The Pacific hurricane season continues to be very active, with the potential of becoming the most active season on record. Hurricane Willa, currently a category 4 major hurricane, is forecast to make landfall in Sinaloa state, Mexico at 02:00 (local time) on Wednesday 24 October as a category 3 hurricane. Most forecasts are in agreement on the track, however, landfall intensity estimates range from a tropical storm to category 5.
Water temperatures remain approximately 0.5-1 degrees warmer than usual. As the storm is moving above warm water, it is possible that it could strengthen further. Currently, there is uncertainty in the central pressure of the storm (expressed in millibars) as it approaches landfall.
In this case, if the storm reached a certain level of central pressure, the event would be sufficient to trigger at least a partial write-down of one specific bond held in some, but not all, Twelve Capital portfolios, the IBRD Fonden 2017-1 C. This bond features a so-called parametric trigger with a write-down schedule depending on the bond’s central pressure before landfall. The parameter, in this instance, is the central pressure. Should the bond be written down by 100%, i.e. the worst case scenario, then the losses to Twelve portfolios would be between 0% and 0.7% of the NAV, depending on specific holdings. This bond is currently the only Cat Bond in Twelve’s portfolios which is exposed to tropical cyclone risk.
Major Hurricane Michael made landfall in the Florida panhandle, near the borders of Gulf and Bay counties, as a category 4 hurricane on Wednesday 10 October. The storm almost reached category 5, which makes it the strongest storm to hit the US mainland since Hurricane Andrew in 1992.
Consensus estimates for losses relating to Michael, which was stronger at landfall than had generally been expected, are now moving to the higher end of the previously-stated ranges but within Twelve Capital’s initial estimate. Insured losses are now estimated by modelling system AIR to be USD 8.3bn (with a range of USD 6.7-10.2bn) and RMS’s estimated range is from USD 6.8 to USD 10.0bn (wind, storm surge and NFIP).
Meanwhile, KCC, another industry modeller estimated losses would be USD 8bn, 50% of which would be in the Gulf and Bay counties alone. Elsewhere, JLT Re, the reinsurance broker, has now estimated that ultimate insured loss could be more than USD 10bn. Note that these estimates are for wind and surge only, at the industry insured loss level. Inland flood is excluded but it is not expected to be significant.
Based on the current estimates, Twelve Capital does not expect any significant impact on its Cat Bond portfolios. In terms of the performance of Cat Bonds, most of our portfolios have made small incremental gains and currently are not expected to have been affected by this event. Looking at private ILS contracts, experience from prior events lead Twelve to believe that Hurricane Michael is unlikely to be a major event from an insurance claims perspective.
This view is also based on recent communications from US agencies the Federal Emergency Management Agency (FEMA) and the National Flood Insurance Program (NFIP). However, it is still very early to draw a conclusion.
The remnants of former Hurricane Leslie struck Portugal, Spain and France between 13 and 16 October, bringing high winds, rain and flooding. Aon estimates economic losses to be in the hundreds of millions of dollars, however, insured losses have yet to be determined.
At the time of writing, there were no other notable events ongoing or having recently occurred.