Monday, April 23, 2012

Excellent Timing: State of Florida Unloads $3/4 Billion of Hurricane Risk

For the last few years the State has been doing their Lady Godiva bit, riding naked in the hurricane insurance biz.
No reinsurance, no Catastrophe bonds. The strategy has been: "Charge underpriced premiums and pray".
And they've been lucky!
No land-falling hurricanes have hit Florida (as hurricanes) since Wilma in October 2005, 2372 days!
And as everyone knows, the probability and intensity of Atlantic hurricanes decreases during El Niño, such as the one we're heading into.

But the current El Niño/Southern Oscillation shift may be a fake-out.
Which is why Florida may end up looking very, very smart.

The El Niño/Southern Oscillation is technically still in La Niña (because of the requirement for three  overlapping three month periods, i.e. five consecutive months) before a change is declared, NOAA's April 23 Weekly ENSO Update says:

• A transition from La Niña to ENSO-neutral is underway.*
No kidding.

BUT, the International Research Institute/Climate Prediction Center has the chance of moving on to full-blown El Niño only rising to 46% by the Aug-Oct tri-month:

The majority of the computer models are in agreement but with a huge caveat, see below the jump*

Why is El Niño in August-September-October important? It's the heart of the hurricane season and, as NOAA shows, BOTH THE 1925 MIAMI HURRICANE AND 1992's HURRICANE ANDREW, the most damaging hurricanes in Florida history, OCCURRED DURING ENSO-NEUTRAL:

Figure 2. Normalized U.S. hurricane damage record for 1925-1997. Years designated as La Niña events are shown in blue, El Niño events in red, and neutral years in black. Values less than $500 million are shown as an ellipse o n the X-axis.
Here's the headline story from Artemis via FT Alphaville:
Massive catastrophe! bond
Behold — what could be the largest natural catastrophe bond ever:...

...That’s S&P’s ratings doc for Everglades Re Ltd. It’s a bond to transfer some of the hurricane risk that a state-backed Florida insurer will face from writing policies for coastal homeowners. Losses from a Hurricane Andrew-level storm would wipe out the principal, according to modelling in the ratings doc.

Citizens Property Insurance originally entered the market to sell $200m of notes. Artemis reports that the offering has since more than tripled to $750m ahead of closing, which is big for Citizens’ first-ever cat bond.
It could also be the biggest for cat bonds as an asset class, Artemis says:
If Everglades Re completes at $750m in size it will become the largest catastrophe bond in the history of the market; for a single tranche, single peril cat bond to hit $750m is unprecedented in the history of the ILS market. The only single insurance-linked security to come close (that we have in our Deal Directory) would be Swiss Re’s $705m Vita Capital III Ltd. mortality catastrophe bond. The largest single natural catastrophe bond we have in the directory is Residential Reinsurance 2007 Ltd. which completed at $600m. Swiss Re’s first Successor cat bond deals in 2006 achieved $950m but were actually issued through a number of different individual transactions.
As to why Everglades Re Ltd got so big – it could be that Citizens saw its chance to lock in fair pricing for its overall reinsurance risk for the two years of the life of the bond. It could also reflect investor hunger for the yield on offer (some 17.75 per cent above returns from Treasury money market funds is possible, says Artemis)....MORE
*From the Storm2K forum:
If you look at the lines,only a handful of them cross into the Moderate El Nino threshold of +1.0C. The majority of them are in the Warm Neutral/Weak El Nino area when the peak of the North Atlantic Hurricane season in ASO.
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