Read our latest article on hurricane Florence here. Hurricane Florence continued to approach the North Carolina coast, but the latest forecast suggests a wobble to the south which could extend the coastal impacts from the storm. Life-threatening impacts are possible, but it remains very difficult to predict this hurricane and the impacts from water as well as the hurricane force winds.
Hurricane Florence surprised the weather forecast models last week, as it travelled further west at lower latitudes lining up the possibility of a U.S. east coast landfall, having originally been expected to curve north.
Now an impactful loss event looks certain and the latest forecast from the National Hurricane Center will keep insurance, reinsurance, catastrophe bond and insurance-linked securities (ILS) interests on their toes over the next 48 hours or more.
However the latest track updates has surprised meteorologists again, as Florence looks set to wobble south and could rake the North Carolina coast as it travels south now, before making landfall in South Carolina. Uncertainty is still high though and it makes the eventual loss ramifications for the industry unclear at this time.
Hurricane Florence continues to grow in size, currently category 2 in strength with maximum sustained wind speeds of around 110 mph and higher gusts.
Florence could fluctuate a little in strength over the hours before landfall, but significant restr.
There is still time for the track to shift a little further and, as ever, landfall location will be key in determining the size of the resulting insurance, reinsurance and ILS market loss.
Hurricane force winds extend outwards up to 70 miles from the center of hurricane Florence now, as the storm continues to grow, while tropical storm force winds extend outwards 175 miles. Florence will impact a wide area, where it comes ashore and impacts are expected to be significant.
Agreement in the forecast models is much tighter now and hurricane Florence is expected to approach a North Carolina landfall on Thursday night into Friday of this week. But the latest suggests a slow trip south along the coast, exacerbating the potential for damages to a wider region.
Timing is more difficult to predict now as many meteorologists suggest Florence will slow on approach to the coast, with a possible stalling that could exacerbate the impacts for the area it nears the shore.
In fact, meteorologists and weather models now suggest that hurricane Florence could wobble on approach to the coast travelling south, perhaps lingering on the coast for as much as 48 hours, bringing torrential rains to the area and affecting a wide swathe of the North and South Carolina coast with strong winds and storm surge over the period.
The good news is that the hurricane could also weaken as it interacts with the coast then, but tropical storm force winds could be felt for a number of days in some weather model scenarios, while hurricane force winds may die down relatively soon after landfall.
Storm surge is a significant concern, with up to 13 foot or 4 metres possible and given the convex shape of the Carolina coastline this could be exacerbated if hurricane Florence makes a slow approach, pushing water onto land.
These meteorological factors have significant ramifications for insurance and reinsurance interests and make forecasting losses extremely difficult with this storm, not just in the immediate wind damage and coastal storm surge flooding that can be expected with a high category hurricane approach and landfall in that area, but also from the expected deluge of rainfall.
The latest NHC update says that:
A Storm Surge Warning is in effect for…
* South Santee River South Carolina to Duck North Carolina
* Albemarle and Pamlico Sounds, including the Neuse and Pamlico Rivers
A Storm Surge Watch is in effect for…
* Edisto Beach South Carolina to South Santee River South Carolina
* North of Duck North Carolina to the North Carolina/Virginia border
A Hurricane Warning is in effect for…
* South Santee River South Carolina to Duck North Carolina
* Albemarle and Pamlico Sounds
A Hurricane Watch is in effect for…
* Edisto Beach South Carolina to South Santee River South Carolina
* North of Duck North Carolina to the North Carolina/Virginia border
A Tropical Storm Watch is in effect for…
* North of the North Carolina/Virginia border to Cape Charles Light Virginia
* Chesapeake Bay south of New Point Comfort
Ramifications and eventual industry losses from the water component of the storm could be particularly significant, given the forecasts show hurricane Florence lingering in the region and passing slowly inland which will result in significant rainfall.
Just how impactful (in terms of financial cost) the wind component turns out to be is uncertain at this time, there is some model disagreement for what happens after hurricane Florence comes ashore as well.
But either way, whether Florence approaches the coast at a snail’s pace bringing strong winds for a long period, heads inland soaking the region, or even lingers on the coast for a time, the threat to lives, livelihoods and property is certainly severe.
