Hurricane Forecast

Hot off the Colorado State presses:

And, for whatever it’s worth, over at the Actuarial Outpost, a hurricane season prediction contest is underway.

A few articles in my reading pile today just seem to go together so well.

First, Insurance Journal reports on the obvious by passing along a blurb from S&P:

The U.S. commercial lines property/casualty insurance “soft” pricing cycle will likely mean outlooks on some commercial lines insurers will be revised to negative in the second half of 2008, according to Standard & Poor’s Ratings Services.

In a new article, which is titled “As U.S. Commercial Lines P/C Prices Fall Further, It’s Time For Insurers To Sink Or Swim,” Standard & Poor’s says that if price declines continue at their current pace, resulting negative outlooks on individual commercial lines insurers in the second half of 2008 could in turn lead to a negative outlook for the commercial lines sector toward the end of the year.

Maybe there’s one or two people in the insurance industry who weren’t aware that, with just a few exceptions (coastal wind, in particular), the market is softening…but for many of us this would fall in the category of “no s—t, Sherlock!”.

However, the prospect of triple-digit combineds and ratings downgrades probably has a few M&A teams waking from their boredom and starting to do the early research in anticipation of future blood running in the streets.

Why, if I’m not mistaken, a minor flesh-wound has already been announced by Progressive:

Progressive Corp.’s profit shrank 34 percent in the first quarter because of slipping premiums, the car insurer said Wednesday.

Progressive earned $239.4 million, or 35 cents per share, in the first quarter, compared with profit of $363.5 million, or 49 cents per share, in the first quarter of 2007.

Premiums shrank 4 percent to $3.49 billion from $3.65 billion.

Of each premium dollar, Progressive spent 94.6 cents administering claims, 5.1 cents on the dollar more than the first quarter last year.

That AP article, by the way, is yet another example of financial reporters needing a bit of an education in the subjects they report.   The 94.6% figure is a combined ratio, not a loss ratio as the article implied.

That’s still profitable, but competition and frequency/severity trend changes have been marking an end to the salad days of personal auto insurance.

But at least there’s some hope of market hardening.   The Klotzbach/Gray hurricane forecast April update has been released:

Hurricane forecasters from Colorado State University today raised the number of Atlantic storms they expect this year to 15, including eight hurricanes, half of them major.

“Current conditions in the Atlantic basin are quite favorable for an active hurricane season,” said meteorologists William Gray and Philip Klotzbach, whose predictions are closely watched by insurers, energy markets and local governments.

In December, they predicted 13 named storms this year, including seven hurricanes, three of them major.

There’s nothing like a good catastrophe to deplete excess capital in the industry, drive some nutty players back to sanity, and firm up prices a bit.

I don’t know whether it was because of all the mortgage hype this week or because hurricane season 2007 turned out to be uneventful in the States, but the folks at Colorado State have once again hit [F9] to prod the random number generators into action, to produce an early guesstimate about storm season ‘08. Their picks:

• 13 named storms (average is 9.6)
• 7 hurricanes (average is 5.9)
• 3 intense hurricanes (average is 2.3)
• 60% chance of cat 3+ making landfall on the U.S. coast (average is 52%)

In fairness to the folks at Colorado State, they do spend a portion of their report reminding readers that there are significant uncertainties involved. Long-long-term weather forecasting is still in its infancy, and variability is huge. Gray and Klotzbach are primarily in the business of identifying correlations between weather patterns at certain times of the year with the tropical storm activity in the following year, and this report is how they opine on them.