(Bloomberg) — Investors in catastrophe bonds are bracing for big losses as the combined destructive force of Hurricanes Helen and Milton threatens to trigger payment clauses on an unprecedented scale.
Two weeks after Helen caused massive flooding in more than a dozen states, Florida is bracing for the impact of Milton, which was classified as a Category 4 hurricane on the five-point Saffir-Simpson scale as of Tuesday. It is expected to make landfall early Thursday morning, pushing a wall of water onto the coast. Millions of people have already been evacuated from the coastline, including residents of densely populated Tampa.
“If Milton hits the Tampa metropolitan area as a Category 4 hurricane, it could lead to the largest reinsurance loss event in history,” Florian Steiger, founder and CEO of Icosa Investments AG, said in an interview. spoke.
Such a scenario, which forecasters are currently predicting, could exceed the impact of Hurricane Ian in 2022, Steiger said. Ian’s influence caused the Swiss Re-Catastrophe Bond Index to initially fall by 10% in September 2022, sending a shockwave through catastrophe bond portfolios and prompting insurers to shift more of their book risk to capital markets. This caused a publishing boom.
Tanja Wrosch, head of cat bond portfolio management at Twelve Capital AG, said if Milton were to hit Tampa as a major hurricane, the bond losses from the catastrophe “would be more significant than from Ian.” The Swiss asset manager has a $5 billion portfolio, including $3.8 billion in disaster bonds.
“The big factor in Milton will be storm surge, flooding from the ocean,” she said.
Catastrophe bonds, or cat bonds as they are called in the industry, are issued by insurance and reinsurance companies to provide financial protection against the most severe natural disasters. Investors who purchase bonds can make large profits if a predetermined event does not occur, but can lose a large portion of their capital if the event does occur. Those losses go towards insurance claims.
According to analysis provided by Preqin, Milton and Herren’s potential cat bond losses would mark a major turnaround for the bond market, which supported some of the most profitable hedge fund strategies last year. The Swiss Re Global Cat Bond Index soared 20% in 2023, outperforming the returns of all other major bond markets.
In 2022, Ian caused approximately $60 billion in insured losses. Chuck Watson, a disaster modeler at Enki Research, said Milton’s damage could result in $60 billion to $75 billion in damages and losses, with some models putting the total at $150 billion. said.
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How much cat bond investors will be required to pay to cover Milton’s impact will depend on the scale of the damage. Florida Citizens, Florida’s last remaining insurance company, plans to raise about $500 million from one of the cat bonds, according to people familiar with the issuance.
Cat bond investors could also be affected by Hurricane Helen’s inland flooding. Moody’s RMS estimates that insurance losses due to Helen in the U.S. private market could be between $8 billion and $14 billion.
“Helen was a once-in-a-millennium rain event,” said Jonathan Schneier, director of catastrophe response at CoreLogic, an Irvine, California-based catastrophe modeling company. “This shows the power of hurricanes inland.”
Investors will also be exposed to losses related to flooding from Helen through their holdings in cat bonds issued by the Federal Emergency Management Agency. In an emailed response to questions, FEMA said it transferred $1.9 billion of flood risk to the private sector ahead of the 2024 hurricane season, with most of it flowing into the cat bond market.
FEMA said it was “too early to make any predictions” about the extent to which these bonds would be activated. As with other coverage types of hurricane bonds, the calculations depend on the actual losses sustained on the ground and can take some time to calculate.
“Initial quotes are typically available within a few weeks, but the speed of payment is typically months to years, depending on the complexity of the loss,” said Rhodri Morris, head of insurance securities analysis at Twelve Capital. said.
Because ILS products have low trigger thresholds, investors in the $60 billion private market for insurance-related securities may face even greater risk of loss than cat bond holders.
There are signs that some cat bond traders are starting to lose their nerve. Someone dumped Florida Cat bonds on Monday for just 67 cents on the dollar, according to Twelve Capital.
There’s a lot of “noise” in the cat bond market right now, Brochu said. “There have been some difficult deals.”
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