Barreling into primary carriers and reinsurers

Risk & Insurance, Oct 1, 2004 by Roger Crombie

Damage estimates from Hurricane Charley range from $4 billion to $10 billion. Hurricane Frances could double that. Whatever the final figure, the Florida State Hurricane Catastrophe Fund, established after Hurricane Andrew, will be tapped. It has $5.6 billion in cash and will absorb much of the reinsurance shock beyond the $4.5 billion in aggregate retentions held by primary companies.

In August, the National Oceanic and Atmospheric Administration (NOAA) issued a revised forecast of a busier-than-expected Atlantic Ocean hurricane season, with two to four major hurricanes expected. Within 48 hours, as if on cue, the first arrived. Hurricane Charley hit Florida. Three weeks later Hurricane Frances hit southern Florida again. And 10 days after that, the threat of Hurricane Ivan cause the evacuation of the Florida Keys.

CHARLEY DELIVERS THE FIRST PUNCH

Charley moved over Cuba and the Gulf of Mexico before making landfall on the southwest coast of Florida. At its peak a Category 4 hurricane with winds exceeding 145 miles per hour, Charley followed a northeasterly path diagonally across the Sunshine State, eventually being downgraded to a

Category 1 hurricane, before heading out into the Atlantic. The hurricane made landfall again in the Carolinas and moved up the East Coast before dissipating east of Cape Cod.

Charley killed 16 people and left thousands of others homeless. Early cost estimates varied widely. The first figure to emerge was an estimate of $15 billion, which made Charley, at least for the weekend newspaper headlines, "the worst storm to hit Florida in 60 years." (Andrew cost $14 billion in insured losses in 1992, the equivalent of $20.3 billion in today's dollars, according to Insurance Services Office Inc.)

The $15 billion turned out to be the estimate for economic total loss, but insurance is always a smaller amount. Insured loss estimates were revised downward to "near $5 billion." Wind speed observations indicated that Charley's "swath of damaging winds narrowed abruptly just before landfall." Charley was just six miles wide when it hit; the 1944 hurricane whose route Charley followed was 33 miles wide.

The $5 billion estimate stuck, and remains the best guess, although the range of industry estimates is from $4 billion to $10 billion. Whatever the final figure, the Florida State Hurrieane Catastrophe Fund, established after Hurricane Andrew, will be tapped. It has $5.6 billion in cash on hand. The fund will absorb much of the reinsurance shock beyond the $4.5 billion in aggregate retentions held by primary companies.

With the fund, with no catastrophe securitization bonds kicking in, and retentions by the insurers and the primary carriers, reinsurance is expected to pay not much more than $1 billion dollars. Munich Re alone estimated losing in the "high hundreds of millions" from Hurricane Charley.

Given combined ratios in the 20s, 30s and 40s in the first half of 2004, such a loss would be well within the budgets of most reinsurers. Combined ratios are not expected to climb much higher than half a point to a point on the full year, although the third quarter will be affected.

The ratings agencies were all sanguine about the prospects for most companies. Standard & Poor's identified "10 carriers for which Florida premiums represent at least 80 percent of all premiums written, with seven of those companies writing more than 90 percent of their business in the state." S&P also pointed out that the Bermuda companies incorporated after Sept. 11 would face "their first brush with a large natural catastrophe event since coming into existence."

NO CAUSE FOR CONCERN JUST YET

The new companies did not rush to the plate with loss estimates, the view being that getting it right was better than getting it fast. Given their initial capitalization and highly charged growth since their incorporation, the dozen companies in the category have some $15 billion in capital. In the week after Charley hit, the Bermuda majors on board before Sept. 11 began reporting.

XL Capital expects to receive net claims of approximately $125 million. The majority of XL's claims are expected to come from its Bermuda-based reinsurance unit. The financial impact of hurricane-related claims will affect XL's third quarter results but will not affect the company's overall financial condition. PartnerRe expects claims to be between $35 million and $45 million and says it will likely exceed forecast earnings this year.

ACE Ltd. expects total net losses for the entire group will be approximately $100 million pretax, which is in line with previously stated guidance for annual catastrophe-related losses.

AIG estimates its worldwide, after-tax net losses in a range of $80 million to $100 million. That figure includes AIG's minority investments in Bermuda-based insurers Allied World Assurance and IPC Holdings. This suggests that both of those companies have taken the Florida weather events in stride. Alea expects to pay only a net $10 million.

Renaissance Reinsurance estimated its losses higher than anyone else's: from $100 million to $140 million. Renaissance Re has a track record of reporting losses lower than most when catastrophe hits; it paid out just $50 million on the World Trade Center loss.