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How Mixing Hurricanes With Low Rates Impacts Insurers


Early estimates for Hurricane Ida’s potential insured damage toll have so far been in the range of around $10 billion to $25 billion.


michael democker/Reuters

Hurricane Ida is certainly going to be a big insurance event. What that means for investors has a lot to do with interest rates, too.

Some early general estimates for Ida’s potential insured damage toll have so far been in the range of around $10 billion to $25 billion. That would make it potentially one of the worst U.S. natural catastrophe loss events of recent years. But a good amount of the loss burden in Louisiana would likely fall to reinsurers, which primary home and auto insurers use to cover their own exposures beyond a certain point.

If more formal loss estimates move toward the higher end of the early ranges, reinsurers may become relatively more exposed, while many primary insurers’ losses might increase by a smaller degree. Morgan Stanley analysts noted that catastrophe losses already incurred in the first half of 2021, such as due to Winter Storm Uri, also mean that those primary-insurance coverage levels might be hit sooner than otherwise.

Shares of reinsurers such as

Everest Re Group


RenaissanceRe Holdings

and Munich Reinsurance are down more than 2% over the past week in anticipation of storms, even as financials overall have rallied. Analysts at Wells Fargo estimated in a note that if Ida does $17.5 billion of damage, it would cost more than a quarter’s worth of earnings for reinsurers they cover, but only roughly one-third of expected third-quarter earnings for primary insurers.

Already, reinsurance stocks have mostly underperformed other insurers so far in 2021. Many commercial property-and-casualty insurers have navigated Covid-19 with losses lighter than feared so far, yet have been able to largely keep pushing rates higher. But there is some rising pressure on recent positive pricing trends for reinsurers, according to industry reviews. A report by brokerage Willis

Towers Watson

in July said that in the reinsurance market “there are increasing signs of capacity supply outweighing demand.”

Worries about inflated costs had limited impact on recent renewal pricing, the report said. But the market for alternative capital is booming, with issuance of catastrophe bonds in the second quarter of 2021 outstripping new issuance in 2019, according to Willis. This market tends to be strong when interest rates are low, leading investors to search for alternative forms of yield. Historically this has hit reinsurance pricing through ample supply of funds.

Insurers have in the past emerged from storm seasons with some stronger pricing momentum that can bolster shares over time. A bad storm loss also can lock up investors’ capital in insurance-linked securities, damping that market. But damage from Ida alone may not be large enough to have a material impact on alternative capital or the catastrophe reinsurance market, Wells Fargo analysts estimated. And if the Federal Reserve is intent on keeping any rate increases quite gradual, investors likely won’t stop searching for alternative sources of yield any time soon.

The case for lower rates rests in part on inflation being transitory. That may be the case over a medium or longer time horizon, but for insurers, it remains to be seen how an acute shock right now might impact the labor and materials costs of rebuilding. Investors should be cautious in the aftermath of this terrible storm.

Hurricane Ida hit Louisiana as a Category 4 storm and knocked out power to the entire city of New Orleans. The storm is testing a $14.6 billion system including levees and flood walls, while threatening hospitals overwhelmed with Covid-19 patients. Photo: Eric Gay/Associated Press

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Appeared in the August 31, 2021, print edition as ‘How Mixing Hurricanes With Low Rates Affects Insurers.’

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