Swiss Re Insurance-Linked Fund Management

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Super typhoon Rai puts Philippines World Bank cat bond on alert


Super typhoon Rai, or typhoon 28W which is known locally in the Philippines as Odette, is tracking towards the country’s central and southern islands and is expected to make landfall with sustained winds as high as 160 mph, putting holders of the World Bank issued IBRD CAR 123-124 catastrophe bond on alert.

The World Bank International Bank for Reconstruction and Development (IBRD) issued Capital-At-Risk Notes Series 123 and 124 came to market in late 2019 and provides the Republic of the Philippines with insurance protection against impacts of earthquakes and tropical cyclones.

The protection is delivered using a modelled loss trigger, which as a result makes it impossible to predict whether a strong cyclone like Super typhoon Rai could result in a significant threat to the investors holding the notes.

With a catastrophe bond that features a modelled loss trigger, it is really only after the event that the calculation agent (AIR Worldwide in this case) can gather all of the required data, input it to its model and run the calculations to define whether the cat bond may have been triggered or not.

In this case, while super typhoon Rai definitely puts the notes on-watch, as in the historical modelling analysis for this cat bond it is only super typhoons that have troubled the notes, we actually think it’s unlikely to trigger the cat bond, as it is set to impact southern and central regions of the Philippines where insured exposure values are lower.

However, it’s worth watching in case it’s footprint is particularly damaging as it crosses the Philippines, or if it deviates from its expected path and comes closer to any major cities.

There is a chance the population centre of Cebu takes a near-direct hit, which could change everything if Rai maintains intensity.

Super typhoon Rai is packing sustained winds of up to 160 mph and gusts of 195 mph or higher. Rai intensified by roughly 85 mph in just the last 24 hours. Click the image below for a larger version.

Super typhoon Rai

Either way, whether it does trouble the Philippines catastrophe bond or not, super typhoon Rai will be devastating for those in its path and tens of thousands of people have been evacuated away from the storm.

Aon’s Impact Forecasting discussed super typhoon Rai in an update and said:

Super Typhoon Rai is forecast to continue tracking towards the west-northwest during the next 72 hours before turning sharply towards the north into a break in the steering ridge of high pressure located to its north. This turn will occur from Day 3 until Day 5 of the storm’s track. Rai is anticipated to make landfall near the northeast coast of Mindanao and the Siargao Islands during the next 6 to 8 hours. The system will then cross over the Visayas archipelago and emerge in the Sulu Sea within 24 hours. It will later cross the northern tip of Palawan before entering the South China Sea in 48 hours.

The typhoon has likely peaked in intensity as cloud tops near the inner core have started to warm in the past few hours. High resolution satellite imagery indicates that an eyewall replacement cycle has either likely begun or is imminent to occur. JTWC calls for some weakening prior to landfall as the eyewall replacement cycle commences and it encounters increasing land interaction across the Surigao Strait. While it remains possible that Rai could experience some slight intensification in the next few hours prior to coming ashore, that seems unlikely at this time.

As the storm crosses the Philippines archipelago, continued disruption of the low-level inflow combined with increasing vertical wind shear will further weaken Rai prior to entering the South China Sea. However, upon entry it is expected to again regain some intensity in the warm waters and a moderately low wind shear environment. After 72 hours, an influx of cooler and drier air – plus a significant increase in vertical wind shear – will lead to rapid weakening by the end of the five-day forecast track.

The Philippines cat bond features a stepped trigger, so depending on the calculated modelled loss amount following any earthquake or tropical cyclone event, the outstanding principal of either tranche can be reduced by 0%, 35%, 70%, or 100%, meaning the severity of a catastrophe will denote how large a payout is due.

It is a $150 million IBRD CAR 124 Class B tranche of notes that are exposed to Philippine tropical cyclone risk.

But, as we said, looking at modelling information we’ve seen from the issuance of this World Bank cat bond, while super typhoons are the major threat, it is storms that track further north towards major cities and the capital Manila that are considered to be most likely to trigger the cat bond notes.

But, even so, the cat bond market will likely keep one eye on super typhoon Rai as it passes through the Philippines, while the insurance and reinsurance market more broadly may also experience some losses from such a severe storm.

We will update you if it becomes clear that super typhoon Rai is likely to pose a threat to the Philippines World Bank catastrophe bond.

Previously, the Bureau of the Treasury of the Republic of the Philippines issued notice to the calculation agent for the cat bond after super typhoon Goni was believed to be an applicable event that required a calculation of the modelled losses to be undertaken.

That storm did not trigger the notes and was more intense than super typhoon Rai, so at this stage we still believe that the notes should be considered on-watch, but are unlikely to be threatened.

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 over 800 transactions.

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