 3.2%, its biggest intraday drop since the day after the election. XL Group was down as much as 3.4%, while Progressive was off as much as 2.9%. Allstate was down as much as 2.4%.

All except one of the members in the Bloomberg Intelligence global P&C reinsurance index was falling, with XL Group as the biggest laggard, followed by Everest Re Group, Aspen Insurance Holdings, Axis Capital Holdings Limited and Validus Holdings Ltd.

Meanwhile, shares of insurance brokers were climbing, with all but one of the stocks in the S&P supercomposite insurance brokers index trading higher. Brown & Brown rose as much as 2.2% to its highest since January.

According to Bloomberg, the Hartford and Travelers are the top commercial insurers in Texas, while Allstate, Berkshire and Progressive are the biggest personal insurers. The top homeowners’ insurers in Texas are State Farm, Allstate Corp. and Farmers Insurance, according to ratings agency A.M. Best.

A spokesman for Allianz told Bloomberg it's "too early" to comment on the scope of storm-related damaged. 

“As the natural catastrophe event is still unfolding, it is too early to comment on the exposure and the potential impact,” Allianz spokeswoman Sandra Matl says in emailed statement. “The AGCS Loss Event Taskforce is closely monitoring and analyzing the situation.”

Spokespeople for Munich Re and Hanover Re said it's too early to provide an exact assessment of damages, though they noted that the storm didn't hit as many population centers as analysts had feared, which should help keep payouts to a minimum.

“The damages caused by Harvey are mostly due to flooding. Thus far, the storm has mostly hit a relatively sparsely populated area with comparatively little objects of value,” says Ernst Rauch, head of Munich Re’s Corporate Climate Center.

Ultimately, the worst storm-related losses might be borne by holders of catastrophe bonds, which are becoming increasingly popular with investors searching for higher yields.

“Hurricane Harvey could cause losses for holders of catastrophe bonds. So-called cat bonds are sold by insurers or by large entities seeking insurance, like transit agencies. Investors receive interest payments, but they lose their principal if certain disasters like hurricanes occur.


Catastrophe bond issuance hit a record high in the second quarter, according to reinsurance broker Aon Benfield. More than $26 billion of cat bonds were outstanding as of June 30. At the same time, economic losses from disaster events have totaled just $44 billion globally in the first half of 2017, compared with the 10-year average of $120 billion during that period, reinsurer Swiss Re said in an estimate this month.


Even if Harvey leads to losses, appetite for cat bonds is expected to remain strong because they offer diversification to pension plans and other large investors.


‘We don’t see [Hurricane Harvey] as a disruptive type of event’ in the cat-bond marketplace, said Paul Schultz, CEO of Aon Securities.”

Right now, damages from the storm are expected to total tens of billions of dollars, with current estimates range from $20 billion to $40 billion. And with much of Houston under water, the flooding disaster may rank as one of the most, if not the most, expensive natural disaster in US history.

With a final tally of the damage still months, if not years, away one thing is clear: regardless of the strength of their balance sheet, insurers will be dealing with the fallout from this storm for a long time.