FloodSmart the main Florence focus for cat bond investors

The FloodSmart Re cat bond is the main source of cat bond exposure to Hurricane Florence, but trading activity has been limited around the storm’s approach.

It appears that a would-be trade in the riskiest layer of the FloodSmart Re 2018-1 cat bond was cancelled yesterday, according to Trace records.

The trade price on the riskier class B layer of the FloodSmart Re cat bond was earmarked at 80c, with a $1mn trade size.

The class B notes attach at $5bn of losses to the National Flood Insurance Program, which is set to face extensive claims as a result of Florence.

The less-risky class A FloodSmart notes attach at $7.5bn.

The NFIP made a full recovery on last year’s reinsurance programme after estimating its Harvey exposure to be $8.5bn-$9.5bn (as of year-end 2017). It faced a further $1.1bn of Irma losses as of July this year.

Its main traditional programme offers partial cover from $4bn-$8bn of losses.

The other bond that some sources said may be at risk is the 2017 Residential Re issuance from USAA, which includes auto cover and has two relatively risky layers with the lowest attaching around $400mn.

However, there hasn’t been much activity around this bond, sources said.  

Given that Hurricane Florence is likely to be a flood event, the National Flood Insurance Program (NFIP) is considered to be the main cause for exposure.

However quota share sidecars and low-lying retro covers are also among the hotspots of ILS market exposure to claims from Hurricane Florence.

Quota shares are generally among the ILS vehicles that routinely take a slice of cat losses that make their way to the reinsurance market, but with the overall market loss expected to be easily an earnings event and nationwide insurers expected to retain a significant share of the total claims, they are not expected to be heavily impacted.

The residual insurers for the Carolinas could be another notable source of ILS and reinsurance exposure, although these schemes rely much more on industry levies than reinsurance, relative to their Florida peers.

The Lloyd’s market is also said to have major exposure to South Carolina beachfront property risk, written on an excess and surplus lines basis and through binders, so reinsurance for these carriers or direct exposure through MGAs could transfer some losses to the ILS markets.