Typhoon Goni threatens partial loss for Philippines cat bond

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The Philippines government’s World Bank facilitated IBRD CAR 123-124 catastrophe bond transaction is under threat from typhoon Goni, which may cause a partial loss of principal for investors in the cat bond if it maintains significant wind speeds as it approaches Manila.

Update at the foot of this article.

Super typhoon Goni, as it currently is, has become the most intense tropical cyclone of 2020 with wind speeds as high as 185 mph as it bore down on the Philippines earlier today.

Currently, the JTWC estimates still super typhoon Goni to have wind speeds as high as 178 mph, with gusts perhaps reaching to over 215 mph, making this a storm that could be devastating for the Luzon, Philippines region and also for its capital city Manila, which is well within the forecast cone.

Which puts the Philippines first catastrophe bond, which provides the country with $150 million of tropical cyclone disaster insurance protection sourced from the capital markets, at clear risk of being triggered.

Swiss headquartered specialist catastrophe bond and insurance-linked securities (ILS) manager Plenum Investments explained that the threat is real and given the exposure of the Philippines World Bank supported catastrophe bond is largely focused around the capital of Manila, Plenum says the current outlook makes it look likely the cat bond will be triggered and face a partial payout.

Current location and forecast path for typhoon Goni:

Typhoon Goni map forecast path, putting Philippines catastrophe bond at risk

As the map from the JTWC shows, typhoon Goni is expected to approach Luzon, Philippines with winds still at 135 knots, or 155 mph at first landfall.

Typhoon Goni is then set to head almost directly towards the capital city region of Manila, with winds still at close to 110 mph or perhaps higher, so close to Category 3 hurricane strength.

The initial landfall region of Luzon faces significant damage from the Category 5 winds it will experience, which will be accompanied by a high storm surge as well.

Manila though, faces the biggest typhoon threat it’s seen in some years as well, with the potential for Category 2 to 3 level winds right into the heart of the city, threatening the Philippines catastrophe bond and also other insurance or reinsurance structures providing coverage to the region.

Plenum Investments explained, “Tropical Storm “Goni” is currently moving towards the Philippines as a high category 5 storm and will hit the mainland in the early hours of Sunday morning. Although the storm will ease somewhat, gusts with wind speeds of up to 300km/h are expected at the peak. The predicted path of the typhoon runs directly over Manila; “Goni” is forecast to be a category 4 storm at this time.”

Plenum continued to explain that, “Major damage is expected, which will also affect a position from the World Bank’s CAT Bond program.

“This USD 150 million bond, issued as disaster relief, covers typhoon losses in the Philippines via a modelled loss trigger mechanism, with the majority of the insured values being in the region around Manila.

“Due to the trigger mechanism, the relevant amount of damage and any associated pay-out will only be known after some time.”

However, analysis based on the forecast strength and path of typhoon Goni makes it likely the catastrophe bond will be triggered, should the storm maintain the forecast intensity and come particularly close to Manila, Plenum believes.

“The strength and trajectory of “Goni” make a (partial) loss of the position currently seem likely and we therefore expect a corresponding market reaction to the valuation of the bond,” the ILS investment fund manager explained.

The Philippines catastrophe bond was issued by the World Bank through its IBRD Capital-At-Risk notes program in November 2019.

The $225m IBRD CAR 123-124 catastrophe bond provides the Philippines government with $150 million of tropical cyclone disaster insurance protection, as well as $75m of earthquake protection through a second tranche of notes.

The Philippines catastrophe bond features a modelled loss trigger, which means that after a catastrophe event strikes the country the calculation agent, which is AIR Worldwide, will run its models to analyse the event and derive a modelled loss figure, based on pre-defined post-event loss calculation procedures.

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 are able to 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.

At the moment, it seems a 35% or 70% loss of principal would be the most likely outcome, if typhoon Goni maintains intensity through to Manila as the forecast suggests.

The higher-end payout would require a particularly impactful event to occur it seems, where as the 35% partial payout of principal seems the greater possibility, although not guaranteed as Goni could weaken further than expected after it interacts with land.

As ever, being a modelled loss trigger, it will take some time before we’ll know whether investors in the Philippines catastrophe bond are facing a loss or not.

In the historical modelling analysis for this cat bond deal, the only storm in the catalogue that caused a high enough modelled loss to result in a payout was 2013’s typhoon Haiyan, a monster category 5 super typhoon that made direct landfall and even that would only have caused a partial 35% loss of principal.

Hence it seems likely the impacts from typhoon Goni will have to be particularly severe for the cat bond to face a loss, which is exactly the scenario that its disaster insurance coverage is designed to provide financing against.

In addition to the World Bank’s Philippines catastrophe bond, there are other disaster insurance, reinsurance and risk financing structures exposed to typhoon Goni, including the Philippines government’s parametric catastrophe insurance coverage.

The Philippines government has had a parametric disaster insurance facility that was backed by a range of major insurance or reinsurance firms and also some ILS funds and direct pension investors as well.

It’s not clear if this was renewed for 2020, but we imagine some level of coverage still exists.

In addition, there are reinsurance programs exposed to any storm that caused heavy damage to the Manila city area, as well as numerous parametric pilot insurance schemes and other disaster risk financing arrangements.

Typhoon Goni is an extreme threat to lives and livelihoods for the region it is going to impact first at landfall, while the impacts across a much wider are will also pose a threat to lives as well.

As a result, any payout of insurance, reinsurance or catastrophe bond arrangements will be welcomed and much-needed in aiding recovery from this expected typhoon disaster.

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.


Post-landfall update 1:

Super typhoon Goni’s (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.

If this proves accurate after the landfall observations are analyse, typhoon Goni may prove to be the most intense cyclone landfall in the record, beating even Haiyan (Yolanda) from 2013.

Goni made landfall at still super typhoon strength at Catanduanes island.

The landfall region, Bicol, Luzon, has been severely impacted with a massive storm surge impacting coastal areas, extreme winds recorded at over 130 mph on the ground and severe flooding reported.

Significant damage and sadly loss of life is likely in the landfall area it seems, with the town of Vicol on Catanduanes island and its 70,000 residents an area of concern.

After crossing Luzon, typhoon Goni had weakened significantly, with the JTWC downgrading its intensity forecast for around the Manila metro region to between 80 and 90 knots.

The weakening of typhoon Goni (Rolly) as it crossed the mountainous islands of Luzon on its way to pass just to the south of Manila could put the triggering of the Philippines catastrophe bond more in doubt.

The catastrophe bond has a concentration of exposure in the Manila area and it was yesterday’s forecast for sustained Category 3 equivalent winds to hit the metro area of the city that signalled a partial payout of the World Bank issued cat bond may come due.

Now, that scenario appears a little less certain it seems, although the cat bond remains at risk of potentially being triggered and facing the lowest 30% payout of principal until the modelled loss trigger is analysed. We won’t know for certain until we hear its fate from sources.

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