Allstate, State Farm brace for Harvey, Irma after respite – Finance News

on Sep10

7 September 2017 | 10:30 am

State Farm and Allstate still are calculating the financial blow of Hurricane Harvey in Texas, even as powerful Hurricane Irma in the Caribbean bears down on Florida.

While the human misery such storms cause hasn’t changed from 2005, when Hurricane Katrina devastated New Orleans, the approach the insurance industry takes to them has evolved considerably. Bloomington-based State Farm, by far the largest insurer of homes and cars nationwide, and Northbrook-based Allstate, also a giant, today call much more on outside insurers to help them absorb the cost of claims from such catastrophic storms.

That explains in part why Allstate’s stock price has fallen just 6.7 percent since Aug. 22, when it started dropping in anticipation of Harvey’s Texas landfall. The insurer’s stock even rose yesterday, to $87.50 a share, despite the higher risk that Irma, with winds now topping 185 mph, could devastate‚Äč parts of Florida after pummeling Puerto Rico.

Much of that has to do with the lessons Allstate learned after Katrina, which cost the company $4.7 billion and wiped out 21 percent of its equity. Since then, Allstate has purchased generous amounts of “reinsurance” in coastal areas prone to hurricanes.

And it’s a far smaller player in Florida than it was in 2005, when hurricanes last lashed the state. Allstate back then was the largest homeowners insurer in the state, with more than 10 percent of the market. Now it’s not even in the top 10.

For Allstate, then, Harvey is likely to be much costlier than Irma, simply because the company is more exposed in Texas. Estimates of total insured losses from Harvey run from $15 billion to $30 billion. With 13 percent of the homeowners’ market in Texas, Allstate conceivably could incur about $2 billion of that, but reinsurers will pay out a significant chunk. Thanks to $21.5 billion of equity as of June 30, Allstate is well-equipped to cover that.

“Most (investors) know this is kind of what Allstate does for a living,” said Paul Newsome, an analyst at Sandler O’Neill & Partners in Chicago.

An Allstate spokeswoman didn’t respond to a request for comment.

State Farm, given its size, will likely shoulder the biggest load among private insurers in covering claims from both storms. The company is private, so it’s harder to assess its financial exposure. But unlike the days of Katrina, State Farm now purchases reinsurance from outside firms, a spokeswoman confirmed. She wouldn’t say how much.

At 6.6 percent, State Farm had the third-largest Florida market share in homeowners’ insurance in 2016. In Texas, it’s by far the largest, with 21.5 percent of the market. State Farm, however, is enormous. With a net worth of $87.6 billion as of the end of 2016, it easily has the capacity to take a significant loss.

Still, the economic blow from Harvey in Houston combined with the potential for a historically powerful hurricane in Florida will put State Farm’s and Allstate’s preparation to the test. Storms of this magnitude frequently cause unpleasant surprises for the industry. When Katrina struck in late August 2005, Allstate’s stock initially dropped about 5 percent in the days following landfall. Once the enormity of the losses became clearer, the stock decline went to 12 percent.

The industry is in particularly sound financial shape to handle what might be a historically bad catastrophe season because there have been relatively few such storms in recent years. But when hurricanes happen in Florida, they tend to be very costly. Andrew in 1992 was second to Katrina in terms of insured losses in U.S. history, causing more than $24 billion in damages in 2016 dollars.

The insurance industry in the U.S. had about $720 billion in capital as of 2016 to cover losses, Newsome said. At the end of 2004, that figure was about $400 billion.



Previous postSee Hurricane Irma's Effects in Florida as It Nears Next postTeen, Brother Arrested in Murder of Philly Dad in Front of Daughter


Chicago Financial Times


Copyright © 2021 Chicago Financial Times

Updates via RSS
or Email