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.


Manthong Mtnrunnr Mon, 08/28/2017 - 17:04 Permalink

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With another 18 inches of rain on the way, it is likely nail-biting time in that business.

In reply to by Mtnrunnr

Paul Kersey DWD-MOVIE (not verified) Mon, 08/28/2017 - 21:20 Permalink

Insurers constantly raise premiums, but, when it comes to paying claims, they have the 3-D policy (delay, deny and defend). If they can, they will delay paying your claim until you are foreclosed. If you can last with you lender, or if you own your house outright, they will deny your claim. If you fight them for denying your claim, they will defend themselves with higher priced lawyers than you can afford to hire. But, if you can afford to hire a good lawyer (oxymoron), they will push hard to settle your claim for dimes on the dollar.

I build and own beach houses. My insurance premiums are so high, and my deductibles are so large, that buying insurance is a money losing proposition, unless my properties sustain catastrophic damages. However, if that happens, they will climb a tree before they will pay me one dime of what they owe. Insurance is a Wall Street con game played on Main Street Americans.

In reply to by DWD-MOVIE (not verified)

Not Too Important Snout the First Mon, 08/28/2017 - 18:00 Permalink

How about 21 Superfund hazardous waste sites in Harris County that are now flooded and leaking/draining into the flood waters?… sewer treatment plants are underwater, and the STP nuclear power plant facility is not designed for a river crest of 50+ feet (and is on the NRC watch list for dam failure):"Not all floods that threaten nuclear reactors have natural causes, however. Many nuclear plants are situated near rivers, and some of them are downstream from a dam. When the dam fails, the resulting flood is sudden and can be catastrophic. Unlike river overflows or hurricanes, dam failures are likely to occur with little or no advance warning, leaving plant operators scrambling to protect their facilities before the floodwaters arrive, typically within hours. So far, dam failures have not affected any U.S. nuclear power plants. But in July 2011 we learned that we may been luckier than we knew, as the NRC released a report stating that previous estimates of flood risk for many reactors were based on outdated information and would need to be revised upward.As the 2011 NRC report points out, dam failures are far from rare; there have been more than 700 of them in the U.S. since 1975."… Worker: “Imminent flood coming” near nuke plant from Hurricane Harvey… “Potentially catastrophic”… Running out of food… Working tirelessly to manage problems… Area turned “upside down” — Nearby river forecast to rise 50 ft and overtop levees, “Major Flood Stage” (VIDEO)'…  

In reply to by Snout the First

847328_3527 Bobbyrib Mon, 08/28/2017 - 19:33 Permalink

 Dear Valued Policy Holder,Please fill out this short 89 page claim form listing all the items you claim lost/damaged. Be sure to include invoices for each item claimed, as well as a recent photo of the item.Please be sure to print in BLACK LETTERS using #18 black ink and send 18 copies of the completed form.We look forward to being a Good neighbor to You and processing your completed form within 18 months.Warm Regards,Betsy ShagswellS&M Home Owners Insurance, LLC  

In reply to by Bobbyrib

rockstone Cognitive Dissonance Mon, 08/28/2017 - 21:45 Permalink

Read the article again. There's is no bailout coming. No graft. That's already been done. The insurers refused to insure in places they knew would flood or do flood every few years or so.

So, the Feds stepped and bought the risk. No skullduggery, no corrupting (it's legal and in plain sight for everyone to view)

It was said and done long before Harvey.

In reply to by Cognitive Dissonance

LawsofPhysics Mon, 08/28/2017 - 16:57 Permalink

LOL!!!  Why not ask Hank "tanks in the streets" Paulson...the whole AIG thing gives him a true insider's perspective of such insurance scams etc.Fuck all the useless overcompensated middlemen already!

Bwana LawsofPhysics Mon, 08/28/2017 - 17:46 Permalink

What the article does not go into is re-insurance. Every insurance company that has a large exposure buys re-insurance. They take an area in which they have an exposure of let's say 2 billion dollars. They buy re-insurance for every claim in that area above 400 million dollars for about 2% of the premium. The 400 million is like their deductible and everything over that the re-insurance carrier picks up. It is very rare when re-insurance comes into play, because having a group of losses that exceeds 20-25% of the total insurance in an area is rare. If you take a company like Allstate the damage Harvey caused is a fly speck in relation to he policies they write and never pay a dime on. I'm sure this will be like the San Fernando Valley earthquake. They paid out about .8 billion in the first nine months but by the end of the year they were ahead because before the dust from the quake settled they were in every state capitol getting rate increases which paid off their liabilities and then some. The largest re-insurer is OPEC.

In reply to by LawsofPhysics

Winston Churchill Bwana Mon, 08/28/2017 - 18:15 Permalink

Its much lower than $400m.Try $10mThen its sliced and diced in tranches, one reinsurance group take risks 10-20 another 20-30,all the way up to the total.Theoretically the higher the tranche the less the risk.Then greed plays in.What happens in practice is the same reinsurers take multiple mezzanines of risk,playing the odds.A very large event can leave those reinsurers ,mostly "names" at Lloyds forced to sell theirother assets to meet claims.Its very opaque and those very wealthy names are already highly levered in every market.They are the real shakers and movers.The 'names" ,not the insurance are what you need to look at. 

