Implications of the Hawaii Fires for Utilities, Insurance, and Banking

In this report, FactSet’s Deep Sector team reviews the impact of the Hawaii fires from several perspectives:

• Implications and outlook for Hawaiian Electric - Jim Kahler, Head of Utility Research at FactSet

• Impact on insurers - Stewart Johnson, Associate Director for Deep Sector Content at FactSet

• Value available to be unlocked in Hawaiian Electric’s banking subsidiary, American Savings Bank - Sean Ryan, VP/Associate Director for Banking and Specialty Finance Sectors at FactSet

Hawaiian Electric

On August 8, a fire swept across the eastern portion of the Maui, ultimately destroying much of the town of Lahaina. Within hours, speculation began swirling around potential causes of the fire, with much attention directed at Maui Electric the local subsidiary of Hawaiian Electric (NYSE: HE). Utility investors, having lived through a recent spate of large utility wildfire liabilities, aggressively sold off the stock in the days after the fire, causing its market capitalization to fall as low as $1.1b, down from $4.2b on August 1.

Figure 1: Hawaiian Electric Industries stock performance, August 2023-present

Source: FactSet

Seven days after the fire, the Washington Post published an article highlighting video evidence of HE’s power lines sparking in high winds and starting a fire the night before Lahaina burned. Hawaiian Electric responded to the allegations in the third of a series of 8-k filings addressing the incident, acknowledging their lines had started a fire, but that it had documentation that local firefighters claimed to have extinguished the blaze and left the area before the fire that ultimately destroyed Lahaina.

Liability for the destruction of Lahaina will not be established for some time. If the 2021 Marshall Fire in Colorado is a guide, it took over a year and a half for the release of an official incident report that partially implicated Xcel Energy, the local utility. In light of the 2017/18 fires in California and subsequent disasters in Oregon and Colorado, utility investors have adopted what Bank of America analysts called a “sell first and ask questions later” mentality.

One aspect that is not clear in Hawaii’s case is what fire mitigation measures will be enacted going forward. In the aftermath of the Camp Fire, PG&E Bankruptcy, and ultimate settlement, the state of California passed legislation that created a state fund for wildfire reinsurance in addition to giving utilities a broad mandate to invest in fire-mitigation programs. Like other utility investments, the costs of these programs are largely passed on to ratepayers. The prospect of a large infrastructure build-out is potentially less feasible in Hawaii than it is in California, however. Hawaii already has the highest utility costs in the United States. Even though California is also known for having high rates, there is a large income disparity between Hawaii and California making ratepayers in Hawaii less able to absorb large rate increases.

Figure 2: 2022 average monthly household utility expense by state and utility expense index

Source: FactSet, EIA, Bureau of Labor Statistics

FactSet’s “Utility Expense Index” shows that Hawaii utility ratepayers spend the most on utilities relative to income than any other state. Moreover, the Utility Expense Index in Hawaii has been rising over the past two years, exceeding its pre-COVID high. This calls into question the ability of Hawaii ratepayers to absorb any increase in utility spending to cover fire mitigation enhancements like microgrids and undergrounding of power lines. More on FactSet’s research into utility affordability is available here.

Figure 3: Average monthly Hawaiian household utility bills by year and utility expense index

Source: FactSet, EIA, Bureau of Labor Statistics

Insurance

The recent events in Hawaii will impact the insurance industry in two ways. Property & casualty companies will see loss ratios rise as claims are paid to policyholders for damaged and destroyed property, such as homes and autos. In addition, all insurance companies may see yields on investment portfolios fall if securities in the portfolio such as banks, utilities, or mortgage investments drop in value due to links to the Hawaiian economy.

Two FactSet Screen On functions help identify which companies may face downward pressure on underwriting and investment income from the events in Hawaii. The top function is used to identify the largest writers of premiums. The largest writers in Hawaii are likely to see elevated underwriting losses, and a drop in underwriting income, as claims are paid. The bottom function identifies insurance companies that hold specific securities. For example, holders of securities such as Hawaiian Electric (subsidiary American Savings Bank) and Bank of Hawaii may see investment income drop.

Figure 4: FactSet's Screen On includes market share and security holding functions

Source: FactSet

Total losses. Insurance companies that hold the top market share in Hawaii are likely to pay the largest proportion of total losses. An estimate of $14-$16 billion for total damage and economic loss from the wildfires was reported in the Insurance Journal on August 10, which is up from the prior estimate of $8-$10 billion. Of the total loss, The US Federal Emergency Management Agency estimates 86% of the buildings damaged in the fires were residential. If this is the case, the bulk of claims are likely to be related to personal homes and autos.

Underwriting income. The top writers of personal insurance in Hawaii will likely pay the bulk of total losses and report increased loss ratios and declines in underwriting income. The top writers of personal insurance in Hawaii can be identified using FactSet’s Screen On function (State/LOB Analysis & Market Share), which produces the results shown in the table below. State Farm and Berkshire Hathaway are two of the largest writers of personal insurance in Hawaii ranked by market share, and they are likely to face the largest share of total estimated losses.

Figure 5: Market share of personal insurance premiums written in Hawaii

Source: FactSet

For perspective, State Farm reported in February that it paid almost $70 billion in Home & Auto claims in 2022. State Farm will certainly incur a share of personal lines losses related to Hawaii that will decreases underwriting income, but a share of total losses relative to State Farm’s market share appear manageable.

