Florida renewals – Early, orderly, with sufficient capital to clear: JMP Securities

The upcoming Florida reinsurance renewals at June 1st are seen as progressing well and at a good pace, despite the hard market environment, with capacity seen as sufficient to enable programs to clear, analysts at JMP Securities have said.

June 1st sees the Florida market setting its reinsurance protection for the year ahead, but following a trend seen over really the last decade, more and more programs come to market earlier in the second-quarter as cedents seek to beat a last minute rush on capacity.

This trend has again been evident for some weeks, helping to deliver outcomes that are as good as possible in the current hard reinsurance market conditions.

Having visited Bermuda to meet with insurers, reinsurers, brokers and insurance-linked securities (ILS) specialists in the last week, JMP Securities analyst team say they “walked away with continued optimism for the state of the market ahead of the key June 1 renewal date.”

The Florida reinsurance renewals appear both “early and orderly” the analysts state, which is a marked improvement on the renewals a year ago.

At the same time there appears to be “sufficient capital to clear”, meaning those that are able to afford their renewals should get the reinsurance they need.

However, June 1 rate increases are anticipated to be in the 30% to 40% range, the analysts estimate, which implies significant year-on-year rate hardening for the Florida catastrophe reinsurance marketplace.

Helping, on the capacity side, is the fact that while some reinsuers had pulled-back, others are “leaning in” to the Florida reinsurance renewal demand.

Differentiation remains a significant feature at this renewal, with reinsurers favouring cedents with more capacity, better terms and pricing where their track-records are better, or they have long-standing relationships.

While some capital has come into the industry, the analysts at JMP Securities “do not foresee an avalanche in the near term.”

The analysts question whether we’re now at the top of the market for catastrophe reinsurance rates, with not much room for further hardening from here on.

Commenting in more detail, the analysts said, “In stark contrast to the January 1 renewal which saw uncertainty and chaos in the weeks leading up to the key renewal date, the June 1 renewal is early and orderly, but with a substantial rise in rates for the market to clear. While we are not fans of pegging a specific rate increase to a renewal as results can vary widely based on cedant, layer, retention, etc., our market sources coalesced around a 30-40% rate increase being a fair description of the renewal overall, with capacity falling off very quickly if buyers try to achieve pricing much below that level.”

The more quality cedents and the already high-priced lower layers of reinsurance towers are likely to see the lowest rate increases, the analysts believe.

“We heard the lowest layers are now being priced at 70-90 rate on line (ROL),” the analysts explained.

Adding, “We understand those viewed as first-tier cedants largely have their programs done, while those that remain in the market in the remaining 10 days until the renewal date are, by and large, lower-tier companies that are struggling to fill their programs.”

Berkshire Hathaway has “shown up to the party” the analysts note, as the widely understood additional appetite from the reinsurer has made itself felt at the renewals.

With reports suggesting Berkshire Hathaway has sought out enormous lines on the Citizens renewal, as well as $100m+ lines from smaller cedents programs, the analysts say.

“While it appears to us the equity markets may have interpreted this as a negative given some stock reactions since the news, we view it as reaffirming of the state of the market and highly consistent with Berkshire’s past practices of coming into the market with large lines when returns are at/near peak levels,” the JMP analysts say.

Other reinsurance capital providers “leaning in” are said to be Arch (possible with some of this being its fronting of ILS capital), Ariel Re and DE Shaw.

Indicating that this could be the top of the market for Florida property catastrophe reinsurance, the analysts state that absent major losses it is hard to see how next year’s June 2024 renewals would see further significant rate rises.

“Let’s cut to the chase – property cat reinsurance conditions are very good right now, particularly as it relates to the June 1 Florida-centric renewal. If the season runs clean, or at a low/moderate level of catastrophe losses, reinsurance ROEs should be strong, and structurally we find it difficult to envision an environment where reinsurers substantially increase pricing again next June 1,” they explained.

Many would afford to pay for additional increases and the improvements expected under the new property insurance legislative reforms should be evidencing themselves by then, making this perhaps the last chance to secure Florida exposure at such high pricing for a while, likely until the next major loss experience or we see litigators and fraudsters find a way to navigate around the new laws.

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