Hurricane Milton to test booming ‘cat bond’ market.

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The devastating hurricane hitting the Florida coast is expected to test the market for so-called catastrophe bonds, threatening losses for a form of securitized reinsurance that is on track for record issuance this year.

US officials warned of the deadly threat from Hurricane Milton, expected to be one of the worst storms to hit Florida in more than a century, as they rushed to evacuate the area before the storm arrive Wednesday night.

Warnings also rose about the threat to Floridians’ property and livelihoods, adding to the losses from Hurricane Helene last month. On Wednesday, credit agency Morningstar DBRS estimated that a likely land entry point south of Tampa Bay could create between $30 billion and $60 billion in insured losses from Milton.

Some of those losses are expected to be paid for by catastrophe bonds, where insurers or other companies exposed to natural disasters pay investors a coupon to take on some of the risk. These “cat bonds” are used primarily to hedge risk from major U.S. hurricanes, but will typically avoid being triggered by lower-impact ones.

“Milton has the potential to be a much bigger loss to the industry than Helene and could impact both existing bonds and future issuance spreads,” said Jean-Louis Monnier, head of insurance-related securities at the reinsurance group Swiss Re.

It will take weeks or months for the market to settle down, he added, as was the case after Hurricane Ian two years ago.

Swiss Re data shows that despite a string of costly weather events in recent years, demand has continued to grow in a market that has become an established alternative asset for institutional investors.

Monnier said this year’s issuance is on track to surpass the $15.6 billion issued in 2023, and he expects the market to surpass $50 billion in outstanding debt next year, a view shared among specialists.

Industry experts expect that there is potential for some loss of face value from the bonds currently issued. Helene is expected to cost insurers up to $11 billion, but there will be “a minor impact on cat bonds,” said one major investor, speaking on condition of anonymity. “Milton has the potential to be more material.”

Some cat bond specialists have drawn a comparison between Milton and Hurricane Ian, one that estimates Milton will provide an initial hit of nearly 10 cents on the dollar to bond prices.

Some market participants reported discounts for Florida-exposed cat bonds in secondary trading, but market reaction will begin to become clearer from Friday, when broker-dealers send price sheets with the most up-to-date bids and indicative offers for each bond. cat.

“Milton could go either way” in terms of impact on the show, said Steve Evans, editor-in-chief of Artemis.bm, a specialist provider of information on insurance-related securities.

A huge loss from Milton could unsettle investors, experts said, but it could also prompt insurers to lean more heavily on the cat bond market to reinsure big risks.

“A major loss to Milton could stall the market for a while, but it could also spur much more longer-term demand for cat bonds,” Evans added.