Hurricane Idalia, which recently hit Florida and made landfall as a powerful Category 3 storm, is currently putting Berkshire Hathaway’s earlier bet to the test. The company had increased its reinsurance underwriting in Florida, primarily driven by attractive high premiums. Now, they are anxiously waiting to see if the losses incurred during this hurricane season will offset their previous gains.
Berkshire’s Risky Endeavor
In May, Ajit Jain, Berkshire’s Vice Chairman of Insurance Operations, announced that the company had underwritten the maximum amount of property-catastrophe reinsurance allowed by their capacity on the April 1 renewable date. Written premiums for this sector experienced a significant rise of 30% compared to the previous year. Although the revenues from this underwriting endeavor are attractive, the risks associated with it are equally substantial.
Potential Profits or Losses
Depending on the extent of damages caused by hurricanes in 2023, Berkshire could potentially earn several billion dollars in profit. However, they also face the possibility of losing as much as $15 billion in the Sunshine State. The fate of their investment now rests on the outcome of Hurricane Idalia.
Hurricane Idalia: A Weakening Force
Fortunately for Berkshire, things are looking promising so far. Hurricane Idalia weakened from a powerful Category 3 storm to a Category 1 hurricane as it traversed across Florida towards Georgia. Analysts at UBS, referencing preliminary estimates from RMS (a catastrophe risk modeling firm under Moody’s), projected average insured losses of $9.36 billion for Hurricane Idalia. This pales in comparison to the $112 billion in damages caused by Hurricane Ian last year.
Monitoring the Intensification Potential
It is important to note that the aforementioned loss estimate could fluctuate significantly over the next few days. Sarah Hartley, Senior Manager of Event Response at Moody’s RMS, highlights the potential for significant intensification due to the very warm sea surface temperatures along Idalia’s path. These temperatures, the warmest in 40 years across the eastern Gulf of Mexico, suggest the storm still has the potential to cause substantial damage.
The Response from Berkshire
At this time, Berkshire has yet to respond to requests for comment.
Berkshire is not the only insurance company enticed by the lure of high premiums in hurricane-prone states. RenaissanceRe Holdings (RNR), another reinsurance giant, also anticipates underwriting more property catastrophe policies ahead of the hurricane season due to the “reasonably good rates.”
The State of Florida’s Property Insurance Market
In a recent earnings call, RenaissanceRe CEO Kevin O’Donnell highlighted a decline in demand for mid-year insurance policy renewals in Florida. According to O’Donnell, this decrease can be attributed to primary insurers reducing their exposure in the state or completely ceasing underwriting operations. Consequently, many of these policies have been taken over by Citizens, a state-backed property insurer that typically purchases less reinsurance.
The primary reason for the reduced demand, O’Donnell explained, is the financial limitations of the insurance companies themselves. Years of significant losses and inadequate pricing have left many insurers unable to afford additional reinsurance coverage. As O’Donnell put it, “The demand was there by buyers, they just didn’t have the wallet to be able to purchase what they needed.”
This situation puts primary insurers in a precarious position regarding catastrophe damages. With less reinsurance coverage in place, these insurers would bear the brunt of such losses before reinsurance kicks in. As a result, smaller firms with weak balance sheets may face insolvency, especially since they lack access to additional capital due to not being publicly traded. Meyer Shields, managing director at investment bank KBW, warned of the potential consequences.
Florida’s property insurance market is primarily dominated by private regional carriers. The only publicly traded names among the top 10 writers of homeowner insurance are Progressive (PGR) and Allstate (ALL), holding 4% and 3.2% market share, respectively. Additionally, Progressive commands a sizable share of the personal auto market at 20.8%, while Allstate holds a 10.5% share.
In contrast, reinsurers are expected to face fewer losses since the threshold for them to assume payment responsibility has increased significantly. While insured losses within the higher end of the RMS range could eat into reinsurance layers, Meredith of UBS believes that the mean expected loss in single digits would not have a material impact on reinsurers. In fact, the storm may help keep catastrophe reinsurance pricing at a firm level for the renewal dates in 2024.