We don’t see Milton driving a reinsurance market turn: J.P. Morgan

Analysts in the J.P. Morgan European equity research team have said that if hurricane Milton’s industry impact comes in between $20 billion and $40 billion, they “don’t see Milton driving a reinsurance market turn” in 2025.

Estimates suggest hurricane Milton’s costs for the insurance and reinsurance industry are coming in lower than the market had initially feared.

Across all estimates seen and collected by Artemis, the range is from almost $25 billion to $45 billion, with a mid-point of $35 billion and excluding losses to the NFIP where it is broken out in those that include it, the mid-point comes down to $34 billion at this time.

Across the leading catastrophe risk modellers, the estimate mid-point is just $32 billion, while if we attempt to extract the NFIP losses from the one cat risk modeller estimate that included them, the mid-point average industry loss estimate for hurricane Milton falls to $31 billion.

Having similarly analysed loss estimates and spoken with investors around the reinsurance market, the J.P. Morgan equity analyst research team say, “The storm came in at less costly levels than perhaps feared but is still likely to be a costly event, in our view.

“However, we do not see Milton at $20-$40bn levels changing the dynamics in the reinsurance market heading into 2025.”

The analysts explain that major reinsurance companies are making strong returns on equity and Milton won’t dent that significantly it now seems.

“Reinsurance market turns have tended to occur following periods of poor profitability for the market or particular stresses in individual years,” they explain.

Adding that, “Even if we assume that Hurricane Milton will drive estimates down in 2024E, the industry is still making excellent returns compared to the past. As a result, we see little impetus for the market to turn or harden further given these strong levels of profitability; we believe the response might have been different if the storm had produced more material industry level losses ($70-80bn+).”

The J.P. Morgan analysts say that looking back to the reinsurance renewals of 2013 might provide some idea of what to expect in 2025.

Explaining, “We believe that the current market conditions in reinsurance are reminiscent of late 2012 ahead of the 2013 January renewals. At the end of October 2012, Hurricane Sandy struck and is still the fifth-largest insured loss of all time, with most management teams expecting that prices would move up slightly at the renewals. However, looking back at what happened, prices reduced 0.5ppt based on the Guy Carpenter rate-on-line index despite expectations in the market. We see the current market with healthy profitability and strong levels of capital being similar in many ways.”

Interestingly, the analysts are now differing slightly with reinsurance brokers, as the major firms have all acknowledged that property catastrophe pricing is likely to prove flatter now, at January 2025, than it would have if Milton had not occurred. Here’s one example from our article on MMC / Guy Carpenter from yesterday.

The analysts state, “Despite the storm being less damaging than feared, there has been a narrative of Hurricane Milton changing the market dynamic towards flatter renewals versus our previous expectation of down mid-single digits,” going on to add that, “we do not see this as a likely scenario at this point in the year.”

It’s perhaps not so much that rates may harden on the back of hurricane Milton, but more that reinsurance and insurance-linked securities (ILS) capital providers have had another relatively significant scare that has again demonstrated that capital-eroding catastrophe events are both possible and likely to occur.

This will make custodians of capital even more motivated to hold onto pricing levels we currently see in the market. But, perhaps more importantly, the way losses will fall from hurricane Milton will also provide significant impetus for capital providers to hold onto attachments and terms for longer.

From what we are hearing from industry sources at this time, if hurricane Milton proves to be a roughly $30 billion to $40 billion industry loss for the private insurance and reinsurance market, then reinsurance and retrocessional capital, including catastrophe bonds and the ILS market, might be expected to take anywhere from 15% to almost 25% of the loss.

At which levels, most views on risk-sharing would deem that to be about right, for a loss event of the quantum of Milton.

As industry losses rise, the percentage that is ceded to reinsurance, retro and ILS capital increases, with very large events even able to see more capital from the reinsurance tiers, than primary capital, exposed.

There is of course the location affected by hurricane Milton to consider, as a loss event in another part of the world might see less reinsurance support called in, but likely with less noise about whether the levels of risk-sharing are fair.

Where Florida is concerned, reinsurance capital has always been more important. Not just because of the exposure, but also the relatively thinly capitalised nature of some domestic market insurers which has made their ability to weather even a storm of Milton magnitude a challenge to weather.

So, we believe reinsurers and ILS capital providers will be motivated after Milton to hold firm on price and terms for Florida, with perhaps a little more flexibility available in other regions of the world, but overall property catastrophe reinsurance and retrocession will likely see a relatively flat renewal, it seems at this stage of the year.

Read all of our hurricane Milton coverage.