Florida draws daredevils at 6/1 renewals while capital still lags

Florida may have successfully tempted some of the market's more adventurous types to its 6/1 reinsurance renewals before the hard market can inspire any real capacity to alleviate a market dislocation, analysts at the Berenberg equity brokerage claimed in a note to clients.

Rate on line hitting can’t-lose levels plus early faith in tort reform may have combined to bring in speculative capacity ahead of the crowds, Berenberg analyst Tryfonas Spyrou wrote.

“It appears that some players and particularly some opportunistic reinsurers, such as Berkshire Hathaway, DE Shaw, Ariel Re and Arch, have shown more appetite for Florida given the current rate momentum and higher expected profitability,” Spyrou wrote.

Comments from Berkshire Hathaway about its deep dive at 4/1 may have heartened markets. Berkshire Hathaway told markets in early May that they had bet heavily on Florida already at the 4/1 renewals to make up for having been squeezed out of the fun at the January deadline.

"Interest from the bellwethers such as Berkshire, in our view, seems to represent a vote of confidence that the market will take a turn for the better," Berenberg wrote of the early read on tort reform.

While some capital has trickled into the market, reinsurers taking a stab at Florida at the 6/1 are well ahead of any market-moving capital flows, Berenberg said.

New capital to date, including ca $8 billion in alternative capital and ca $1.5 billion of equity, "is merely alleviating some of the high pressure of increased demand for reinsurance."

That's a roughly 2.3% increase in capital against a rise in demand, driven by cats, inflation, climate change and demographic shifts, that may be up by some 10-15%.

New capital, moving forward, is not in a broad stream. Amongst alternative lines, cat bonds may be having their day, but Berenberg reports that money comes only from specialists, not the larger investors like pension or endowment funds who still require convincing.

Those who did dive in at 6/1 may enjoy some fine returns, Berenberg added, citing "sky-high" rate on line, including above 100% for layers below the Florida Hurricane Catastrophe Fund (FHCF), virtually guaranteeing profits unless a second hurricane hits. Rate increases were also said to be "very high" on second and third layers of 70-80% and 8-12% at the top layers.

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