Sandy threatens billion dollar losses, could threaten catastrophe bonds

by Artemis on October 28, 2012

Hurricane Sandy continues to bear down on the U.S. eastern seaboard with forecasters still predicting a convergence of three weather systems that could turn Sandy into a ‘perfect storm’ (or Frankenstorm if you prefer). Sandy is forecast to converge with a low pressure system moving in from the west and cold Arctic air coming from the north. The merging of these systems could result in a huge storm system which might sit over the northeast U.S. for a number of days.

Updates as weather conditions develop can be found at the bottom of this article here.

Experts are now suggesting that Sandy, still a category 1 hurricane at the moment, could cause more extensive damage and hence higher losses than last years hurricane Irene. Irene was responsible for around $15.8 billion of economic losses and around $5 or $6 billion of insured losses, some experts expect Sandy to be worse. Sandy is forecast to cause an insured loss in the low to mid-single digit billions by some observers, including Validus’ CEO Ed Noonan in an earnings call on the 26th, but others are suggesting that if the conditions conspire to realise the worst of forecasts then the insured loss could be much, much higher. Reinsurers will certainly be facing some payouts from Sandy even if the impact is lower than expected. The majority of forecasters believe Sandy will be a catastrophe event, the question is how catastrophic?

Should losses from Sandy move up into the double-digit billions of dollars then it is possible that some catastrophe bonds could face a risk of being impaired. There are a significant number of cat bonds which have some exposure to the area where Sandy is forecast to come ashore. These are hurricane cat bonds which cover the entire eastern coastline or multi-peril cat bonds with broad hurricane coverage included as one of the perils. The exposed cat bonds come in both aggregate and per-occurrence form, the aggregate cat bonds will be more likely to be impacted if Sandy’s losses are lower where as a higher loss could even impact per-occurrence structures. It’s very hard to forecast what cat bonds are at risk but we’ve detailed some possibilities below.

Catastrophe bonds in the path of hurricane Sandy

To give you an idea quite how broad the cat bond markets potential exposure is to U.S. northeast coast hurricane, all of the most recent three cat bonds to come to market all provide some cover for the northeastern states threatened by Sandy. Most cat bonds which are structured on a per-occurrence basis have been designed to protect against the most severe storms with losses in the tens-of-billions, this should see most of them safe. For aggregate cat bond sponsors though there is the chance for Sandy to qualify as an event under the terms of the cat bond deal and erode the attachment to some degree, leaving investors more exposed to future loss events.

Of the aggregate bonds which have some hurricane cover in this region the two Residential Reinsurance deals from 2011 and 2012 (Residential Re 2011 and the more recent Residential Re 2012) could be a concern as they have already had some of their aggregate losses eroded by thunderstorm events. Then there are cat bonds like Merna Reinsurance III which covers State Farm on an indemnity basis. State Farm have one of the largest exposures in the mid-Atlantic states, over $3 billion of exposure, making them an insurer with cat bond protection to watch. Liberty Mutual are another insurer with a good deal of exposure in the path of Sandy and an indemnity triggered cat bond providing hurricane cover in the area with Mystic Re III Ltd. (Series 2012-1). Travelers are also one of the more exposed insurers in the northeast and also have an indemnity cat bond which includes hurricane coverage in Long Point Re III Ltd. Another insurer with a cat bond providing cover in the path of Sandy is Assurant with their Ibis Re II Ltd. cat bond.

Of course it’s not just insurers with potential cat bond exposure. A number of reinsurers have cat bonds with exposure in the path of Sandy. The three most recent cat bonds, Munich Re’s Queen Street VII Re Ltd., SCOR’s Atlas Reinsurance VII Limited and Swiss Re’s Mythen Re Ltd. (Series 2012-2) have not officially come on risk yet and are due to next week, possibly after Sandy’s impact has been at its peak, so these could be considered safe. Cat bonds which are on risk from reinsurers include Munich Re’s Queen Street VI Re Ltd. covers that region, Swiss Re’s Mythen Ltd. (Series 2012-1) and SCOR’s Atlas VI Capital Ltd. (Series 2011-1). These all cover the exposed areas.

