LONDON (Reuters) – Catastrophe bonds issued by the U.S. National Flood Insurance Program (NFIP) fell sharply on Friday, according to a weekly broker’s note. This reflects expectations that Hurricane Milton could trigger payments for storm cleanup.
Catastrophe bonds are a type of insurance-linked security (ILS) that provide institutional investors with access to the insurance market.
Catastrophe bonds typically offer high returns to investors, but the issuer preserves their principal if a specific event occurs in a particular region, such as a hurricane or flood.
Hurricane Milton caused widespread flooding and spawned a spate of deadly tornadoes on Florida’s east coast this week, killing at least 16 people and leaving millions without power.
Seven catastrophe bonds issued by the NFIP, totaling $1.3 billion, were down 13% to 59% on Friday compared with a week earlier, according to a memo from brokerage Aon seen by Reuters. Aon and NFIP did not respond to requests for comment.
“We are monitoring NFIP bonds covering hurricane flooding, but it is too early to tell the exact impact,” specialist investor Twelve Capital said in a note.
NFIP provides insurance to reduce the social and economic impacts of flooding. According to data from specialized website Artemis, the catastrophe bond provides protection against flood risks from named storms.
Several other disaster bonds issued by insurance companies also fell sharply, according to The Aon.
Determining whether a catastrophe bond was caused by a hurricane could take weeks or months, industry officials say, during which time investors will not be able to redeem the bond.
Analysts at UBS said in a note that the impact of the hurricane is likely to “trap private ILS capital.”
(Reporting by Carolyn Cohn; Editing by Diane Craft)
