Hurricane Ike Losses Won't Spur A Major Turn In The Soft Market

Hurricane Ike--which caused anywhere from $6 billion to as much as $18 billion in insured losses, catastrophe modelers estimate--will likely boost the industry's combined ratio, perhaps back over the magic 100 mark for the year, but will not substantially alter the current soft market's direction, analysts say.

Standard & Poor's and Fitch Ratings put out papers last week acknowledging that the losses from Ike, along with other tropical storms this season, could mean a downside in earnings for the industry.

However, S&P noted that "we believe the aggregate catastrophe losses from these successive storms are earnings events for the industry rather than capital events."

S&P added that the storms, as well as poor investment returns and investment write-downs, are contributing to a troubled financial picture for the industry and could affect ratings or outlooks in the future.

Fitch Ratings said it believes losses from Ike will add one-to-four points to the 2008 U.S. statutory combined ratio, which is expected to exceed 100.

Fitch warned that while the industry will not see a material deterioration, the possibility for smaller insurers, especially those with concentrated geographic focus, could be materially affected.

Fitch also noted that because Ike was a Category 2 storm when it hit Texas, it would not trigger catastrophe bonds.

Both S&P and Fitch said Ike would not alter the current overall property-casualty market's pricing decline, but S&P did say it would probably stabilize the property-catastrophe market. S&P also said primary insurers would probably bear the brunt of the losses because reinsurance aggregates would not be triggered.

Meyer Shields, a financial analyst with Stifel Nicolaus, agreed that while the storm might stem the recent slide in property insurance prices in catastrophe-prone areas, it would not alter the global soft market.

Lisa Gibson, insurance partner at Deloitte, also said that Hurricane Ike, along with Fay and Gustav, are "still not large enough to drive a change in the market rates. It would take 2008 turning into a repeat of 2005, with industry losses of $30 billion to $50 billion, for that to occur."

A.M. Best said that despite the size of Hurricane Ike, it would not be a solvency event for the industry, adding that while some ratings of individual companies might be affected, the overall financial strength of the industry would not be weakened.

Hurricane Ike battered Galveston, Texas, and the surrounding cities along the state's barrier islands, leaving homes and businesses leveled along the coast. The storm came ashore as a strong Category 2 hurricane on the Saffir-Simpson scale, with winds upward to 110 miles per hour.

Flooding from the surging Gulf began on Sept. 12 as Ike moved onshore throughout the day. After hitting Texas head on, the storm swept into the Midwest, bringing heavy rains and high winds into the region and knocking out power to hundreds of thousands of homes and businesses--including National Underwriter's home office facility in Erlanger, Ky.

Ike is expected to make the top-10 list of hurricane losses, possibly surpassing Wilma in 2005.

EQECAT put its initial damage estimate between $8 billion and $18 billion for the counties of Brazoria, Harris, Galveston, Chambers and Jefferson. The figures factor losses for commercial and residential properties, business interruption, and offshore energy production platforms.

EQECAT said losses from energy production platforms would primarily be limited to older, shallow-water facilities.

"Onshore, flooded pumping stations and refineries are expected to impede immediate resumption of energy production," Tom Larsen, senior vice president of EQECAT, said in a statement. "However, disruption isn't expected to be extensive."

Risk Management Solutions revised its estimate last week to anticipate insured losses of between $7 billion and $12 billion, which includes both onshore and offshore losses. The figure does not include flooding.

AIR Worldwide put onshore losses at between $8 billion and $12 billion, with expected losses of $10 billion. It put offshore losses at considerably less--$600 million to $1.5 billion.

"High-rise office buildings in downtown Houston have been subject to winds around 30 miles-per-hour higher than at ground level, potentially aggravated by debris from the proximity of these buildings in the downtown area," Christine Ziehmann, director of model management at RMS, said in a statement. "Damage that has been observed so far to windows and facades is similar to that experienced in southeast Florida form Hurricane Wilma in 2005."

"As expected, Houston's high-rise buildings are reported to have sustained major damage to glazing, much like the damage caused by 1983's Hurricane Alicia," Peter Dailey, director of atmospheric science at AIR, said in a statement. "AIR expects wind damage to be widespread, not only along the coast but also extending well over 200 miles inland form Galveston."