Hurricane Harvey – catastrophe bond exposure

Here’s a quick look at just how much of the near $30 billion of outstanding catastrophe bonds could be exposed to a major Texas hurricane, be that hurricane Harvey that is rapidly approaching Category 3 on approach to the state, or any other major storm.

It’s important to note that we don’t have the actual data for expected losses of every cat bond in our Deal Directory, so establishing precisely how much of the outstanding catastrophe bond market is exposed to hurricane Harvey isn’t possible.

But we can take a look at cat bonds that are Texas named storm and hurricane exposed and those U.S. wind cat bonds that tend to cover every hurricane exposed state on the east and Gulf coasts, as well as a few multiperil bonds.

For Texas only exposure, there are only the two outstanding Texas Windstorm Insurance Association (TWIA) cat bonds, which total $1.1 billion of exposure, $400m from Alamo Re Ltd. (Series 2017-1) and the $700m Alamo Re Ltd. (Series 2015-1).

Both are exposed to Texas hurricane risks, with attachment points set relatively high as they sit above reinsurance in the TWIA tower.

As well as this $1.1 billion of pure Texan hurricane exposure, U.S. hurricane exposed cat bonds (either pure wind or mult-peril) which have some Texas exposure in the majority of cases (a handful may not) in our Deal Directory total a huge $10.6 billion from 39 outstanding cat bond deals.

Clearly it would take a hurricane much larger than Harvey to create losses to all of these cat bonds and in fact the majority have attachment points that are far too high to be troubled by Harvey over the coming days, but it’s useful to see just how much of the cat bond market carries U.S. wind risk and could be exposed to the storm.

Some of the most exposed catastrophe bonds, based on having the highest expected losses or attachment probabilities, are the following cat bond tranches:

Residential Reinsurance 2013 Ltd. (Series 2013-2)  Class 1 – $80mn – 13.06% expected loss (EL) – 21.38% attachment probability (AP)

Blue Halo Re Ltd. (Series 2016-2) Class B – $55mn – 11.53% EL – 15.14% AP

Residential Reinsurance 2014 Ltd. (Series 2014-1) Class 10 – $80mn – 9.86% EL – 11.84% AP

Galileo Re Ltd. (Series 2016-1) Class A – $100mn – 8.66% EL – 12.74% AP

Galileo Re Ltd. (Series 2016-1) Class A-1 – $75mn – 8.65% EL

Loma Reinsurance (Bermuda) Ltd. (Series 2013-1) Class C – $72mn – 7.95% EL – 10.32% AP

Residential Reinsurance 2016 Ltd. (Series 2016-1) Class 10 – $65mn – 7.58% EL – 12.03% AP

Blue Halo Re Ltd. (Series 2016-1) Class A – $130mn – 7.24% EL – 8.65% AP

Residential Reinsurance 2015 Ltd. (Series 2015-1) Class 10 – $50mn – 6.2% EL – 8.33% AP

Citrus Re Ltd. (Series 2016-1) Class E-50 – $100mn – 5.75% EL – 8.11% AP.

Of course, this is an unscientific look at which catastrophe bonds could be exposed to hurricane Harvey, as to do so more precisely we would need to know the exposure by county of the state of Texas and much more granular detail. But, at first glance, these are the cat bond tranches with the highest expected loss that have Texas hurricane exposure.

It will likely come to light in the next 24 to 48 hours which, if any, cat bonds are really exposed to Harvey.

Update:

Sources report a relatively large amount of secondary trading activity for one or two particularly exposed cat bond names, including one of the Res Re transactions.

Meanwhile, Ben Brookes, VP Capital Market Solutions at RMS, said ;”The RMS capital markets team have been busy looking into the potential impact on the cat bond market – at the moment we have our eyes on Fonden, with its parametric trigger extending from Mexico up the Texan coastline. If the central pressure of the storm drops significantly and it hits the box, that deal could be at risk. Likewise, we note a Res Re class with elevated attachment probability – albeit only slightly. Interestingly, at this point we don’t see the Alamo deals looking at risk. The relatively high attachment points might explain that. The situation will become clearer as the event unfolds, of course.”

It’s interesting that the Recently completed Fonden cat bond (IBRD / FONDEN 2017) is considered exposed, as it seems that a significant press drop would be required for Harvey to trouble the parametric trigger.

Update 2:

As Hurricane Harvey made landfall with a reported central pressure of 938mb, above the 935mb or lower required to cause a triggering of the IBRD / FONDEN 2017 catastrophe bond and what would be a 25% payout of the Class B notes, currently it seems this bond is safe, despite it appearing that Harvey’s eye passed through the parametric box.

However, we may have to wait for the final report from the NHC on Harvey for this bonds fate to be fully understood. We will update on the status of this bond next week.

View details of every catastrophe bond transaction in our Deal Directory.