Milton likely an earnings event as losses appear more modest than feared: Jefferies

With Hurricane Milton’s insured losses likely to be more modest than initially feared, the equity analyst team at Jefferies has suggested that it will probably be a large earnings event and is not expected to drive up property reinsurance rates in 2025.

“With the path and strength of the storm less severe than initially feared, and with no storm surge in the Tampa area, we believe that it is becoming increasingly clear that this is an earnings event; likely in the 1-in-20 year PML range,” the analysts explained.

This conclusion follows the backdrop of meaningful recovery in Bermudian stocks over the last three days, with shares roughly at Friday’s levels.

However, it lags behind the recoveries seen in prior large storm events, likely reflecting lower pricing power expectations on the back end of what appears to be an earnings event.

Out of the four insured industry losses illustrative scenarios, Jefferies notes that investors should focus on the $25 billion-$50 billion scenarios, as the ultimate loss from Milton is expected to be weighted to the lower end of scenarios.

The analysts also do not expect Milton to drive up property reinsurance rates in 2025, but the range of outcomes should narrow. This does not mean that a sub-$50 billion industry loss in an otherwise benign catastrophe year for reinsurers would result in risk-adjusted rate increases. Simultaneously, the near miss of a well over $100 billion industry loss scenario may keep fear-driven discipline at the forefront, possibly leading to mid-SD declines for US risk.

Yesterday, analysts at Keefe, Bruyette & Woods (KBW) suggested that Milton could still drive property catastrophe reinsurance prices higher at January 1 renewals, but perhaps only at a low pace.

AM Best has also warned that the hurricane poses a significant threat to the Florida-concentrated property insurers that lack diversification.

Considering that property catastrophe reinsurance rates that stepped up by about 40% in the US post-Ian, are very accretive, this could be viewed as a good outcome, though earnings power will modestly erode and NII yields will be compressing as well.

For primary insurers, for whom M9’24 cat losses were far from benign, Jefferies does not expect property rates to decline in 2025, but given overall favourable returns YTD due to more diversified books, there still may be limited room to achieve meaningful rate increases.

The analyst team adds, “In a $50 billion industry loss scenario from Milton, the analysts expect RNR to see an approximately 5% BV ex AOCI erosion, FIHL to see about 4% and EG to see around 3%. Analysts note that considering the 20-25% H1 op. returns that cat-exposed Bermudians generated in H1, and are expected by us to generate in 3Q24 as well, we would not expect even a higher end of illustrative loss from Milton to result in negative EPS for the year for Bermudians. We also expect primary insurers – more diversified – to post positive EPS for the year.”

However, the industry must proceed with caution that storm season is not over yet, and additional storms may shift the pricing power into 2025.

Jefferies continues to view 2022’s Hurricane Ian, which made landfall just north of Fort Meyers (farther south than Milton’s landfall), resulting in approximately $53bn in insured losses, as the closest equivalent. However, Ian resulted in out-sized flooding, and saw a greater storm surge, but also made landfall in a lesser developed part of Florida’s west coast.

So far, other firms, like Icosa Investments’, estimate Milton-related insured losses to be between $20 billion and $60 billion, noting the range is still subject to change due to significant uncertainty.

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