Hurricane Milton: Litmus Test for the Catastrophe Bond Market

As Hurricane Milton strikes the Florida coast with great destructive force, investors are closely watching the catastrophe bond market. This form of securitized reinsurance is under scrutiny given the unprecedented issuance volumes this year. Authorities in the U.S. are warning about the life-threatening danger posed by Milton, one of the worst storms to hit Florida in over a century. Areas south of Tampa Bay are considered the likely impact zone and could suffer insured losses between 30 and 60 billion USD. Insurers expect that part of these losses will be covered by catastrophe bonds, a financial instrument where investors receive a coupon in exchange for taking on risk. Jean-Louis Monnier of Swiss Re emphasizes that Milton has the potential to cause greater losses than the previous Hurricane Helene. This could affect both existing bonds and future issuance spreads. Interestingly, the demand for these alternative investments for institutional investors continues despite a series of costly weather events. With an expected issuance value of over 15.6 billion USD this year, the market is on track to reach an outstanding volume of more than 50 billion USD next year. Industry insiders do anticipate some loss of the principal on already issued bonds due to Milton, but the exact market development will only become clear in the coming weeks. Some experts compare Milton to Hurricane Ian and forecast an initial price drop of about 10 cents per dollar in bond prices. Initial reactions in the form of discounts on Florida-exposed catastrophe bonds in the secondary market are already visible. Whether these movements steer the market into a downward spiral or a growth phase remains to be seen. The loss from Milton could unsettle investors but simultaneously create incentives to increasingly focus on catastrophe bonds in the future. In the long term, this could lead to increased demand and sustainably impact the market.