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Fitch: Florida Insurance Market Braces for Significant Losses
September 8, 2017 / 4:07 PM / 2 months ago

Fitch: Florida Insurance Market Braces for Significant Losses

(The following statement was released by the rating agency) NEW YORK, September 08 (Fitch) Hurricane Irma is anticipated to make landfall in south Florida on Sunday morning September 10, potentially as a Category 4 hurricane with sustained winds exceeding 130 mph. The storm could travel throughout the state of Florida as a category 3 (winds > 110mph) or category 4 hurricane before moving on to other southeastern states. Fitch Ratings is monitoring and assessing the potential impact on insurance industry ratings. While Fitch believes the Florida (re)insurance market is well equipped to handle substantial hurricane losses, if Irma were to produce insured losses greater than $75 billion, or if another significant hurricane struck Florida following Irma, some (re)insurers participating in the Florida market could experience notable financial strain. In such extreme scenarios, Fitch believes Florida specialist property writers will endure the most severe financial strain, followed by some segments of the global reinsurance market. Significant reinsurance losses could also impact catastrophe bonds and collateralized reinsurance structures. Florida has been spared from a major hurricane since Hurricane Wilma in 2005. However, the projected path and severity of Irma creates the potential for economic and insured losses to significantly exceed those experienced in the worst Florida hurricane in modern times, Hurricane Andrew in 1992, which created nearly $25 billion (adjusted to 2016 dollars) of insured losses. Florida's population and coastal property exposure have grown substantially over the last 25 years. As such, global reinsurer Swiss Re projects that a storm following Andrew's path would cause economic losses of $80 billion-$100 billion with insured losses of $50 billion-$60 billion. Swiss Re further estimates that if Andrew's path was 20 miles north and made a direct hit on Miami, insured losses may range between $60 billion-$180 billion. Insurance organizations with exposure to losses from Irma include: Florida state-sponsored entities, Citizens Property Insurance Corp (Citizens) and Florida Hurricane Catastrophe Fund (FHCF), diversified private market insurers, Florida property insurance specialty writers, and numerous global reinsurers. Florida Citizens and FHCF Fitch believes that the risk profile and financial positions of Citizens and FHCF have materially improved in recent years due in part to substantial increases in claims-paying resources generated by a lack of large losses. Both Citizens and FHCF also both benefit from access to premium assessments and debt-issuing capabilities in the event of large losses exhausting existing claims paying resources. FHCF serves as a vehicle to maintain stable underwriting capacity in Florida property markets and a key source of reinsurance coverage for Florida insurers. The organization has a record fund balance of approximately $14.9 billion available to meet claims in the 2017-2018 contract year. These funds combined with proceeds available from past pre-event bond issuance exceed FHCF's coverage limit of $17 billion in 2017. Depopulation efforts at Citizens, the state-sponsored insurer of last resort has greatly reduced underwriting exposures. As of July 31, 2017, Citizens had 453,339 policies on its books, with a total exposure of approximately $116 billion. This volume compares with the company's peak size in 2011 of nearly 1.5 million policies with total exposure of $511 billion. Citizens' estimated 1-in-100-year probable maximum loss estimate has declined from approximately $23.2 billion at year end 2011 to $6 billion at yearend 2016. This estimate compares with Citizens' reported policyholders surplus of $7.5 billion at June 30, 2017. National Insurers Over the last decade Florida homeowners' insurance market share has shifted away from both Citizen's and national underwriters, such as State Farm Mutual Group and Allstate Insurance Group, and towards a number of smaller Florida-based homeowners' specialists. As such, leading national homeowners' underwriters have significantly reduced exposures in Florida property insurance. While these national underwriters will still endure meaningful losses from events such as Irma, Fitch believes their balance sheet size and diversity will enable the companies to absorb these losses, likely with ratings intact. Florida Homeowner Specialists Florida property specialists hold approximately 64% Florida homeowners' insurance market share by Fitch's estimate as of year-end 2016. Many of these companies have grown in recent years by writing business previously covered by Citizens. The majority of the companies have relatively brief operating histories, with balance sheet and claims organizations untested by a severe hurricane. Notable specialists include publicly traded companies: Universal Insurance Group, Heritage Insurance Group, Federated National Insurance Company, United Insurance Holdings Group, and HCI Group. Combined these companies have a market share in Florida of approximately 25%. Regulatory oversight of Florida specialists from the Florida Office of Insurance Regulation (FLOIR) includes establishment of a minimum level of surplus that must be maintained by each insurer following the application of a modeled 1-in-100-year probable maximum loss event, as well as a separate scenario analysis stress test based on modeled losses from multiple significant historical catastrophe events. Fitch believes that most Florida homeowners' specialists reinsurance programs provide an ability to absorb losses from events up to approximately 1-in-100-years. Losses above such levels could go "over the top" of catastrophe reinsurance programs. Fitch believes that the risk of going over the top of catastrophe program limits is a greater concern with Florida homeowners specialists given relatively low absolute capital levels, limited business diversification and questions as to their ability to raise capital following large loss events. Fitch does not rate this group of companies. Reinsurers Primary companies, and especially the Florida specialists, manage risk accumulations by ceding a large proportion of business to third party reinsurers. In an analysis of Schedule F statutory filings of the top 15 Florida homeowners' specialists including Citizens, FHCF assumes the largest level of premium by a wide margin for this group, totaling $735 million in 2016. Among private entities, Lloyd's of London is the next largest reinsurer by premiums assumed, followed by Everest Re Group, Ltd.; Allianz SE; and Tokio Marine Holdings, Inc. Fitch believes if losses from Irma are ultimately at the higher end of current estimates, there could be downward pressure on some reinsurer ratings. There is also a question if losses are so large that they prompt an improvement in reinsurance pricing, which could help mitigate losses. Alternative Reinsurance The impact of Irma is also expected to reach capital market investors, since Florida property risk is passed to the ILS (insurance-linked securities) market through multiple vehicles including catastrophe (cat) bonds, collateralized reinsurance, industry loss warranties, and hedge fund-supported reinsurers. The ILS market has experienced significant growth and has outpaced the traditional reinsurance market in recent years. According to Aon Securities, ILS capacity was $88.8 billion at June 30, 2017, representing 15% of the global reinsurance market. Catastrophe bond issuance reached an all-time high of $11.3 billion in the 12-month period through mid-year 2017, though the par amount outstanding is about $25 billion. Swiss Re Capital Markets estimates about 45% of outstanding cat bonds are exposed to Florida wind events and over 60% are exposed to the broader U.S. wind. A number of outstanding catastrophe bonds focus on Florida wind events or include it as a covered peril. Three of the current largest sponsors of catastrophe bonds include Everest Re Group, XL Catlin and USAA Insurance Group (USAA), each of which have multiple cat bonds outstanding providing protection against U.S. named storm risk. Several private market cat bond transactions are also currently outstanding (Market Re Ltd., Oak Leaf Re, Ltd.), with specific exposure to Florida wind risk, that are sponsored by Florida specialists. Fitch is closely monitoring activity related to Hurricane Irma, and will provide updates on any rating implications as loss experience emerges. For more information on the Florida insurance market, see "Fitch: Florida State-Run Property Insurers Well Positioned in Advance of Storm". Contact: Christopher A. Grimes, CFA Director +1-312-368-3263 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 James B. Auden, CFA Managing Director +1-312-368-3146 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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