So as you can see there are a good number of cat bonds with potential exposure (important to note the word potential) and that is not an exhaustive list. There are many more cat bonds which have some level of U.S. hurricane exposure in those states, some are structured in such a way that there is no chance of Sandy impacting them, others we cannot be so certain on. Check out our catastrophe bond Deal Directory for information on every cat bond transaction.

Bloomberg quoted Patti Guatteri of Swiss Re Capital Markets as giving a ‘loose estimate’ that $1 billion of cat bonds could be at risk from Sandy. Speaking with Bloomberg on Friday, Guatteri said; “Some investors are looking for bids on specific bonds that are the most exposed to the Northeast. A few things have traded, but nothing at hugely distressed levels, so clearly there is not panic in the market at this point.” We heard the same from other contacts in the market, that traders seemed to be holding off on making trades as they waited to see whether Sandy would turn to the U.S. coast. In the same article, Bloomberg quotes Nelson Seo from Fermat Capital as saying that even if Sandy did cause some sort of impact on the cat bond market he did not expect it to be severe enough to wipe out the returns the market has seen so far this year.

Hurricane Sandy’s storm surge threat

The chance of hurricane Sandy causing a large storm surge is increasing as the storm grows in size on approach to the coast. The National Hurricane Center are forecasting Sandy to bring ‘life-threatening storm surge flooding’ to the mid-Atlantic coast, including Long Island Sound and New York harbour. With winds forecast to still be close to hurricane force at landfall, a wind field that spans over 1000 miles and timing that coincides with high tides Sandy could cause severe coastal flooding. There have been evacuation orders in place for some coastal areas and residents are advised to heed them.

The NHC says that if the storm surge peak coincides with high tide waters could reach levels above ground of 6 to 11 feet in northern New Jersey, Long Island Sound and New York harbour. Elsewhere levels of 3 to 8 feet above normal are predicted.

The NOAA’s Hurricane Research Division put the destructive potential of Sandy’s storm surge at 5.7 on a scale of 0 to 6, according to Jeff Masters Weather Underground blog. Apparently this is a higher destructive potential than any hurricane observed between 1969 – 2005, including Category 5 storms like Katrina, Rita, Wilma, Camille, and Andrew. Masters explains that Sandy’s storm surge could overtop flood walls in Manhattan. Irene managed this, but the storm surge was not enough to flood the New York subway system. It’s believed that Sandy will cause a storm surge several feet higher than Irene’s which Masters says could flood parts of the subway system causing billions in damages if the storm surge hits at high tide. Masters gives a 50% chance of this occurring in his latest article.

Hurricane Sandy weather impacts and forecast

Sandy poses a threat from hurricane force winds, rainfall totals of 3 to 12 inches possible, snowfall of as much as three feet in certain inland areas as well as the storm surge threat. The worrying aspect with Sandy is the potential for the storm to sit over the northeast for a number of days creating havoc and leaving the potential for losses to accumulate more widely. The total potential for loss with Sandy is extremely large but all the weather conditions would have to conspire to form the ‘perfect storm’ creating the maximum loss. We hope some of these factors diverge meaning that Sandy is weaker than expected and the impact to the U.S. population, economy and the re/insurance industry is much lower than the worst case scenarios suggest it could be.

It’s important not to focus on the Category 1 nature of Sandy. All the experts are saying that a storm of this size, Sandy, at over 1000 miles wide is the second widest storm on record, after Olga in 2001, can cause massive damage and losses without the intensity of a higher category. The size and breadth of Sandy means a broad impact zone and even now areas of the U.S. east coast are experiencing winds strong enough to cause some light damage. Sandy needs to be taken seriously given the current forecasts.

We’ll keep you updated on Monday as Sandy approaches the shore and you can always keep up to date with our interactive tracking map here.

Update (6am ET):

Hurricane Sandy has strengthened into a strong category 1 storm with maximum sustained winds of 85mph. The minimum central pressure of the storm keeps dropping and is now down to 946mb. Further strengthening is forecast as Sandy approaches the mid-Atlantic coast and the pressure could drop further too. This would have an effect of tightening the isobars of the storm ensuring that strong winds will extend far from the center at landfall.

Sandy has now begun to turn towards the U.S. as forecast. Currently the NHC track shows Sandy making landfall around the Delaware, New Jersey border to the south of Atlantic City. This track is slightly further south than was forecast yesterday, although it is still not certain quite where landfall will happen.