In reply to by Bwana

rbianco3 Mon, 08/28/2017 - 17:05 Permalink

The gub-mint has it covered.That's why I bought many ounces of gold last night- time will tell if it was a bad move but I'll take the $20 per/oz before I receive shipment tomorrow.Between the housing crash, Trump election, crypto-calls and liquidation for gold last night- this AM my wife called me a fucking prophet. My ego hasn't gone down yet but I'll be wrong one day. I'm pessimistic on the future of USA of IS rael.

zebra77a Mon, 08/28/2017 - 16:59 Permalink

The insurance lady getting pissed in my old mans bar in the day would brag about how they NEVER pay..If they ever do it's default and left gov issue the check..Hey its only fiat what can go wrong? How much was a cheeseburger in Zimbabwe $4 Trillion?

Bwana zebra77a Mon, 08/28/2017 - 17:54 Permalink

In the old currency that had bunches of zeros dropped three times the final Zimbabwe bank note was 100 trillion dollars which was worth .87 USD. The 100 trillion is deceptive because of the reissues dropping zeros. The note was actually 100 septillion or 100,000,000,000,000,000,000,000 for 87 US cents.

In reply to by zebra77a

Stan Smith Mon, 08/28/2017 - 17:01 Permalink

I think a significant issue in Houston is going to be the fact that huge amount of the folks down there simply arent covered with flood insurance.If anyone doesnt think taxpayers arent going to be on the hook for some of that, they are smoking some serious stuff.Just wait until every home within 2 miles of a waterway has a new taxpayer funded boat per household.  Go long on Bass Pro?

FoggyWorld Stan Smith Mon, 08/28/2017 - 18:14 Permalink

That notion of putting every single home even on a pond into NFIP is already in the works.  But NFIP is very tricky and if they pay out to people who weren't covered, those houses will be obliged to pay for NFIP insurance forever. That could soon be a significant chunk of change.  There is a cap on it right now that expires on September 30th of this year and then - without Harvey - all bets are off.   And for Sandy, many of us lost boats and they just haven't been replaced.  No one, but no one made out like a bandit - at least when it came to homeowners.   NFIP was in the red before Sandy and I guess more money will be printed because the current number of policy holders probably doesn't add up to enough to take care of Harvey.  But the long term game plan really is to make everyone on a creek buy NFIP insurance.  Doubt though even with high rates that there will ever be enough to cover something like Harvey.  And FEMA has yet to develop insurance for earthquake areas or those that get smacked by tornados but they have it in mind.A good deal of the cure is implementing higher and stronger building codes and that will happen in Texas as it has in other hurricane hit areas already. But Harvey just isn't a textbook hurricane becaue it is lingering around and has passed its due date so the damage gets worse than whatever normal would have been. 

In reply to by Stan Smith

garcam123 Mon, 08/28/2017 - 17:04 Permalink

I'm guessin if you live in Buffalo Bayou areas where that dude said all the high dollar houses are going to get flooded by the COE, you might get some assistance, but if you're where de  simple foks live, you're on the emergency D-BG Program........that's the one where they'll settle right away and you get your chopice of: DICK or BUBBLE GUM and if you bitch, motherfucker.......I might shoot your fuckin ass wid dis BAZOOKA! HOW DAT?

Drater Mon, 08/28/2017 - 17:04 Permalink

Homeowners will get fukked by their insurance carrier and then the crooked contractors crawling out of the woodwork . Nice time to be a renter there...just wave goodbye to the landlord and wish them good luck dealing with everything 

Ben A Drill Mon, 08/28/2017 - 17:04 Permalink

ACA in Houston will collapse. Car insurers will fail, property insurance policies will be bankrupt.

Trump will say: If they were insured then PAY them in FULL! Make America Great Again. At least I hope he says that.

FoggyWorld rbianco3 Mon, 08/28/2017 - 17:56 Permalink

That sure isn't how Sandy played out.  Money for temporary housing for the not too many who needed it but only those with NFIP insurance got paid not too heftily based on FEMA contractor adjusters for claims pertaining only to water damage.   Regular homeowner's covered non-water related situations and something called a REMM loan was offered for those who needed to upgrade and uplift their houses.  The interest rate was a bit lower than the bank's but the government selected the contractor.   And second home owners got nada from NFIP.  It was hardly a windfall.The big sums you hear about go to the State, county and local governments which are all run by politicians and boy did the spending of those dollars show it.   And the worst part of the squander was that FEMA never audited any of those governmental bodies and we who lived here could see that that really should have been done.   Hope they drop so many of their useless employees and hire some serious accountants.  

In reply to by rbianco3