Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

Hurricane Irma, potentially the worst storm to hit the U.S. in decades, might be strong enough to finally knock American International Group Inc. off the nation's too-big-too-fail list.

That's not to say the storm is good news for AIG or anyone else. AIG already suffered losses from Hurricane Harvey. And of the nation's largest insurers, AIG looks to be the most exposed to Irma, which is expected to reach Florida on Sunday. Analysts at Bloomberg Intelligence estimate that AIG has $31 billion in property insurance outstanding in the three Florida counties alone -- Dade, Broward and Palm Beach -- the state's gold coast. That figure includes houses and other property, such as artwork or yachts, as well as commercial residential developments like condo towers.

Southern Exposure
AIG ranks as the No. 2 largest property insurer in Southeastern Florida
Source: Bloomberg Intelligence
Based on an evaluation of Palm Beach, Broward and Dade counties.

The only company facing larger potential losses -- more than $50 billion -- is the tiny Universal Insurance Holdings Inc., which has specialized in covering residential property in Florida's hurricane zones as other insurers have fled the state. Chubb is the next largest exposed insurer after AIG with just $17 billion in covered property. Travelers' portfolio includes just $271 million in insured property in those Florida counties.

Nonetheless, few think AIG will have any problem weathering even this catastrophic storm. AIG has $74 billion in equity and $91 billion in insurance reserves. Shares of AIG have fallen 10 percent since the beginning of August, or $5.5 billion off its $53 billion market cap. Only two analysts of the 17 analysts that follow AIG and are tracked by Bloomberg have downgraded the stock. Most of the rest give a price target north of $70 a share. On Friday, the stock was up slightly to $59.

Hunkering Down
AIG's recent stock drop has cut the company's market cap by about $5.5 billion since Aug. 1
Source: Bloomberg

When AIG demonstrates that it can survive a huge hurricane, it will strengthen its case to be removed from the list of systemically important financial institutions -- firms regulators fear could be most likely to spark the next economic shock. The designation comes with additional regulatory costs.

AIG ended up on the list in the first place because of its actions during the financial crisis; it wrote a whole bunch of derivatives, something it does not do anymore, on mortgage bonds that it couldn't quickly pay back. AIG is one of only two insurers on the list; Prudential Financial is the other. MetLife won a court case to escape the designation, and other obvious examples like Warren Buffett's Berkshire Hathaway convinced regulators behind the scenes that they were not actually in danger of causing a financial crisis. 

Giant insurers, despite their size and important role in the economic system, probably don't deserve to be on the SIFI list in general. Banks can cause shocks to the economy because they both need constant liquidity and add to the pool of available money. Insurers, unless they write a lot of financial derivatives, generally do not have the same sudden liquidity shocks. Furthermore, the Trump administration's regulatory rollback agenda includes shrinking the number of firms on the SIFI list, and many are already betting that insurers will drop off relatively soon.

Perhaps the only argument for maintaining insurers on the SIFI list is climate change, which appears to be contributing to more hurricanes and other natural disasters and consequently more potential insurance losses. Two Category 3 storms have not hit the mainland U.S. in a single year in more than a decade. Estimates for total damage from Irma are as high as $130 billion. Reinsurance and catastrophe bonds are supposed to spread the risk, much like securitization and derivatives were supposed to in the housing market, so some similarities exist there. And the failure of a reinsurer could cause the failure of a number of other insurers. The SIFI designation, after all, is not solely about whether a firm is at risk of failure but what happens when it does.

Catastrophe Anxiety
Insurance losses in the U.S. from hurricanes and other disasters have not jumped in the past decade and a half
Source: Bloomberg

But it appears the recent growth in reinsurance risk has increasingly been taken on by hedge funds. AIG does have a reinsurance business, but according to Barclays, its reinsurance exposure in Florida is small, equal to just 1.7 percent of its capital, which suggests that even if Irma is a bad storm, it could leave AIG battered but solidly upright. If it can safely absorb Irma's blow, and with risk spread around, AIG will be in good position to argue to regulators that it poses no threat to the financial system.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Stephen Gandel in New York at

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