Re-Insurance

Cat-bond capital at risk from Irma

  • Preparing for the worst: James Byrd, left, and Richard Clark, right, load their sandbags in a truck in Sarasota, Florida as they prepare for Hurricane Irma (Photograph by Mike Lang/Sarasota Herald-Tribune via AP)

Catastrophe-bond investors are at risk of seeing some of their capital wiped out by Hurricane Irma if the deadly storm hits Florida. S&P Global Ratings said yesterday it had identified 13 catastrophe bonds at risk.

Bermuda is the epicentre of the catastrophe-bond market. The bonds, which reinsurers use to bolster their capacity for covering risks, are tied to specified types of catastrophe and offer investors a return in exchange for the risk of losing some, or all, of their principal if an event occurs.

The insurance-linked securities market, which has boomed in recent years has seldom been tested by a major catastrophe.

S&P’s bulletin came out yesterday as hundreds of millions more dollars were wiped off the market value of Bermudian reinsurers in New York trading, as Irma remained on track to hit southern Florida on Sunday.

Shares of Blue Capital Reinsurance Holdings, a collateralised property-catastrophe reinsurer and subsidiary of Endurance, and itself part of the Sompo International Group, plunged more than 14 per cent.

In a statement through the Bermuda Stock Exchange yesterday, Blue Capital said it had suspended its share buyback programme.

“The company makes this decision based on the potential impact to its investments from a US landfall of Hurricane Irma, although it will not know what, if any, material impact there may be until it has completed its normal post-event procedures,” Blue Capital stated.

Aspen Insurance Holdings dived 10.3 per cent amid the carnage, while Validus Holdings took a 7.2 per cent hit, Everest Re fell 6.8 per cent and XL Catlin was down 5.1 per cent.

Artemis.bm, a website run by Steve Evans, an expert, who closely tracks the insurance-linked securities market, pointed out that the potential for a Miami area direct hit had been calculated as a $131 billion realistic disaster scenario by Lloyd’s of London.

Late last year financial regulator the Bermuda Monetary Authority estimated that a Miami-Dade hurricane would cost $125 billion, of which Bermudian companies’ share would be 11 per cent, or $13.4 billion, while losses from an onshore Gulf windstorm would be $107 billion, of which Bermuda’s share would be 17 per cent, or $18.6 billion.

“The reinsurance and insurance-linked securities market would take a significant share of such an impact,” Artemis reported.

“Many primary insurers would exhaust their reinsurance arrangements, including a number of catastrophe bonds and ILS structures as this is exactly the magnitude of loss that the ILS market’s capacity is deployed to protect against.

“How impactful it would be to ILS interests is impossible to speculate, but it’s safe to assume that a Cat 4 or Cat 5 landfall on the path shown would cause a significant loss to ILS funds and their investors.”

The 13 cat bonds at risk, according to S&P, which are exposed at varying levels, include two classes of Kilimanjaro Re 2014 notes, five classes of Residential Reinsurance notes from 2013, 2015, 2016 and 2017, Tradewynd Re 2013 notes and four issuances of Horseshoe Re II.

A note from Morgan Stanley analysts suggested that traditional reinsurers should be able to survive the hit from Irma.

“While the uncertainty of Irma losses remains an overhang to the group in the near term, we think the market is discounting a one-in-100-year loss event, for some reinsurers,” the analysts said.

“We believe the industry balance sheet should be able to withstand such a catastrophic scenario.

“Historically, property and casualty stocks tend to underperform immediately following major losses, but outperform subsequently as losses become certain and investors’ focus shifts to stabilising and improving pricing.”