The NHC says:
The reconnaissance aircraft found that maximum sustained winds remain near 130 mph (215 km/h) with higher gusts. Florence is a category 4 hurricane on the Saffir-Simpson Hurricane Wind Scale. Some strengthening is forecast through tonight. While some weakening is expected to begin by late Thursday, Florence is still forecast to be an extremely dangerous major hurricane when it nears the U.S. coast on Friday.
1. A life-threatening storm surge is now highly likely along portions of the coastlines of South Carolina and North Carolina, and a Storm Surge Warning is in effect for a portion of this area. All interests from South Carolina into the mid-Atlantic region should complete preparations and follow any advice given by local officials.
2. Life-threatening, catastrophic flash flooding and significant river flooding is likely over portions of the Carolinas and Mid-Atlantic states from late this week into early next week, as Florence is expected to slow down as it approaches the coast and moves inland.
3. Damaging hurricane-force winds are likely along portions of the coasts of South Carolina and North Carolina, and a Hurricane Warning has been issued for a part of this area. Damaging winds could also spread well inland into portions of the Carolinas and Virginia.
The storm surge warning is most severe for the Cape Fear to Cape Lookout region:
– Cape Fear NC to Cape Lookout NC, including the Neuse, Pamlico, Pungo, and Bay Rivers…9-13 ft
– North Myrtle Beach SC to Cape Fear NC…6-9 ft
– Cape Lookout NC to Ocracoke Inlet NC…6-9 ft
– South Santee River SC to North Myrtle Beach SC…4-6 ft
– Ocracoke Inlet NC to Salvo NC…4-6 ft
– Salvo NC to North Carolina/Virginia Border…2-4 ft
– Edisto Beach SC to South Santee River SC…2-4 ft
Catastrophe risk modeller RMS said, “Florence will be the strongest hurricane to make landfall over North Carolina since Hazel in 1954 – this would be a major event for the insurance industry. As with all hurricanes of this intensity, Florence poses significant impacts due to damaging hurricane-force winds and coastal storm surge, but inland flooding is becoming an increasing threat. Forecasts include the possibility of Florence slowing down after landfall and causing as much as 20 inches of rain in the Carolinas. While very significant, this remains much lower than the amount of rainfall observed last year during Hurricane Harvey.”
In fact, the NHC’s latest forecast now suggests that 15 to 25 inches of rainfall could be widely experienced near Florence’s track over portions of portions of the Carolinas and Mid-Atlantic States through into early next week, while there could be isolated rainfall totals of as much as 35 inches.
The NHC said:
Coastal North Carolina…20 to 30 inches, isolated 40 inches. This rainfall would produce catastrophic flash flooding and significant river flooding.
South Carolina, western and northern North Carolina…5 to 10 inches, isolated 20 inches. Elsewhere in the Appalachians and Mid-Atlantic states…3 to 6 inches, isolated 12 inches.
The flood threat is severe, especially given the potential slow movement of hurricane Florence and the fact some of the region has already been saturated by rainfall in recent weeks.
In terms of the wind, tropical storm force winds will arrive on Thursday and could persist for some days, if hurricane Florence wobbles at the coast, while the timing and impact of hurricane force winds is more difficult to forecast given the relative uncertainty associated with this coastal approach.
So that leads us to what is at risk for insurance, reinsurance and cat bond or insurance-linked securities (ILS) markets.
A number of catastrophe bonds are exposed, generally the higher layers of certain bonds providing U.S. wide coverage, or aggregate bonds with exposure in the region. However cat bond exposure will depend largely on the approach and speed of hurricane winds at landfall, given the property damage is the main driver of loss.
There are catastrophe bond layers in the Residential Re series sponsored by USAA that could be threatened if hurricane Florence made a particularly impactful hit on a higher value area of the coastline, market sources said.
Another bond highlighted has been Blue Halo Re, from Allianz, which being a novel term aggregate cat bond (meaning losses can accumulate across the duration of the deal) is likely carrying aggregate deductible erosion from last year still.