For additional perspective on premiums written in Hawaii by State Farm, the statutory exhibit of premiums/losses available on the workstation provides a breakdown by state of the personal line premiums written by State Farm Group (P&C). Sorting by premiums written shows that personal lines premiums written in Hawaii are a very small portion of State Farm’s total personal premiums.

Figure 6: Personal insurance written by State Farm Group (P&C), by state

Source: FactSet

Investment income. Insurance companies that own investments impacted by the events in Hawaii, such as utility or bank securities, may see investment income drop if realized losses rise or dividend / interest payments are missed or lowered. FactSet’s Screen On function (Insurance Investment Holdings) produces a list of insurance companies that own specific securities. The tables below show insurance companies that have exposure to Hawaiian Electric (and its subsidiary American Savings), and Bank of Hawaii. Insurance company exposure as a % of equities and fixed income portfolios is well below 5% in both cases.

Figure 7: Insurance company holders of Hawaiian Electric

Source: FactSet

Figure 8: Hawaiian Electric share price

Source: FactSet

Figure 9: Insurance company holders of Bank of Hawaii

Source: FactSet

Figure 10: Bank of Hawaii share price

Source: FactSet

Looking ahead. The statutory exhibit of premiums/losses available on the workstation shows the combined ratio broken out by state and line of business. The table below shows State Farm Group (P&C) produced a combined ratio of 65.6 in 2022 for its personal line premiums written in Hawaii. Changes in this number in future periods will be a good indicator of how events in Hawaii impacted underwriting income.

Figure 11: State Farm Group (P&C) exhibit of premiums and losses written in Hawaii  

Source: FactSet

Insurance conclusion. The recent events in Hawaii will very likely cause a drop in both underwriting income and investment income for certain insurance companies. FactSet’s investment holdings Screen On function identified the top writers of personal insurance in Hawaii. If the largest writer, State Farm, incurs losses from the events in Hawaii in proportion to its market share, underwriting income will drop. However, a percentage of total losses in proportion to State Farm’s market share appear reasonable to manage. FactSet’s investment holdings Screen On function identified insurance companies that held positions of Hawaiian Electric and Bank of Hawaii, which are two securities that have been negatively impacted by the events. Screen On showed that holdings of these two securities by insurance companies were a very small portion of equity portfolios, which may cause immaterial drops in investment income.

American Savings Bank 

Hawaiian Electric owns the third largest bank in Hawaii. One unusual potential source of capital for Hawaiian Electric is its bank subsidiary, American Savings Bank. As illustrated in Figure 12, ASB is the third largest bank in Hawaii by deposits. 

Figure 12: American Savings ranks third in Hawaii deposit share

Source: FactSet

Figure 13: American Savings branch map

Source: FactSet

Traditional thrift franchise. In contrast with Bank of Hawaii and First Hawaiian, American Savings is, as the name suggests, more of a traditional savings bank. The loan book, as shown in Figure 14, is heavily concentrated in residential real estate. In most years (including 2022), noninterest income accounts for just 17-18% of total revenues, or about half of the proportion one might expect at a commercial bank of similar size. Profitability is also about what one might expect from such a franchise; in 2022 the NIM was 2.98% and the ROE was 13.4%.

Figure 14: American Savings’ loan book is mortgage-centric

Source: FactSet

Clean loan book. One upside of a mortgage-centric portfolio is (usually) clean credit, and American Savings does enjoy that; just 22bps of loans are nonperforming, and reserves appear ample at 1.12% of loans. Net charge offs have been running at just 14bps (annualized) in 1H23.

Underwater securities. Like most banks, American Savings’ securities portfolio has taken a hit from rising interest rates; since the end of 2021, AOCI has gone from -$38 million to -$325 million. At June 30, the unrealized loss on MBS was $230 million in the available-for-sale portfolio and $47 million in the held-to-maturity portfolio. The HTM loss was 9% (pre-tax) of the bank's $495 million in common equity at June 30.

Assessing potential buyers. The key issue with this market is that it is non-contiguous, which limits its attractiveness to many mainland banks, but the market share report in Figure 12 shows several mainland banks that do already maintain a branch presence—HomeStreet, CBB, First Foundation, RBB, First American Financial, and First Citizens BancShares. That last one is the largest by a wide margin, having tripled in size over the past couple years via the acquisitions of CIT and, this year, SVB. SVB is still in the early stages of integration, which may mute their appetite (or that of regulators to grant approval) for further acquisitions. On the other hand, this is a highly acquisitive bank that is willing to make non-contiguous acquisitions. Bank of Hawaii or First Hawaiian could theoretically achieve a lot of cost savings due to branch overlap (30 of ASB’s 36 branches are within one mile of a Bank of Hawaii branch; 31 ASB branches are within one mile of a First Hawaiian branch) but the pro forma market share would be high enough that some divestitures would likely be required. A wild card is Japanese banks, which could be interested in one of the few Hawaiian bank franchises that can deliver critical mass.

Figure 15: American Savings overlap with Bank of Hawaii

Source: FactSet

Figure 16: American Savings overlap with Bank of Hawaii (Oahu only)

Source: FactSet

Figure 17: American Savings overlap with First Hawaiian

Source: FactSet

Figure 18: American Savings overlap with First Hawaiian (Oahu only)

Source: FactSet

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.