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Original Risk: A Society for Change Agents

Japan typhoon cat bonds marked down on Hagibis uncertainty


Catastrophe bonds exposed to Japanese typhoon losses have largely been marked down due to market uncertainty over the eventual industry loss from recent typhoon Hagibis.

down-arrow-profitTyphoon Hagibis is currently estimated to have caused an insurance and reinsurance market loss of up to US $16 billion, although many in the market expect it will be a little lower than the top-end of estimates.

The remaining Japanese typhoon cat bonds that are outstanding currently in the market are all per-occurrence in nature, after the only aggregate typhoon cat bond was triggered and is facing a total loss after the impacts of 2018’s typhoons Trami and Jebi.

But the per-occurrence Japan typhoon cat bonds that are outstanding all have relatively high attachment points. We understand that they model out as likely to attach only in the event of a typhoon causing an insurance and reinsurance market loss closer to the $20 billion or higher mark.

Given the need for the industry loss to rise significantly, before any of the remaining Japan typhoon cat bonds would be triggered, it’s considered very unlikely that we’ll see any catastrophe bond losses because of typhoon Jebi.

The riskier of the outstanding per-occurrence cat bonds exposed to Japanese typhoons have been marked down by close to 17% or so, while others are marked down 10% to 15%.

These mark downs are not because cat bond fund managers and investors are specifically expecting any losses, but rather to account for uncertainty and nervousness surrounding industry loss estimates following the escalation seen with last year’s Jebi.

Reflecting the fact that these mark-downs are mainly due to uncertainty, rather than a fear losses could attach to these cat bonds, there hasn’t been any trading of Japan typhoon cat bonds recorded by Trace since shortly after Hagibis struck, with only one bond trading right after the storm hit.

Interestingly, there aren’t any international multi-peril cat bonds currently outstanding that feature Japanese typhoon risk, as cat bond deals that try to cover all of the largest international exposures have become fewer in number in recent years.

However, our sources tell us that international deals including Japanese exposures are possible again in the near future, as sponsors are showing increasing interest in covering all of their peak zone exposures with cat bonds again, after the impacts of the last two years of typhoons.

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