The worst of the storm surge is still forecast for further north and New York / Long Island are currently a real concern for some significant flooding. The way the geography lies Sandy will push the storm surge up into New York harbour which if that coincides with the high tide could be a major issue.

Update (9.30am ET):

Sandy remains a strong category 1 storm with 85mph sustained winds at her center with higher gusts. Sandy is accelerating towards the coastline and pressure remains at 946mb at the last update from the NHC. Flooding from storm surge remains a concern on the latest track. The NHC says that some further strengthening is possible before Sandy makes landfall.

Update (11.30am ET):

Hurricane Sandy’s maximum sustained winds have increased a little to 90mph while the minimum central pressure has dropped a little to 943mb. This is consistent with the forecast which called for strengthening as Sandy approached land. This will not just be intensifying the eye of Sandy, the storm is turning extra-tropical and so will be strengthening throughout the wind field, meaning wind damage could become more widespread. A little further strengthening is possible according to the NHC.

The storm surge forecast remains a concern. At the recent high tide some flooding has occurred around New York harbour, Long Island and New Jersey. The next high tide tonight is expected to be higher and this is when flood potential for coastal areas will reach a maximum.

Update (2.30pm ET):

Sandy has accelerated towards the U.S. east coast and is now just over 100 miles off the New Jersey coast, slightly to the south of Atlantic City. Still packing 90mph winds, Sandy is not expected to lose any intensity before landfall. The minimum central pressure of Sandy has continued to drop, now at 940mb. The forecast for storm surge has not changed, nor for wind speeds, the size of the wind field or any other impacts. Sandy remains a very large and dangerous storm and landfall will likely occur around 8pm to 10pm ET as long as the storms forward speed does not change.

Update (10.00pm ET):

The storm surge from hurricane (now extra-tropical) storm Sandy has inundated New York and many areas of the east coast of the U.S. Storm surge levels reached the worst case forecasts we mentioned above and the latest reports from New York authorities suggest that the subway has been flooded along with some of New Yorks key road tunnels. The Mass Transit Authority says that subways could remain closed for days due to flood damage.

From the reports we’re seeing the damage from storm surge and flooding is about as bad as could have been anticipated, we can only imagine what it is like along the New Jersey coastline where Sandy came ashore.

Over 3 million electricity customers are said to be without power in the north east U.S. now. This is among the largest total blackouts seen in memory in the U.S.

At the latest update an hour ago, Sandy remained a strong extra tropical cyclone with 80mph sustained winds. The storm surge peak should now have been reached meaning waters will gradually subside but inundated areas could take time to pump out, with some observers saying the subway system in New York could be days before it is usable again.

From a flooding perspective Sandy looks to have dealt the worst blow thought possible. Quite what this means for loss estimates is impossible to fathom. Television pictures show widespread flooding through some of the U.S.’s most expensive residential and commercial property zones. It’s certainly possible that Sandy will cause a major economic loss, well in excess of the numbers mentioned earlier today. What that means for insurers and reinsurers is difficult to say as there is, as always with flood events, the NFIP to consider as well. However this will be a large industry losss, possibly even the largest financial loss from a U.S. northeast storm on record.

Here are a few of our other Sandy related articles, with the most recent first:

Plenum Investments: No impact to ILS fund expected from hurricane Sandy

Sandy hits U.S. northeast with deadly blow, impacts from storm continue

EQECAT estimates Sandy insured loss $5B-$10B comments on cat bonds

Catastrophe bond market participants comment on Sandy

Catastrophe bond indices both decline on Sandy’s approach

We’ll be back to update you in the morning. Once again, we hope everyone in affected areas stays safe.

Here are some useful resources:

Hurricane Sandy location and forecast path

Hurricane Sandy location and forecast path

Significant river flood outlook for areas in hurricane Sandy's path

Significant river flood outlook for areas in hurricane Sandy's path

Hurricane Sandy 72 hour rainfall forecast

Hurricane Sandy 72 hour rainfall forecast

Hurricane Sandy satellite image

Hurricane Sandy satellite image

Hurricane Sandy, experimental storm surge forecast

Hurricane Sandy, experimental storm surge forecast

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