2016-10-07 - Av Henrik Sjöholm

Update on hurricane Matthew

Hurricane Matthew is the most severe hurricane to strike Florida in more than a decade. On its way to Florida, it has passed over several countries in the Caribbean. While our management is focused on possible insurance claims, it is already a severe catastrophe, and we deeply sympathize with all those affected by it.

As can be expected, Matthew is expected to trigger substantial insurance losses in Florida and thus can affect the reinsurance industry and also the insurance linked market. Entropics has monitored the development of the hurricane closely and continuously re-evaluated portfolio exposure as new facts has arrived from the National Hurricane Center (NHC) and modelling firms. Our meteorologist has assisted our investment team in evaluating probabilities of insurance claims as the hurricane develops.

It must be stressed that all forecasts come with a high degree of uncertainty and, as the hurricane presently follows a path just offshore of the coastline, small variations from the forecasts can produce widely divergent insurance loss. What we see is that a worst case scenario, where Matthew would make landfall directly over Miami and then move inland, is currently remote. This scenario would have had dire effects on cat bond portfolios, including Entropics’. In the last monthly report, the historical event “Great Miami 1926”, with a projected loss of 26.8% can be used to grasp the hypothetical effect on the portfolio, following an extreme loss for the insurance industry as such.

The rating agency S&P has put 15 cat bonds on the watch list, though none are downgraded but are monitored, and insurance linked industry analysts point at a few additional non-rated bonds that could be affected if the system develops unfavourably.

The latest forecasts from the National Hurricane Center indicate a slightly more benign path for the hurricane than reports in the past few days, and if these forecasts are correct, the impact on cat bonds will be limited. For Entropics’ portfolio, this would entail either no or small losses. However, this could change with coming reports as the situation develops, though a major loss, such as an event similar to Great Miami is currently remote. We continuously monitor and analyse the development of the system and the secondary market.

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