Hurricane activity may support January 2019 reinsurance pricing: Morgan Stanley

Reinsurance pricing at the upcoming key January 2019 renewals could be supported by the active hurricane season and the unique features of recent storms, meaning rates may hold up better than had been anticipated, according to Morgan Stanley’s analysts.

Morgan Stanley’s analyst team had been expecting reinsurance rates to return to a softening trend in January 2019, with flat to -5% pricing trends having been anticipated.

But after the major hurricane losses of 2017, another active season in 2018 could be enough to provide some support for reinsurance pricing, the analysts believe, at least on the margin of the market if not more broadly across it.

With somewhere in the region of $5 billion to $10 billion of industry losses expected from recent hurricane Michael and a significantly proportion of that expected to fall to reinsurance capital as well as ILS players, Morgan Stanley’s analysts believe that facing hurricane losses two years on the run could help to put some supporting pressure underneath prices towards the end of the year.

Low retention levels are the norm for the major Floridian insurers that were most exposed to hurricane Michael, with major players such as Universal only set to retain approximately $35 million of its losses from the storm, Heritage roughly $20 million and FedNat roughly $20 million.

That suggests a reasonable hit going to their reinsurance capital providers, including fully collateralized cover provided by ILS funds and investors in some of their various third-party capital structures. One area that may not be hit at all significantly though is the catastrophe bond market, given most cat bonds attach higher up.

This was reflected yesterday in FedNat’s announcement that of the roughly $275 million of gross losses it expects from hurricane Michael, only around $23 million is likely to be retained by the insurer, with its reinsurers picking up the rest.

The analysts also note the top reinsurers in Florida, which include the FHCF, Lloyd’s, Chubb, Allianz, Everest Re, Munich Re, RenRe, Axa and Axis, but also in its list of the top providers of reinsurance cover are catastrophe bonds from Residential Re (USAA’s issuance), Citrus Re (Heritage’s issuance) as well as ILS specialists Aeolus, and the Poseidon Re vehicle owned by Nephila Capital.

While it’s not currently anticipated that catastrophe bonds will see any significant losses from hurricane Michael, the major ILS and collateralized retrocession underwriters in Florida will all likely take their share of the eventual industry loss from this event.

The Morgan Stanley analysts said, “ILS funds are active participants in the Florida market and could share the losses,” but also noted that exposures would likely be manageable for the reinsurers the analysts track, which suggests a well dispersed loss among traditional and alternative reinsurance providers.

But overall and no matter how minor the loss for any player, even though hurricane Michael’s losses won’t come close to the 2017 hurricanes, the analysts do believe that it will provide some pricing support at 1/1 2019 renewals.

“We think (1) another active season (14 named storms so far), (2) the unique features of Florence (heavy flooding) and Michael (rapid intensification), (3) lingering loss revisions from Irma, as well as (4) a series of global catastrophes (Typhoons Jebi and Mangkhut, Indonesia earthquake and tsunami) should support pricing, incrementally,” the analysts explained.

Additionally, the analysts point out that the recent IPCC climate change report could mean that the perception of natural catastrophe risks is heightened, which could provide important urgency among markets at the renewals meaning prices hold up better than expected as well.

The analyst world seems unanimous in believing that so far 2018 catastrophe loss activity is not going to be sufficient to create any upwards movement in renewal rates in January 2019, except perhaps in highly localised and cedant specific cases.

J.P. Morgan’s analyst team said, “We think property catastrophe reinsurance prices are unlikely to meaningfully change due to the storm.”

While analysts at Keefe, Bruyette & Woods said in a recent report that even hurricane Michael on top of the heavier than expected third-quarter global catastrophe loss activity was unlikely to move the market.

However, a number of the analyst firms do believe that adding losses from hurricane Michael into the mix does create more supporting pressure, to prevent further declines at 1/1.

How exactly that pans out remains to be seen and depends a lot on the level of competition for signings and the amount of fresh capital raised in time for 1/1.