Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Hurricane Irene a potential threat to many catastrophe bonds


Hurricane Irene has now intensified into a major Category 3 hurricane with maximum sustained winds of 115mph. The storm is forecast to intensify further as she makes her way through the Bahamas before heading for the U.S. coastline. Where exactly she will hit the U.S. coast, or if she even will, is still uncertain with some forecast models suggesting landfall as far west as Wilmington, North Carolina and others suggesting Irene will miss the U.S. coast altogether.

The model consensus though, shows Irene making landfall somewhere on the U.S. eastern seaboard as a major hurricane. It is going to be hard to predict her path until the storm has passed the Bahamas and is back into the open waters of the Atlantic to the west of Florida. While none of the models show hurricane Irene making landfall on Florida itself, that scenario can’t be completely discounted yet as the weather conditions leave a lot of room for uncertainty.

A significant volume of catastrophe bonds have exposure all the way down the U.S. east coast, from New York to Florida. Of the total outstanding catastrophe bond market, around 70% have exposure to hurricanes hitting the U.S. coastline. It’s hard to predict how many cat bonds may be at risk from a landfalling hurricane Irene given the uncertainty in her direction, but it’s reasonable to suggest that anywhere Irene makes landfall along the eastern seaboard will leave some holders of catastrophe bond notes potentially exposed.

Particularly large cat bond hurricane risk exposures exist in Florida (of course) and also North Carolina. North Carolina has over $500m of Johnston Re Ltd. cat bonds exposed to hurricanes purely within that State. Most of the other potentially exposed cat bonds cover much of the U.S. east and gulf coast, so some exposure for many of these multi-region cat bonds is also to be expected.

Look back through the last few years of our catastrophe bond Deal Directory and you can see that there could be close to $6 billion of catastrophe bonds (including private transactions) in the marketplace right now which have some exposure to hurricanes hitting the Florida or eastern U.S. coastline.

Any landfall made by hurricane Irene on the U.S. east coast could result in billions of dollars of insured losses, potentially enough to increase the upward pressure on re/insurance rates. A worst case scenario of hurricane Irene coming ashore on a major population centre could result in the biggest U.S. insured loss so far this year.

Keep track of hurricane Irene on our 2011 Atlantic Hurricane Season page.

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