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Catastrophe bond market participants comment on Sandy


We’ve been busily canvassing opinions and thoughts on hurricane Sandy’s potential impact from our contacts and friends in the marketplace today. Sandy is still threatening to be the worst northeast hurricane in memory, larger in size, with stronger winds and threatening a larger storm surge than last years hurricane Irene. Reinsurers and the catastrophe bond market are not out of danger yet and very early estimates suggest an insured loss in the mid to upper single digit billions.

As we said, estimates are very early and there are many factors that could increase losses or reduce them, storm surge and flooding being one major unknown alongside just how long Sandy’s remnants will impact the northeast after it merges with the winter storm coming from the west. Depending on the time that the peak storm surge occurs and whether that coincides with high tide will have a large bearing on the potential losses from the storm. At the moment it looks as if Sandy may be accelerating towards the coastline meaning that landfall may occur before high tide, however there is always a chance for a storm to slow or stall just off the coast.

So here are some insights from a number of cat bond and ILS industry participants with a viewpoint on the impact to the sector from hurricane Sandy.

We asked Stefan Kräuchi of Hong Kong based insurance-linked investment consultancy ILS Advisers for his thoughts on the storm:

“Sandy is comparable with hurricane Irene one year ago, which caused damage of approx. USD 4.5bn. Sandy is a large storm with low strength. As a result of its size, it will very likely affect a large portion of the US coast regardless where actual landfall will occur.”

“On the positive side the rainfall forecasts for Sandy are much less than for Irene one year ago. It was that rainfall before Irene that made flooding much worse last year. Moreover one has to keep in mind that flood losses are generally picked up by the US governments national flood insurance program rather than private insurers. The losses are probably more of an issue for primary insurers than for reinsurance companies since the losses for primary insurers will most likely remain below reinsurance attachment points.”

“Some major primary insurance companies have cat bond cover they could draw on. However the attachment points are typically at a much higher insured loss level than the USD 5bn, which the comparison with Irene would imply.”

“If losses should turn out to be material, then this if anything could be a reason for premium rates to go up in the upcoming January 2013 renewal. Then this would definitely be a reason for investors either to increase their allocation to the asset class of insurance linked investments or to finally get into the asset class. We hope of course for none to minor impact of the landfall of Sandy and our thoughts are with the people in the US who are concerned about their properties and communities.”

We also spoke with Luca Albertini of Leadenhall Capital Partners LLP, who commented

“Cat bond trading levels on Friday did not point to real concerns on any of the bonds. Mark to market pressure has been seen, but we have not seen distressed selling showing real concern on triggers. Most hit are aggregate transactions, as this event is indeed likely to erode aggregate deductibles in a number of trades. We cannot predict as of now what the loss will be but we are very carefully monitoring the size of the storm and the potential for damages.”

Samuel Scherling, Head of ILS at investment manager Alternative Beta Partners AG told us:

“No trading activity seen in the market today. Personally I believe that the wind damage will be limited, may be some flooding spillover for indemnity bonds. Currently I see the industry loss in the $5-10B range with possibly no impact on cat bonds.”

Finally Brad Chance, CEO of ILS asset manager Petra Haven Capital LLC said:

“The number one driving force is the intensity, sheer size of the storm, and geographic area that it will impact. With the pressure dropping and winds intensifying per the latest update this is gonna be really interesting, but still flooding is the main fear at this time, not wind.”


Also our latest insight on Sandy can be found in this article.

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