It also may be worth watching cat bonds in the Kilimanjaro (from Everest Re) and Galileo or Galilei range from XL.
But it’s worth reiterating that the meteorological outlook, in terms of the slow approach to the coast with some weakening as it moves, does mean hurricane Florence may not be as impactful to most exposed cat bonds as it could have been.
FEMA’s FloodSmart Re cat bond here is the exception, given the slower Florence’s approach, the more rainfall will be produced in the area and the greater the potential for the NFIP’s reinsurance program to be triggered.
At this stage we’re told by sources that bid and offer spreads remain wide in the secondary market and aside from some initial trading on less exposed names, not much is changing hands yet in the secondary cat bond market.
We’d expect that situation, of buyers and sellers struggling to make their price ambitions meet, to continue now, given the uncertainty over landfall windspeeds.
Also of note, Plenum Investments, the specialist ILS manager from Zurich, said today that, “From CAT Bond investor optics, this area of the US east coast is the one with the lowest population density and thus has a comparatively low potential for high insurance losses. This also explains why we currently see no price reactions in the secondary market because of the approaching hurricane.”
However it is worth highlighting, as Steve Bowen of Impact Forecasting (the catastrophe risk analysis experts at Aon Reinsurance Solutions) pointed out, that population growth along the coast has increased steadily in the area and as a result exposure has been on the rise in the region. This increasingly becomes a factor the more time Florence spends with the eye just offshore of the coast.
We are told that some diversifying cat bonds, covering risks other than U.S. hurricane, have been sold as ILS funds wanted to free up capital in advance of a potential major industry loss event such as this. But that dynamic may also stop now, given the uncertainty over the coastal approach and potential wobble/weakening.
Live cat trading has remained light to non-existent, brokers said.
We’re told live cat capacity was strongly priced through Tuesday, but some activity could be seen as hurricane Florence approaches, although there is still a risk that capacity will dry up completely due to uncertainty making it harder for markets to agree on price.
Given the rainfall forecast the NFIP reinsurance program is particularly exposed and may come into play. It provides $1.46 billion of flood reinsurance coverage and attaches covering 18.6% of losses between $4 billion and $6 billion, and 54.3% of losses between $6 billion and $8 billion.
There are said to be roughly 450,000 NFIP flood insurance policies in force in North Carolina, South Carolina, and Virginia alone. Florence’s wide impact could see significant payouts, we’d imagine.
The NFIP’s new FloodSmart Re catastrophe bond sits higher up in the reinsurance program, covering 3.5% of its losses between an attachment point of $5 billion and exhaustion of $10 billion through a riskier $175 million tranche of Class B notes, and 13% of its losses between $7.5 billion and $10 billion through a $325 million tranche of Class A notes.
It’s impossible to say how impactful Florence will be to flood insurance from the NFIP, but this is a factor to watch out for, given the current forecast for extreme levels of rainfall over a number of days in the region most affected and also inland as Florence slowly moves onshore.
Reinsurance treaties could be triggered if hurricane Florence’s impacts are particularly bad in the region. Quota share reinsurance arrangements could also result in some losses flowing into ILS and collateralized reinsurance markets.
Certain areas of retrocessional coverage, including collateralized and pillared, will also be exposed to Florence, as well as industry loss warranties (ILW’s). However the wobble on approach could result in a lower eventual market wide loss from wind, meaning chances of triggering these instruments is more uncertain now.
There are likely to be some industry loss trigger instruments with lower triggers that could be exposed to Florence, with perhaps anything above a $10 billion industry loss putting these in play.
Overall, for the ILS fund and investor market, it is collateralized reinsurance and retrocession that will bear the brunt of any industry losses from hurricane Florence, rather than cat bonds.
What level of losses the storm could cause remains unknown, and generally the market continues to suggest anything up to roughly $20 billion, in terms of industry-wide losses, while analysts have pointed to something much lower at around the $12 billion mark, based on likening the storm to Hugo from 1989 (which RMS says could be a $12 billion loss if repeated today).
RMS said that its Hwind unit highlights Wilmington, NC as the city most likely to be impacted after which it considers the most exposed metro areas to be, in descending order, to be Cape Hatteras, Myrtle Beach, and Charleston.
