As we were recently reminded, hurricanes, like other natural disasters, have the potential to be devastating and disrupting events. As Florida and Texas begin the recovery and rebuilding process, historical context provides perspective about the likely impact these storms will have.
Total losses from Hurricane Harvey are expected to be sizeable, ranging between $70 to $100 billion. In terms of total economic losses, these estimates put Harvey behind only Hurricane Katrina, which caused $160 billion in damages (adjusted for CPI in today’s dollars). Losses for Irma are expected to be less, $20 to $40 billion. This wide range is understandable when you consider Florida’s massive property risk—there is $1 trillion of property on the east coast alone. Hurricane Irma also spanned 400 miles.
The primary financial risk stemming from the storms are from property damage, both commercial and residential. The impacted areas of Houston represent 5% of the U.S. population. Of the 1.7 million single family homes in the impacted counties, 11% are already reported as damaged and the assessment is ongoing. While there is currently no early report about the property damage in Florida, the state represents 6% of the total U.S. population.
For perspective, Katrina impacted 400 counties across 4 different states and damaged more than 1 million homes. It is also worth noting that since Hurricane Katrina FEMA has taken steps to increase its ability to more efficiently command and coordinate relief resources. Currently there are more than 10 federal disaster aid programs available to individuals and families as they struggle to recover from these storms. If properly deployed, we are hopeful that these resources will contribute to a shorter duration and improved severity of outcomes for impacted areas and people than was experienced with Katrina.
Nonetheless, the monetary costs associated with Irma and Harvey will be substantial and manifest in sizeable losses for both the private and public sectors. In the private sector, insurers will undoubtedly face significant costs as they settle claims, although uninsured losses will also be substantial, impacting consumers and lenders as well as investors secured by real estate. This is likely to prove particularly true in areas impacted by Harvey, where damage from flooding appears to be meaningfully underinsured. For impacted consumers, this will challenge their ability to continue to meet payment obligations on a timely basis, a risk for lenders and investors in securitized investments.
From a macroeconomic standpoint, these losses do not directly enter GDP accounting and overall, long-term impacts may prove to actually be negligible as recovery activity offsets near-term slowdowns in the third and fourth quarters. However, this is contingent on the recovery effort being focused and efficient and able to continue relatively isolated from further negative idiosyncratic risks at this delicate stage.
From a risk perspective, these catastrophic storms underscore the importance of geographical diversification. Equally important is gaining broad exposure to different fundamental drivers of risk. The total size of the securitized credit market is more than $2.5 trillion—and risk related to the residential housing market only accounts for roughly one-third of the market. Other primary fundamental drivers of performance in the securitized market include the U.S. consumer (common in many ABS subsectors) and the corporate credit cycle (especially for CLOs).
For a securitized allocation to be successful on a standalone basis or as part of a broader multi-sector fixed income strategy, we believe managers need to have exposure across the various securitized sub-sectors and tactically adjust allocations based on the most attractive opportunities and perceived relative value at any given time.
Past performance does not guarantee future results.
This commentary has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) changes in laws and regulations and (4) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors.