• Harvey is the worst storm to hit the U.S. coastline in over a decade, causing insurance stocks to sell off and creating better buying opportunities.
• Damage will be extensive due to wind and even more so due to flooding, with over 50 inches of rain expected in some locations.
• Oil facilities are clearly vulnerable and other commercial and personal property will be destroyed, hitting insurers with significant losses.
• Insurance carriers in Texas include major players such as Chubb (NYSE:CB), American Int’l Group (NYSE: AIG), and Travelers (NYSE: TRV) on the commercial side, and Allstate (NYSE: ALL), Berkshire Hathaway (NYSE: BRK-A), and Progressive Corp. (NYSE: PGR) on the personal lines side.
• Not clear at this time if Harvey will trigger any catastrophe bonds, but it is unlikely to firm industry pricing.

A Category 4 Event

Insurance stocks have sold off on the Harvey news, creating better buying opportunities, as typically the stocks sell off on the news of a storm and then rally when insured losses are assessed at less than feared. Economic losses from Harvey are likely to exceed insured losses, as flood insurance is more a federal government than a private sector covered risk.

Hurricane Harvey made landfall on Friday night August 25, 2017, in the coastal town of Rockport, Texas, about 30 miles outside of Corpus Christi, Texas.  Upgraded to a category 4 hurricane, it hit land with 130 mph winds.  While the strong winds from the hurricane and several related tornadoes surely created wind losses, the biggest problem with Harvey concerns subsequent flooding.  The storm was downgraded quickly to a tropical depression once it hit land, but it has stalled over the region rather than moving out as a typical storm would. 

Harvey comes almost exactly 25 years to the day that Hurricane Andrew devastated the state of Florida and forever changed the insurance industry by establishing Bermuda as a major insurance center. Late August is also the anniversary of Hurricane Katrina (2005), to date the most costly U.S. hurricane at about $50 billion in 2016 dollars.  Two of the costliest hurricanes to hit the U.S. in recent years have landed in Texas – Hurricane Ike in 2008, and Hurricane Rita in 2005.  Hurricane Alicia was another major hurricane that hit Galveston, TX in 1983.

Lessons Learned

Subsequent to Hurricane Andrew, building codes were strengthened, insurers modified their coastal exposure, government took a larger role in providing coastal insurance, and more sophisticated catastrophe modeling took hold.  Katrina was a disaster due to loss of many lives in addition to significant property losses, and it led to greater focus on federal preparedness and potential for loss from storm surge. Yet, many were still unprepared for Superstorm Sandy, which hit the Northeast rather than Texas, and which caused significant storm surge damage as it came ashore at high tide. Many policyholders affected by Sandy had insufficient flood insurance protection, and that could also turn out to be the case with Harvey. Only about 17% of Sandy losses were covered by the National Flood Insurance Program. Flooding is generally covered by the government flood program and relatively few homeowners buy the extra coverage. But insurers will likely face losses from commercial property, business interruption, and autos.

Despite all that has been learned from those prior storms, increased development of coastal property has raised the potential for losses from hurricanes.  Greater urbanization of flood plain regions, i.e. Houston, with pavements and parking lots has created situations where water often has no path to be discharged and absorbed into the ground, leading to greater flooding when storms hit.

Implications for Insurers

While it is too early to know the extent of insured losses from Harvey, we know that the major publicly-traded insurance firms exposed to Texas include the major players -- Chubb (NYSE: CB), American Int’l Group (NYSE: AIG), and Travelers (NYSE: TRV) on the commercial side, and Allstate (NYSE: ALL), Berkshire Hathaway (NYSE: BRK-A), and Progressive Corp. (NYSE: PGR) on the personal lines side. See Insurance Information Institute for Texas insurance details here.

It isn’t clear at this time if any catastrophe bonds might be triggered by Harvey. It is unlikely Harvey losses will be significant enough to firm industry pricing. It is estimated that it would take a $100 billion event to firm the market, given strong capital levels. Industry capital exceeded $700 billion at end of the first quarter 2017, and typically an event that depletes at least 10% of capital is needed to turn pricing.

The stock sell-offs present better buying opportunities for the insurance stocks mentioned, as losses are likely to be earnings events rather than capital issues. The major insurers are all well-capitalized, can withstand major events, and reinsurance will help defray some of the costs. The key will be to watch out for the oil refineries when they reopen.  Any damages to such facilities would add to insured losses.