Philippines Gov requests cat bond loss calculation for typhoon Goni

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The Bureau of the Treasury of the Republic of the Philippines has issued notice to the calculation agent for its World Bank facilitated IBRD CAR 123-124 catastrophe bond transaction that it believes recent super typhoon Goni to be an applicable event that requires a calculation of the modelled losses to be undertaken.

philippines-flagIt’s the first step, post-catastrophe event, towards deriving whether the recent typhoon has impacted the country severely enough to trigger the exposed $150 million of tropical cyclone disaster insurance protection that one tranche of the World Bank facilitated catastrophe bond provides the Philippines government.

Super typhoon Goni (also known as typhoon Rolly locally in the Philippines) intensity was upgraded by the JTWC just prior to landfall to 170 knots, which is close to 196 mph sustained winds.

Based on recordings of 1-minute sustained winds, Goni is the strongest recorded tropical cyclone to ever make landfall anywhere in the world.

Goni made landfall at still super typhoon strength at Catanduanes island on October 31st, with the landfall region, Bicol, Luzon, severely impacted with a massive storm surge impacting coastal areas, extreme winds recorded at over 130 mph on the ground and severe flooding reported.

Further landfalls were made as typhoon Goni moved across the Philippines, but the track was further south than forecasts had suggested, which meant metro Manila was not as severely hit as assumed.

The Philippines government has already estimated the costs to infrastructure and agriculture at well over $250 million, a figure expected to rise as this was announced within days of typhoon Goni’s landfall.

Now, a week on from the storm, the government of the Philippines Bureau of the Treasury has submitted an event notice, calling on the calculation agent for its catastrophe bond, catastrophe risk modeller AIR Worldwide, to run the calculation process and derive whether typhoon Goni was severe enough to trigger the notes, we can reveal.

The Philippines catastrophe bond features a modelled loss trigger, meaning it requires AIR to run the event calculation process documented in the agreement, which involves running its models and looking at the resulting modelled notional impact assessment it produces.

If the calculation process produces a figure above the attachment point, the catastrophe bond will be deemed to face a loss.

As we explained prior to typhoon Goni’s landfall, the $225m IBRD CAR 123-124 catastrophe bond affords the Philippines government $150 million of tropical cyclone disaster insurance protection, as well as $75m of earthquake protection through a second tranche of notes.

AIR Worldwide will now run its models to analyse the event and derive a modelled loss figure, based on pre-defined post-event loss calculation procedures for the tropical cyclone tranche of cat bond notes.

The resulting modelled loss total will then need to be compared to the terms that define whether any payout is due under the cat bonds tropical cyclone coverage.

The $150 million of tropical cyclone exposed cat bond notes can payout in increments of 0%, 35%, 70% or 100% of principal, depending on how severe an event is and how high the resulting modelled loss is calculated to be.

With typhoon Goni, even prior to the event it looked like a partial loss could be on the cards, with a 35% or 70% loss of principal seeming the most likely outcome, if typhoon Goni had maintained its intensity through to Manila as the forecast suggested at the time.

As Goni did weaken a little more than expected, thanks to interaction with mountainous islands in its path, and the track shifted a little further south, taking the strongest winds away from metro Manila, it’s now more questionable whether the cat bond is likely to be triggered or not.

But, with the event notice submitted by the Philippines government, AIR will now run the process and report back to the Bureau of the Treasury and investors in the catastrophe bonds with a modelled loss total for typhoon Goni. That figure will then define whether any payout is due.

It seems likely the highest payout possible, as typhoon Goni had weakened by Manila where most of the exposure for the cat bond is weighted, would be the 35% of principal, so the lowest amount under the terms of the catastrophe bond deal.

But still, should this prove to be the case, which remains uncertain at this time, the additional capital will be welcomed by the Philippines government as a boost to its disaster recovery efforts after the typhoon.

It may take some time for all of the event parameters to be collected and for the calculation agent process to run and investors we’ve spoken with believe that no payout or triggering is the most likely outcome, once the modelled loss calculation has run.

However, until that process is run it remains very uncertain and it all comes down to the data inputs and the model run across the notional Philippines portfolio of risk, to derive an index number that can be compared to the trigger.

We’ll update you as and when we hear any more on the Philippines catastrophe bond and whether typhoon Goni has triggered any payouts of investor principal.

You can read all about the landmark Philippines catastrophe bond, the IBRD CAR 123-124 issuance, in our comprehensive catastrophe bond Deal Directory that includes details on around 700 transactions.

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