Investors in Catastrophe Bonds Prepare for Significant Losses as Hurricane Milton Approaches
As Hurricane Milton gears up to make landfall early Thursday morning, investors in catastrophe bonds are bracing for substantial losses that could rival the largest reinsurance events in history.
Milton, currently classified as a Category 4 hurricane on the Saffir-Simpson scale, follows closely behind Hurricane Helene, which recently wreaked havoc across over a dozen states with severe flooding.
Experts warn that if Milton strikes the Tampa metropolitan area as a Category 4 hurricane, it could lead to one of the most significant reinsurance loss events to date.
“If Milton hits the Tampa metropolitan area as a Category 4 hurricane, it could lead to one of the biggest reinsurance loss events in history,” noted Florian Steiger, CEO of Icosa Investments AG.
Forecasts predict that Milton’s impact could exceed the fallout from Hurricane Ian in 2022, which resulted in around $60 billion in insured losses.
Tanja Wrosch, head of catastrophe bond portfolio management at Twelve Capital AG, indicated that losses from Milton could be more severe than those from Ian. Wrosch explained that the anticipated storm surge and flooding from Milton are significant concerns.
“A big component from Milton will be storm surge — flooding from the ocean,” she said.
Florida Governor Ron DeSantis urged residents to have an escape plan in place, as the storm is expected to bring significant damage across various regions of the state. Millions have already evacuated coastal areas, particularly from densely populated cities like Tampa.
Catastrophe bonds, known as cat bonds, are financial instruments used by insurers to transfer the risk of severe natural disasters to the capital markets. Investors who purchase these bonds stand to earn substantial returns if no catastrophic event occurs. However, they may face significant losses if such an event does take place, with those losses used to cover insurance claims.
The anticipated losses from both Hurricanes Milton and Helene mark a stark contrast to a market that recently experienced substantial growth. The Swiss Re Global Cat Bond Index surged by 20% in 2023, making cat bonds one of the most profitable strategies in the hedge fund sector.
According to disaster modeler Chuck Watson from Enki Research, Milton may result in damages ranging from $60 billion to $75 billion, with some estimates reaching as high as $150 billion. The actual losses that cat-bond investors will need to cover will depend on the storm’s impact.
Additionally, investors face potential losses related to the inland flooding caused by Hurricane Helene. Moody’s RMS has estimated U.S. private-market insured losses from Helene to be between $8 billion and $14 billion.
While it is still too early to calculate the full impact of Milton, the potential for high losses is evident. Analysts have indicated that if Milton makes landfall near Tampa, it could lead to insured losses of mid-double-digit billions.
As the region grapples with the aftermath of Helene, which left approximately $11 billion in damages, the pressure on Florida’s insurance market is expected to intensify. The state is already facing challenges due to the high cost of insurance, with homeowners paying an average annual premium of $11,163 as of July 2024.
Despite the daunting forecast, some industry experts express cautious optimism. Mark Friedlander from the Insurance Information Institute stated that the Florida insurance market is currently in a better financial position than in previous years, thanks to recent legislative reforms aimed at addressing issues such as legal abuse and claims fraud.
