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US insurers well prepared for expected average hurricane season: Fitch

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U.S. property/casualty insurers are in a good position for what is expected to be an average hurricane season in 2018, Fitch Ratings Inc. said Thursday.

New York-based Fitch said in in its annual hurricane season preview report that U.S. insurers are well prepared at the start of the 2018 hurricane season to withstand a significant catastrophe this year after suffering through last year’s volatile hurricane season.

Aggregate industry policyholders' surplus grew 7.5% in 2017 to a record $765 billion, as elevated underwriting losses were offset by higher total investment returns.

Early forecasts of the upcoming June 1 to Nov. 30 hurricane season suggest the forces that help develop tropical storms appear to be neutral and indicate a near-average season.

Hurricanes Harvey, Irma and Maria combined to produce $80 billion in insured losses last year, Fitch said, making 2017 the second costliest hurricane season in North America, trailing 2005 when Hurricanes Katrina, Rita and Wilma caused insured losses of $107 billion in 2018 dollars.

While primary U.S. insurers incurred significant losses from these events, Fitch said, the nature of 2017's storms led to a sizable portion of the financial fallout to be shouldered by offshore reinsurers, alternative capital and the National Flood Insurance Program.

"Significant property losses in 2017 will lead to higher premium rates in loss-affected primary market segments," Christopher Grimes, director of Fitch Ratings, said in a statement. "Market pricing data indicates that the soft market appears to have finally reached a bottom, with rate increases seen in most lines, particularly commercial property and property catastrophe reinsurance business."

The Fitch study said reinsurers are seeing rate increases again, though not to the degree that many market participants had anticipated. The improved pricing environment may be short-lived for reinsurers. Senior Director Brian Schneider said in the statement that alternative capital in the reinsurance markets “competes directly with traditional capital, which limits the extent of cyclical price changes following severe catastrophe-loss years.”

The Florida primary insurance market reported net insured losses from the 2017 season that were relatively limited compared with sizable gross losses that companies largely passed to the reinsurance sector and alternative capital investors. Florida specialist homeowners' insurers rely heavily on the use of robust reinsurance programs to manage capital and stabilize financial performance.

Demand for insurance-linked securities and catastrophe bonds remains very strong to date in 2018 with nearly $3.6 billion of cat bonds exposed to named storms announced thus far, Fitch said.

Capital markets returned in full force following losses paid with few visible trapped capital effects from outstanding 2017 claims settlements, which Mr. Grimes said is a sign that "investors remain undeterred from allocating capital to the sectors as investors continue to view catastrophe (re)insurance as diversifying source of risk."