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Storm Hilary California impacts might erode some agg cat bonds: Twelve Capital


The impact of tropical storm Hilary in California and surrounding areas of the US south west could be another event that serves to further erode some of the retention layers sitting beneath catastrophe bonds that provide aggregate reinsurance protection, investment manager Twelve Capital has cautioned.

Twelve Capital logoWhile once major hurricane Hilary weakened on approach to California and the south west United States, the storm brought with it significant moisture and has caused widespread flooding and the threat of landslides.

This rainfall has dropped on areas typically very dry, with over a years worth of rain hitting many areas.

Data from the US National Weather Service shows two-day rainfall totals as high as almost 12 inches, with these very highest storm totals seen in mountainous regions of California.

Hilary was the first tropical storm to impact the Los Angeles area of California in some 84 years, according to reports, driving home how unusual this event was for the region.

Hilary is now post-tropical, but the rainfall continues and flooding impacts are expected to continue over the next day or more, with risks elevated for some areas downstream of the high rainfall totals in mountainous parts of California.

As of early Monday morning, the National Weather Service said that “virtually all rainfall daily records have been broken thus far,” with storm Hilary.

Parts of Los Angeles and Ventura Counties have been the worst affected, and around 20,000 customers were without power in Southern California according to electrical utility Southern California Edison.

While the impacts from Hilary continue for California and the region, catastrophe bond and insurance-linked securities (ILS) specialist investment manager Twelve Capital has highlighted again that certain cat bond structures can still have exposure to this kind of event.

Twelve Capital said in an update that there has been “limited wind-driven damage reported,” but also noted the extreme rainfall threat from storm Hilary, saying that “intense precipitation has caused flash flooding across many regions in Southern California (including Los Angeles), which will be important to monitor over the coming days.”

The investment manager continued by saying, “During the summer months, Southern California usually experiences limited rainfall, often more exposed to drought conditions and potential wildfires.”

But also highlighted the potential for there to be some ILS market exposure to the storm, by saying, “Twelve Capital has positions with exposure to California, however the wind and flood exposure in particular is limited, with the event more likely to add to the aggregate erosion of exposed catastrophe bonds.”

The investment manager had recently also highlighted how other events, such as the wildfires in Hawaii, could also have an effect on some aggregate reinsurance structures.

Certain catastrophe bonds have come under some pressure in recent months due to an erosion of aggregate deductibles, especially after severe convective storms (SCS) drove significant insured losses across the United States in recent months.

Hilary could add to this, although despite the severity of rainfall and flooding seen, it would likely only be a minimal contributor on top of the aggregate erosion already experienced, we’d expect. Not least given flood losses tend to be largely uninsured, rather than covered by insurance protection.

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