RMS said that the most common comparison hurricanes are considered to be, along with their losses in 2018 dollars, Fran 1996 ($7.6bn), Hazel 1954 ($15.0bn), and Hugo 1989 ($20.5bn).
The firm also noted that these are not forecasts of the loss amount, just comparisons of similar storm footprints and impacts to the region Florence is targeting.
“We would expect that the loss would fall closer to Fran and Hazel ($8-15bn) than Hugo due to the landfall location and quick wind decay forecast,” RMS said.
However that may not take into account all of the flood losses and NFIP exposure, we’d imagine and the wind component being so uncertain now means we should expect a wide range for any guesses that come out today.
J.P. Morgan analysts said $8 billion to $20 billion. If it was at the upper end of that range the analysts said this would be well below Q3 earnings for the major re/insurers it tracks.
But it did note that a $20 billion loss could result in a hit that is 51% of pretax profit for Munich Re, 23% of BOP operating profit for Zurich, and 10% of operating profit for Allianz (the firms it tracks).
Tellingly the J.P. Morgan analysts note, “These are relatively modest numbers and we believe would have negligible impact on our dividend and buyback forecasts for these groups, particularly given the absence of Atlantic hurricanes so far.”
Hence it won’t drain any excess capital away, but Munich Re in particular would be likely to share some of its losses with ILS investors and funds, given its use of collateralized retrocession.
Insured values in the path of hurricane Florence are significant, of course, given the landfall location.
Corelogic said that $170.2 billion of property reconstruction values are in the path of hurricane Florence and could be at risk of storm surge. But that’s not helpful in identifying the industry loss, as values at risk do not ever come close to industry-wide losses.
Wilmington N.C. alone has roughly $7.75 billion of property reconstruction value at risk and with that area perhaps being close to where the eye makes landfall, based on the current forecast, it’s perhaps a more useful number to think about as the storm surge will be highest around the eye area.
Enki Research has updated its information and said that its models suggest economic damages of roughly $14 billion from hurricane Florence’s impacts and as much as another $15 billion from flooding, depending on a number of variables.
At that level the industry loss would be sub-$10 billion with an NFIP flood component that is hard to predict, we’d imagine.
Just how much of an impact hurricane Florence could have on insurance, reinsurance and ILS fund or investor interests remains extremely uncertain and that uncertainty is not going away currently.
The probability that there will be an impact, including to the ILS market, remains high, but the meteorological factors make it impossible to forecast with any accuracy.
The market will remain on watch but trading activity may only be light, due to the uncertainty associated with hurricane Florence.
As an update, Robert Muir Wood, Chief Research Officer of Science and Technology at RMS spoke at the Monte Carlo Rendez-vous today and explained some of the flood related aspects of the storm.
“Florence is interesting because if you look at equivalent historical storms which have made landfall at Cat 4 or Cat 3 in this region – which include Hugo in 1989 and Hazel in 1954 – they’re all moving a bit faster than Florence is moving or is expected to move at landfall. So Florence is anticipated to give higher rainfall totals than we’ve seen in equivalent historical events for wind.
“The estimates are there may be 15 or 20 inches of rainfall and exactly where that is going to depend on how the forward motion stores and whether it actually starts moving off towards the North or North West and whether that moves over Virginia or Maryland. Virginia and Maryland I believe have been hit by a lot of precipitation over the past few weeks, so they are primed for flooding. It won’t take a lot more rainfall before there will be a lot of flooding there.
“Charlotte is interesting as a city because it’s got some kind of commendation from the National Flood Insurance Program for the degree to which it has protected itself against floods. And that protection has the potential to be significantly tested in what Florence brings after landfall.
“So that’s just an insight into the flood component. Obviously you’re going to hear much more about the wind component of Florence, but in fact there is likely to be a significant flood component as well, which will add to the flood losses in the U.S which have been accumulating over the last few years.”
We’ll update you as information becomes available and by visiting our 2018 Atlantic Hurricane Season page you can view our interactive tracking map for all Atlantic storms.