Hurricane Ida made landfall in southeastern Louisiana on August 29, 2021, as an even more-powerful storm than Hurricane Katrina, which made landfall exactly 16 years earlier in August 2005 as a Category 3 storm with sustained winds near 125 mph. Though less-powerful, Katrina was a bigger storm with hurricane force winds bearing down on a larger area than Ida has. However, S&P Global Ratings thinks the insured losses from Ida, though substantial, appear to be well below the $41 billion of onshore privately insured losses experienced due to Katrina. A key difference is that the system of levees and pumping stations that protects the city of New Orleans and some of its suburbs, substantially upgraded following Katrina, worked as intended, thus averting the massive economic losses and humanitarian crisis caused by the flooding of the city during Katrina. Another important difference is that Ida generated a smaller storm surge and made landfall further to the west than Katrina in a less-densely populated area with a topography more resilient to storm surge.

Primary P/C Insurers Well Positioned To Absorb Losses From Ida

Wind and the consequent water damage from rain are likely to be the primary causes of damages from Ida, rather than the storm surge losses seen with Katrina. The direct premiums written by our rated P/C insurers is split roughly 60/40 between personal and commercial lines, so the most affected line will be residential property. But commercial property losses will be substantial and could be exacerbated by the widespread extended power outages across much of southeastern Louisiana, including New Orleans. We do not expect the auto insurance sector to face significant losses because mandatory evacuation orders were in effect for areas identified as in danger of flooding.

Louisiana is one of the peak wind exposure zones for many re/insurers, and many primary insurers have taken steps to reduce their property exposure in the area since Katrina. These measures include limiting the aggregate amount of risk underwritten in coastal areas and increasing use of reinsurance. The direct property premiums written by our rated insurers represent a small proportion of their total premium volumes (see table 1).

Table 1

We have examined the potential impact of Ida losses by applying a market-share approach based on a hypothetical $25 billion industry loss estimate to derive an indicative loss estimate for each insurer. While we assumed that the bulk of these losses will be retained by the primary insurers, losses passed along to their reinsurers will also be material.

Fortunately, most of the rated primary P/C insurers entered 2021 with strong capital positions (see charts 1 and 2). Based on these loss estimates, we believe the impact on capital adequacy, as measured by our proprietary capital model, would not be material enough to affect any of our ratings. Of course, this could change if an insurer ends up with regional concentrations leading to net losses significantly above this estimate.

Chart 1

Chart 2

Reinsurers Won't Remain Unscathed By Hurricane Ida

Although it is still too early to fully quantify the insured loss range from Hurricane Ida, it's clear that this is a major event for the sector. Initial insured loss estimates range from $15 billion up to $25 billion. We think global reinsurers will be significantly exposed to the damage caused by Ida, especially hitting the sector's catastrophe budget and earnings. But we expect the potential losses from this event on a stand-alone basis, will likely result in an earnings event rather than a capital event. Moreover, we view the sector as continuing to benefit from robust capitalization.

Nonetheless, losses in the first eight months of the year indicate that 2021 could potentially be another expensive natural catastrophe loss year for the reinsurance industry. The global reinsurance sector in 2017-2020 didn't earn its cost of capital due to COVID-19-related losses, large natural catastrophe losses, adverse loss trends in certain U.S. casualty lines, and fierce competition among reinsurers exacerbated by alternative capital. As a result, our sector view of the global reinsurance sector remains negative.

In the first half of 2021, the global re/insurance sector faced the second-highest natural catastrophe loss of about $40 billion versus the 10-year average of about $33 billion, according to Swiss Re. This was a result of winter storm Uri hitting Texas, as well as hail and wildfires. The second half of the year started off on a bad foot with severe floods in Europe and wildfires in the U.S., Greece, and Turkey. The German Insurance Assn. (GDV) indicated that insured industry losses for Germany for the June and July floods alone could be about $10 billion. Hurricane Ida adds to that and is the first significant Atlantic hurricane in terms of insured losses in 2021. The Atlantic hurricane season has just begun and will last until November. Predictions from the National Oceanic and Atmospheric Administration (NOAA) indicate an above-average Atlantic hurricane season.

Historically, the top 21 global reinsurers have had an average market share on global insured catastrophe losses of about 20%. The market share usually increases at tail events such as Hurricane Ida and the European floods in July. Therefore, we think reinsurers will take at least that share of these losses, while market share was lower for the catastrophe losses in the first half of 2021. So, the operating performance of the sector was sound in the first half of the year benefitting from a relatively benign catastrophe environment in the second quarter of 2021. With the annual catastrophe budget and expected profit before tax of about $35 billion (see chart 3), the sector has a significant cushion before severe events hit its capital. On an aggregate basis, we think about $8 billion-$9 billion of the annual catastrophe budget for the top 21 reinsurers was used up in 2021 before Hurricane Ida. We assess that the exposure for the top 21 reinsurers in the exposed zone for 1-in-10 year to 1-in-250 year return periods lies between $2 billion and $24 billion (see table 2). However, if Hurricane Ida exceeds a 1-in-20 year loss for the affected area, the remaining annual catastrophe budget of about $4 billion-$5 billion would likely be wiped out for the sector and additional catastrophe losses would start eating into the sector's expected earnings. We believe a 1-in-20 year loss from Ida would broadly equate to a $25 billion overall insured loss for the broader industry, which appears to be the upper end of the current early loss estimate.

Capitalization has been one of the pillars of strength for the sector. Entering the 2021 North Atlantic hurricane season, global reinsurers' capital remained robust and redundant above the 'AA' confidence level by about $19.1 billion or 7% as of year-end 2020 (see chart 3).

Chart 3

While Hurricane Ida is a significant loss event for the reinsurance sector, coupled with the European floods, we expect the firming rate environment will continue in the upcoming P/C renewal season in 2022. The sector's ability to meet its cost of capital in 2021 has shrunk with Ida and will depend on the catastrophe development for the rest of the year. We will closely monitor the exposure from Ida for respective reinsurers since the catastrophe budget consumption can vary—we could take rating actions if our base-case capital and earnings assumptions are not met. But at this stage, we expect hurricane Ida to be an earnings event for the sector versus a capital event.

Table 2