Pension funds, endowments, wealthy families and other large investors could be on the hook for a portion of damages caused by Hurricane Michael, particularly if the storm intensifies.
The exposure for these large investors stems from their ownership in catastrophe bonds, which are issued by insurers or entities seeking insurance, The Wall Street Journal reports. The investors receive interest payments but can lose their principal if certain disasters occur.
About $15.7 billion in outstanding catastrophe bonds have potential exposure to Florida, where Michael was set to make landfall, according to reinsurance broker Aon Securities. In addition to cat bonds, some of these investors also have exposure to hurricane risk through other types of insurance-linked securities.
Michael could cause between $1 billion and $3 billion in insured losses, according to estimates by B. Riley FBR Inc. If Michael makes landfall as a Category 3 storm, it could affect about 57,000 homes in the Florida Gulf Coast with a total reconstruction value of about $13.4 billion, according to analytics firm CoreLogic. As of this morning, Michael was approaching Florida’s northeastern coast as a Category 4 storm with landfall expected today.
Large investors have piled into cat bonds in recent years as they chased diversification and higher returns. The risk to bondholders is they can lose their principal if certain events occur, like hurricane winds above a certain speed or damages that exceed a certain dollar threshold. There are now $30 billion of these securities outstanding, up from roughly $26 billion a year ago, according to Aon.
