Swiss Re Insurance-Linked Fund Management

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Scope & scale of Sandy makes catastrophe bond losses unlikely: Willis


According to comments from Willis Capital Markets & Advisory (WCMA), the capital market division of global broker Willis, hurricane Sandy’s impact on the catastrophe bond market is likely to be muted. The scope and scale of Sandy make it unlikely that any cat bonds will be triggered, under current loss estimates, but if losses mount and the estimates increase then some exposed cat bonds could be at risk.

WCMA said that 72% of outstanding catastrophe bonds have exposure to U.S. hurricanes to some degree, although not all will have specific northeast exposure. Interestingly, WCMA believes that Sandy will be defined as a hurricane for the purpose of cat bond transactions, saying that the event definition will likely cause Sandy to qualify as a hurricane despite the fact it degraded to a post-tropical storm just before making to landfall. Fortunately for investors in cat bonds, the scope and scale of Sandy means that it is unlikely any bonds will be triggered.

WCMA notes that there is a lot of discussion around business interruption and contingent business interruption and that this is one of the unknown factors that could affect Sandy’s losses. Business interruption and demand surge / loss amplification component to the event could trigger greater losses than those currently estimated, according to their press release.

Sandy did cause some exposed bonds to experience pricing pressure, says the WCMA report, highlighting two bonds we mentioned the other day here. The Successor Class V – F4 bonds, maturing 10 November 2015, sponsored by Swiss Re and the East Lane Re IV B maturing 13 March 2015, sponsored by Chubb are two considered most at risk. WCMA also note that investors have had concerns about some cat bonds with aggregate triggers where Sandy can erode the aggregate protection, such as the Residential Re deals which are on watch and Combine Re which is safe from principal losses but not from aggregate erosion.

The report notes that despite the impact of Sandy many hurricane exposed bonds continue to trade at prices above par. In summary, WCMA believes that Sandy will have little if any impact on the pricing of newly issued catastrophe bond deals, especially outside the U.S. That will be encouraging for Q4 cat bond sponsors who have perhaps been holding back their issuance until the Sandy loss picture becomes clearer.

Bill Dubinsky, Head of ILS at WCMA, commented “Based on initial loss estimates from modelling firms, we believe that Hurricane Sandy will have little if any impact on new issue pricing in the catastrophe bond market, especially outside the U.S. Of course, if losses mount and early estimates prove wrong, some bonds could be at risk.”

These comments have been released today along with WCMA’s latest quarterly insurance-linked securities market update. We’ll cover the report in more detail in later articles.

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