Insurance Industry

The US property and casualty insurance industry has had a difficult time with hurricanes in the last year and a half. Four of the ten most catastrophic hurricanes in the history of the USA have occurred in the past 13 months. These four hurricanes include Charley, Ivan, Frances and Jeanne. The list got longer with the addition of Hurricane Katrina and Rita recently.

The Insurance Industry and recent hurricanes

In August 2005, the US property and casualty insurance industry, as well as the oil and gas industry faced its sternest challenge ever in the form of Hurricane Katrina, which caused floods in New Orleans besides devastating other regions in Louisiana, Mississippi and Alabama. While the death toll on account of Hurricane Katrina touched an estimated 1,000 people, the economic damage is expected to be in the region of US$125 billion.

The estimates may vary for the insurance industry, but Hurricane Katrina is likely to result in more insured losses than big catastrophes such as 9/11 terrorist attacks (US$20.1bn) and Hurricane Andrew (US$20.5bn).

Already 35 insurers have announced estimates of pre-tax losses aggregating US$10.69 to US$11.88 billion. The break-up of insured losses in the insurance industry are as follows:

• Homeowners (48%);
• Personal auto (6%);
• Offshore energy (14%);
• Commercial, multi and peril (32%).

Hurricane Katrina destroyed 275,000 homes as compared to 28,000 homes by Hurricane Andrew in 1992 and a combined 27,500 homes by Hurricane’s Charley, Frances, Ivan and Jeanne. In terms of regions, Louisiana accounted for 70% of insured losses followed by Mississippi (20%) and Alabama (10%).

Analysts expect the US property and casualty insurance industry to post its worst ever insured catastrophic losses in 2005. Fitch, the credit rating agency, observed: “A loss of this magnitude always has the potential to stress or even render insolvent some insurers. It is the smaller insurers with exposure concentrated in the affected areas that are at greatest risk of insolvency.” Standard & Poor's, however, went ahead and placed its ratings on ten insurance and reinsurance groups on ‘credit watch with negative implications’ due to possible exposure to Hurricane Katrina. The ten companies include international companies such as Ace Group, Lloyd's, Oil Casualty, Montpelier Re, PXRE and Swiss Re as well as US companies such as United Fire Group, Allmerica, Allstate and State Farm.

Clearly, Hurricane Katrina is forecast to result in heavy insured losses, but the US property and casualty insurance industry is expected to survive due to strong performance in 2004 and the first quarter of 2005.

The US property and casualty insurance industry posted an impressive profit after tax of US$38.72 billion in 2004, up from US$30.03 billion in 2003 thanks to pricing and underwriting discipline offset by record catastrophic losses of US$25.5 billion.

The first-quarter performance of the US property and casualty insurance industry in 2005 was robust. In fact, the financial and underwriting performance in the first-quarter of 2005 was the best in years although top-line growth was sluggish. The combined ratio of the US property and casualty insurance industry stood at 91.9 in the first quarter of 2005. Before Hurricane Katrina struck, the US property and casualty insurance industry was on course to report an underwriting profit for the second year in row, but now that seems unlikely.