September 11, 2018

Hurricane Florence takes aim as major storm. What’s at risk?

Hurricane Florence is now forecast to make a direct hit on the United States east coast in the Carolina’s late Thursday night into Friday, with the forecast path now taking a dangerous hurricane Florence ashore as a category 3 or 4 storm, with significant impacts possible.

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 the scenario of an impactful loss event looks certain and the latest forecast from the National Hurricane Center will have insurance, reinsurance, catastrophe bond and insurance-linked securities (ILS) interests on their toes.

Hurricane Florence forecast track and path

Hurricane Florence forecast track and path

Hurricane Florence is now a large hurricane, currently category 4 in strength with maximum sustained wind speeds of around 140 mph and higher gusts.

The NHC believes that Florence could reach Category 5 for a time, perhaps with 150 mph sustained winds, before weakening slightly and making a Category 4 (perhaps 3) when the eye comes ashore, landfall somewhere around the Wilmington area of North Carolina.

There is still time for the track to shift a little and as ever the landfall location will be key in determining the size of the eventual insurance, reinsurance and ILS market loss.

Hurricane force winds extend outwards up to 40 miles from the center of hurricane Florence, while tropical storm force winds extend outwards 150 miles.

Hurricane Florence continues to grow as it approaches the United States and with the storm passing through a light wind shear environment with sea surface temperatures near 29C, there isn’t much to prevent Florence from intensifying further as indicated by almost all of the guidance.

Hurricane Florence model intensity guidance - From TropicalTidbits.com

Hurricane Florence model intensity guidance – From TropicalTidbits.com

Agreement in the forecast models is much tighter now and hurricane Florence is expected to make a North Carolina landfall on Thursday night of this week.

Latest Global and hurricane model runs for hurricane Florence - From TropicalTidbits.com

Latest Global and hurricane model runs for hurricane Florence – From TropicalTidbits.com

That has significant ramifications for insurance and reinsurance interests, not just in the immediate wind damage and coastal storm surge flooding that can be expected with a high category hurricane landfall in that area.

The latest NHC update says that:

A Storm Surge Watch has been issued for the east coast of the United States from Edisto Beach, South Carolina northward to the North Carolina-Virginia border, including the Pamlico and Albemarle Sounds.

A Hurricane Watch has been issued for the east coast of the United States from Edisto Beach, South Carolina, northward to the North Carolina-Virginia border, including the Pamlico and Albemarle Sounds.

But ramifications and eventual industry losses could be particularly significant, given some forecasts show hurricane Florence lingering in the region and passing slowly inland which could result in significant rainfall.

Just how impactful that turns out to be is uncertain at this time, there is some model disagreement for what happens after hurricane Florence comes ashore. But either way, whether Florence heads inland soaking the region, or curves out and lingers on the coast, the threat to lives, livelihoods and property is beginning to look severe.

The NHC says:

Maximum sustained winds are near 140 mph (220 km/h) with higher gusts. Florence is a category 4 hurricane on the Saffir-Simpson Hurricane Wind Scale. Some strengthening is expected during the next day or so, and Florence is expected to be an extremely dangerous major hurricane through Thursday night.

1. A life-threatening storm surge is likely along portions of the coastlines of South Carolina, North Carolina, and Virginia, and a Storm Surge Watch will likely be issued for some of these areas by Tuesday morning. All interests from South Carolina into the mid- Atlantic region should ensure they have their hurricane plan in place and follow any advice given by local officials.

2. Life-threatening freshwater flooding is likely from a prolonged and exceptionally heavy rainfall event, which may extend inland over the Carolinas and Mid Atlantic for hundreds of miles 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 Watch will likely be issued by Tuesday morning. 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, including The Neuse and Pamlico River, where a surge of as much as 6 to 12 ft is anticipated, while 5 to 8 ft is expected for Cape Lookout to Ocracoke Inlet, and between 2 ft to 6 ft of surge elsewhere in the warned areas.

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 20 inches of rainfall could be widely experienced near Florence’s track over portions of North Carolina, Virginia, and northern South Carolina through Saturday, while there could be isolated rainfall totals of as much as 30 inches.

So that leads us to what is at risk.

A number of catastrophe bonds are particularly exposed, generally the higher layers of certain bonds providing U.S. wide coverage, or aggregate bonds with exposure in the region.

There are catastrophe bond layers in the ResidentialRe series sponsored by USAA that could be threatened if hurricane Florence makes 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 term 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.

However, at this stage we’re told by sources that bid and offer spreads are 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 to change today though and activity heat up, as the forecast landfall location becomes clearer and as some ILS investors look to offload the more exposed cat bond names.

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 noting, 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.

We are also told that some diversifying cat bonds, covering risks other than U.S. hurricane, have been sold as ILS funds in some cases want to free up capital in advance of a potential major industry loss event such as this.

Live cat trading has been light to non-existent, brokers we spoke to said. We’re told live cat capacity was strongly priced through yesterday, but some activity may be seen as hurricane Florence approaches and it does seem like today would be the day to buy last-minute reinsurance or retrocession, as once Florence gets too close capacity will likely dry up completely.

Given the rainfall forecast the NFIP reinsurance program could again come into play, given 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.

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 an area to watch 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 once onshore.

Numerous reinsurance treaties could trigger if hurricane Florence’s impacts are as bad as the forecast now suggests. Quota share reinsurance arrangements could also see more losses flowing into ILS and collateralized reinsurance markets.

Certain areas of retrocessional coverage, including collateralized, could also be exposed to Florence, as well as industry loss warranties (ILW’s).

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 again that is likely to bear the brunt of losses from hurricane Florence, rather than cat bonds.

What level of losses the storm could cause remains extremely uncertain, but some in the market are suggesting 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, but that is just based on likening the storm to Hugo from 1989 (which RMS says could be a $12 billion loss if repeated today).

RMS has revealed a possible of a $20 billion loss to publisher Bloomberg.

RMS also 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.

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.

However, as the industry knows every hurricane is different.

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 said that its models suggest economic damages of $20 billion from hurricane Florence’s impacts and as much as another $15 billion from flooding, depending on a number of variables.

Just how much of an impact hurricane Florence could have on insurance, reinsurance and ILS fund or investor interests remains extremely uncertain.

However the probability that there will be an impact, including to the ILS market, is much higher now and rising all the time as Florence nears the coast.

The market will be on watch today and tomorrow and activity, in terms of secondary cat bonds and also live cat trading is likely to pick up.

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.

 

To read more articles like this one, visit Artemis.

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