US P&C insurers: paradise lost as severe weather event hits Hawaii

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Are hailstones getting bigger, one equity analyst recently asked an executive at Travelers. The US property and casualty insurance industry has suffered through a summer of devastating thunderstorms on the continent.

The National Oceanic and Atmospheric Administration says the US has had 15 climate/weather loss events exceeding $1bn through early August. The 40-year average for a whole year is eight. Texas has been hit hardest. Allstate’s second quarter combined ratio — incurred losses and expenses over earned premium — of 145 per cent was a near record.

Then calamity struck Hawaii. Hurricane winds last week led to a firestorm that has claimed at least 99 lives on the island of Maui. Moody’s estimates the insured losses from these fires will exceed $1bn.

In the US, insurers have aggressively raised prices of premiums. In perilous locations such as California and Florida they have even stopped writing new policies. Given the worsening economics for claims, there is concern that insurers will not underwrite risk at any price.

Losses are exacerbated by general inflation, particularly for car insurance. New cars and parts have been affected by supply chain challenges. Moody’s notes that Hawaii already has high construction costs as materials have to be imported to the remote islands. A massive rebuilding effort could require importing labourers as well.

Higher interest rates along with elevated premiums should be tailwinds for insurers. Yet shares of insurers such as Allstate, Progressive and AIG are down between 3 per cent and 22 per cent this year, while the S&P 500 has climbed 16 per cent.

Bad years are a hazard for all property and casualty insurance insurers. But those anomalous periods are usually followed by relative peace for a time. This allows insurers to rebuild reserves before the next challenging year. It is too soon to conclude that the baseline for a severe loss year has permanently shifted upward. Still, the Travelers executive did admit to some anecdotal evidence of bigger hail.