Major Insurer Downgraded after Climate Losses

Ask not for whom the bell tolls, it tolls for thee. Not just in Florida.
Major insurance companies that we all rely on are under increasing strain from a steady increase in climate amplified weather events.

Allstate Insurance was recently downgraded by Standard & Poors

The Insurer: (paywall)

Allstate has had the issuer credit and financial strength ratings on its core operating subsidiaries downgraded from AA- to A+ by S&P after a challenging first half of the year saw it report deteriorating underwriting results driven by cat(astrophic) losses, auto losses and modest adverse reserve development.

Financial Times quoted S&P’s evaluation:

“The downgrade reflects Allstate’s continued weak underwriting performance given elevated catastrophe losses, persistently high loss costs for the personal auto business, and the increased exposure — measured by premiums — consuming higher levels of capital. Through the first six months of 2023, the S&P-adjusted consolidated combined ratio for Allstate rose to 115.6% from 105.4% for the same period in the prior year. The homeowners line of business saw the steepest erosion with the company’s reported combined ratio increasing to 132.3% for the first six months of 2023 from 95.9% for the same period in 2022 with Property-Liability year-to-date catastrophe losses of $4.4 billion, greater than the $3.1 billion loss in all of 2022. The auto business, while improving on an underlying basis in the quarter, still weakened year to date on a calendar year basis to 106.4% from 105% as elevated catastrophe losses and minimal adverse development outpaced a meaningful expense improvement. As a result, we expect the company to achieve a net loss for the year with the combined ratio in the 108%-110% range, assuming a normalised level of catastrophe losses in the second half of the year.”

FT also noted that “not only did Allstate swing to a steep loss for the first half of this year in its homeowners’ insurance business, it also saw greater catastrophe losses than it did for all of last year.”

Further, FT noted that typically, Insurers hit with major catastrophes count on the mammoth “Reinsurance” companies (insurance companies that insure insurance companies, for instance, Lloyds of London) to take the pressure off following a major Hurricane Katrina of Sandy scale disaster, what they’ve seen lately is a steady increase in the number of lower amplitude events, primarily severe convective (thunder) storms. FT notes that “this year has brought a steady storm of only moderate disasters to the mainland US, leaving Allstate on the hook for more of the claims.”

They point to an analysis by Moody’s Investors Service, which rates the creditworthiness of companies, governments.

Moody’s Investor Service:

Severe weather events are happening more often. Recently in the US, atmospheric river storms have been battering Northern California with heavy precipitation, major flooding, fierce winds and mudslides. These followed December’s deadly winter storm Elliott, whose heavy snowfall, powerful winds and extreme cold temperatures caused estimated insured losses of approximately $5.4 billion according to risk modeler Karen Clark and Co.

Climate change, which has led to increased frequency and severity of weather-related natural catastrophes, also poses a significant risk to insurers and reinsurers. Global insured natural catastrophe losses have averaged about $100 billion over the past five years. Reinsurers in particular are feeling the heat as they accumulate losses from primary companies. To counter this, many are raising prices, limiting coverage and even exiting some markets to improve returns.

The rise in natural catastrophes over the last five years has increased losses for global insurers and reinsurers in tandem with the rise in economic losses. Reinsurers absorb risk from primary insurers and have seen large catastrophe losses that have taken a toll on profitability.

Although total insured losses are always lower than total economic losses — because not all property is insured — average insured losses are climbing steadily. In 2021, insured natural catastrophe losses reached around $110 billion, according to Swiss Re, making it the third-costliest catastrophe year since 2011.

Over the past five years, insured natural catastrophe losses averaged about $100 billion, with 71% of the losses occurring in North America, followed by 12% in Asia and 11% in Europe.

High inflation is pushing up the cost of materials and labor, exacerbating the impact of post-pandemic supply chain disruption.

Construction materials in the US, for example, are more than 40% higher since the beginning of 2020 and 10% higher in Europe. This increase is driving higher property replacement costs, which in turn feeds through into higher homeowner and commercial property claims.

Reinsurers have responded to the increase in natural catastrophes with significant premium rate increases, reflecting a sector-wide reassessment of catastrophe risk following several consecutive years of bigger than expected claims.

In Moody’s 2022 annual survey of reinsurance buyers, 40% of respondents expected rate increases of at least 7.5% for property lines this year. In fact, average increases at the Jan. 1, 2023 renewals were well above that level, according to Gallagher Re.

Reinsurer Swiss Re points out “Severe thunderstorms account for up to 70% of all insured natural catastrophe losses in first half of 2023”.

Swiss Re:

Martin Bertogg, Head of Catastrophe Perils at Swiss Re, said: “With severe thunderstorms as the main driver for above-average insured losses in the first half of 2023, this secondary peril becomes one of the dominant global drivers of insured losses. The above‑average losses reaffirm a 5 – 7% annual growth trend in insured losses, driven by a warming climate but even more so, by rapidly growing economic values in urbanized settings, globally. The cyclone and flood events in New Zealand in the first quarter of 2023 are testimonies of the risk to today’s large urban centres, continuing patterns observed in 2021 in the Germany flooding, and in 2022 in Australia and South Africa.”

Severe convective storms – storms associated with thunder, lightning, heavy rain, hail, strong winds and sudden temperature changes – caused USD 35 billion (nearly 70%) in insured losses worldwide in the first half of 2023. This means that insured losses are almost twice as high in a six-month period as the annual average of the last ten years (USD 18.4 billion).

In the US, a series of severe thunderstorms prompted insured losses of USD 34 billion in the first half of 2023, the highest ever insured losses in a six-month period. Ten events caused losses of USD 1 billion and above each, compared to an annual average of six events for the previous ten years. The most affected state was Texas. 

Eugene Robinson in the Washington Post:

The insurance industry is already making an adjustment that we all soon will feel. A report last week by the reinsurance giant Swiss Re calculatedthat severe thunderstorms in the United States accounted for 68 percent of insured natural catastrophe losses worldwide in the first half of this year. Reinsurance companies will pass along those costs to the primary insurers who cover your home and your car. Primary insurers will eventually pass along those costs to you — though imagine facing the random violence of extreme weather without insurance at all.

As individuals and as communities, we need to think more about worst-case scenarios and actively plan for them. We have an old hemlock tree in front of our house that’s near the end of its life span. I love it, but we’re going to have to take it down and plant a replacement — before a storm brings it down.

Climate change is personal. Act accordingly.