Reinsurance firms could be the ones hit the hardest should hurricane Dorian make landfall and cause sizeable impacts in Florida, according to analysts at Keefe, Bruyette & Woods (KBW).
Update, Sep 5th: Hurricane Dorian remains a strong hurricane. The U.S. coastline is not yet in the clear, as Dorian is forecast to hug it on the way north, with dangerous winds and storm surge expected and a chance of making landfall. Our latest here.
Then the forecast for hurricane Dorian is for steady intensification, with major Category 3 possible according to NOAA’s latest update, all the way towards a Florida landfall early Monday as a major hurricane, somewhere on the eastern coast up towards the Space Coast and Daytona Beach area.
The Bermuda high is blocking hurricane Dorian from recurving out to sea and the model runs are increasingly converging on Florida being the hurricane’s landfall destination.
In a briefing distributed to clients, equity analysts on the reinsurance sector at KBW said that a sizeable impact from a hurricane in Florida could hurt reinsurers the most.
The reason given by KBW for this is that primary insurers have relatively low retentions in Florida.
But we also think the upsizing of appetites among reinsurance firms at renewal seasons so far this year, as well as the shrinking of available retrocessional capital, all points towards the reinsurance sector having the greatest exposure to any 2019 hurricanes that make it to a landfall in the sunshine state.
There’s still no guarantee that hurricane Dorian will reach Florida, but with every updated run of the forecast models it is looking more likely.
Roughly five days out from landfall a hurricane Dorian landfall now looks likely anywhere from the Bahamas, south Florida right up to Georgia or South Carolina, but the middle of the forecast cone remains focused on mid-Florida.
KBW’s analysts explain that, “We think any sizable hurricane event and/or one that impacts a meaningful portion of Florida’s east coast would likely impact reinsurers more than primary Florida insurers.”
Reinsurance firms have largely increased the size of their exposures to U.S. catastrophe risks, including Florida wind, at the recent renewals to take advantage of better pricing, meaning their exposure could be greater than in recent years.
At the same time, Florida’s primary insurers have in some cases increased their use of the Florida Hurricane Catastrophe Fund (FHCF), to bulk up on protection at a cost that was seen as more efficient than reinsurance this year by some.
Meanwhile, sources of retrocession, particularly collateralized, are shrunken compared to recent years and many reinsurance firms will be going into this wind season with less protection against peak catastrophe perils as a result.
Which all suggests that KBW’s analysts may be right and reinsurers could be more exposed to a hit if hurricane Dorian intensifies and strikes the Florida coastline.
But, at the same time as growing their books in Florida, many reinsurers have also increased their use of third-party capital at the same time.
It now tends to be the case that when reinsurers catastrophe risk appetites increase, it is on the basis that they bring the capital markets with them and end up making greater use of vehicles like sidecars and funds that they own.
Even reinsurance giant Swiss Re has ceded more of its catastrophe risk exposure to sources of retrocession, including third-party capital, in recent months, as it grew its overall global property catastrophe book to take advantage of higher priced risks.
It’s also worth noting that a number of syndicates operating at Lloyd’s stepped up at the renewals of Florida catastrophe reinsurance this year, to increase their share of program layers and ramp up line sizes.
Hence Lloyd’s syndicates should also be an area of focus with any hurricane landfall in the state, especially given the lack of the pillared retro product many Lloyd’s syndicates had been heavy users of.
This is likely to have also been the case at numerous other reinsurers, suggesting that any major hit to reinsurers from a significant Florida hurricane would also hurt their third-party capital vehicles, seeing investors taking shares of losses through quota shares, sidecars, or other joint-venture vehicles.
Some reinsurers may have been using their third-party capital vehicles as replacement forms of retrocession in 2019 (it’s a fine line between partner capital and retro capital sometimes), given the shrunken availability of capital markets backed retro this year.
That could mean third-party investors are actually more on the hook for a share of some reinsurers losses in 2019, than they would have been in prior years.
Third-party capital is still used opportunistically be many reinsurers, as a way to support expansion into peak catastrophe risk zones. Given the improved pricing at Florida renewals this year, it seems safe to think that third-party investors may hold more exposure to Florida hurricanes through reinsurer owned vehicles this year.
The latest on hurricane Dorian is that the storm is packing 75 mph sustained winds with higher gusts and tropical storm force winds extend around 80 miles from the storm’s centre. Hurricane force winds extend outwards 20 miles.
Hurricane Dorian has been growing in recent hours, given this morning the radius of tropical storm force winds was cited as just extending 45 miles out.
The forecast track for Dorian has also adjusted slightly, suggesting the storm could spend more time over the warm waters near the Bahamas, which might suggest a greater ability to intensify further as a hurricane.
So a growing hurricane, forecast to intensify and aim for Florida in a few days time as a major Category 3 or even higher landfall event.
Certainly one to watch for the insurance, reinsurance and insurance-linked securities (ILS) industry, although still too early for any trading to emerge or hedging moves to be made.
In reality its tough to identify who would be hardest hit from any storm. But should Dorian provide a major hurricane landfall threat to Florida, it’s certain that reinsurance and ILS or catastrophe bond risk capital will be very exposed.
Below is the latest intensity model output from TropicalTidbits.com
Below are the latest hurricane forecast model tracks for Dorian, from TropicalTidbits.com.
NOAA’s latest on Dorian is below:
At 200 PM AST (1800 UTC), the center of Hurricane Dorian was located near latitude 18.3 North, longitude 65.0 West. Dorian is moving toward the northwest near 13 mph (20 km/h), and this motion is expected to continue for the next day or two. On this track, Dorian should continue to move near or over the U.S. and British Virgin Islands this afternoon and then move over the open Atlantic well east of the southeastern Bahamas.
Maximum sustained winds have increased to near 75 mph (120 km/h) with higher gusts. Dorian is forecast to continue strengthening during the next few days over the Atlantic waters.
Hurricane-force winds extend outward up to 20 miles (30 km) to the north and east of the center. Tropical-storm-force winds extend outward up to 80 miles (130 km) primarily to the east of the center. An elevated weather station on Buck Island just south of St. Thomas reported a sustained wind of 82 mph (132 km/h) and a gust of 111 mph (178 km/h).
The estimated minimum central pressure from nearby observations is 997 mb (29.44 inches).
We will update you on hurricane Dorian as it proceeds and the threat it could pose to global insurance, reinsurance and ILS market interests.
You can always visit our 2019 Atlantic hurricane season page for the latest.