Hurricane Milton: A Potential $175 Billion Damage Scenario

Overview

Hurricane Milton, a Category 4 storm, is predicted to hit Florida's Central Gulf Coast near the Tampa area either late Wednesday or early Thursday. The damage from this storm could potentially exceed $50 billion, with some estimates reaching as high as $175 billion. This is equivalent to the amount the Biden-Harris administration has sent to Ukraine since the war began.

Storm Damage Estimates

According to various research firms, this once-in-a-century storm could cause a catastrophic storm surge of up to 15 feet and winds exceeding 150 mph. This could result in a significant financial burden for both insurers and the government. Analysts led by Yaron Kinar from Jefferies have suggested that a major hurricane impact in one of Florida's most densely populated areas could result in losses in the tens of billions of dollars.

Potential Losses

Kinar has suggested that a 1-in-100 year event could result in losses of up to $175 billion if it hits the Tampa region, and $70 billion if it hits the Fort Myers region. If Milton maintains its current path through the more developed Tampa region, the losses could be even greater. The National Hurricane Center predicts a massive 15-foot surge of water across the Tampa region, which could cause significant damage to buildings and critical infrastructure.

Comparison with Previous Storms

According to analysts at Morningstar DBRS, insured losses from Milton could range from $60-$100 billion if the hurricane hits the Tampa metro area directly. This would put Milton on par with Hurricane Katrina in 2005. Bloomberg Intelligence analysts Matthew Palazola and Eric Bedell have also suggested that losses could total around $100 billion.

Insurance Claims

Hurricane Milton is expected to generate insurance claims in the tens of billions, with economic losses being much higher. The storm is likely to hit Tampa Bay as a Category 3 hurricane, which could result in nearly $100 billion in insured losses. CoreLogic estimates a reconstruction cost of $123 billion for residential properties in Tampa Bay and Sarasota under a Category 3 scenario. In 2020, the Tampa Bay Regional Planning Council estimated residential "structural losses" across six counties of $287 billion in the event of a Category 5 hurricane. However, only a fraction of this would be insured and Milton is not expected to reach Category 5 at landfall.

Impact on Insurers

Florida's state-run Citizens, mutual State Farm and smaller regional insurers may have the most exposure to Hurricane Milton losses, based on statewide market share. Among large, public insurers, Allstate and Progressive could see the most claims, holding about 3-4% homeowners market share in the state. However, even in a $100 billion event, the average hit to 2024 annual EPS for BI-covered insurers is 15%. This analysis uses industry losses of $30-$60 billion, applies those to Florida market share and accounts for reinsurance. If a carrier does not write coastal or high-value business in the state, this analysis could overstate their losses.

Flood Risk

Despite the likelihood of record-breaking storm surges from Milton, insurers are likely to avoid most flood claims, as this peril is typically excluded from homeowners policies. Nearly all flood insurance in the US is underwritten by the National Flood Insurance Program (NFIP). In parts of Florida where flood insurance is mandatory for residents with a federally backed mortgage, the penetration rate is only 46%. It's much lower where flood insurance isn't required.

Market Impact

Despite a rebound in insurance stocks on Oct. 8, the loss of market capitalization since Oct. 3 is still above potential losses for some, most notably Chubb. Progressive lost nearly $1.9 billion of value, bouncing back from a nearly $4 billion decline. This move is much closer to our assumption of $1.5 billion in after-tax claims for a $100 billion industry loss. The market reaction for Allstate looks in line with that scenario, but if industry claims are closer to $65 billion, the company's reinsurance would absorb more of the impact.

Global Impact

Analysts at UK investment bank Peel Hunt noted today that Lloyd's of London published a realistic storm disaster scenario earlier this year that projected a $134 billion loss for the insurance sector. Ryan Sweet, chief US economist for Oxford Economics, stated that about 3% of the US economy's GDP is within the storm's path, which could create a .14 percentage point drag on fourth-quarter GDP growth.

Bottom Line

As we await the impact of Hurricane Milton, it's clear that the potential damage and financial implications could be significant. The estimates vary, but all point to a substantial cost that will be borne by insurers, the government, and ultimately, the public. What are your thoughts on this impending natural disaster? Do you think the estimates are accurate? Share this article with your friends and let's discuss.

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