Philippines requests cat bond event calculation for super typhoon Noru

Given the significant impacts of recent super typhoon Noru, locally known as Karding, which made landfall in Luzon on September 25th, we’ve learned that the Bureau of the Treasury of the Republic of the Philippines has now issued a notice to request its World Bank issued IBRD CAR 123-124 catastrophe bond undergo another event calculation process.

We reported before super typhoon Noru made landfall that the Philippines World Bank issued catastrophe bond should be considered at-risk, after the storm underwent rapid intensification to become a major category storm before its landfall.

Typhoon Noru explosively intensified into super typhoon Noru, with its sustained winds gaining almost 100 mph over a 24 hour period before making landfall, making it a significant enough storm to potentially trigger the Philippines government’s catastrophe bond arrangement.

Zurich-based catastrophe bond investment manager Plenum Investments said it deemed the Philippines World Bank cat bond as “likely to default,” after Noru (Karding) made landfall.

Fellow Zurich-headquarter ILS fund manager Twelve Capital agreed, saying that “It is well possible, that this event can trigger a payout of the remaining principal of the already partially-defaulted IBRD Cat Bond covering that peril.”

Now, the process to calculate whether September’s super typhoon Noru (Karding) was strong and damaging enough to trigger a payout from the Philippines catastrophe bond is underway, after the countries Government notified the calculation agent of its intention to activate the event calculation process at the end of last week.

As a reminder, the Philippines catastrophe bond has already defaulted once before, making a payout of principal to the Philippines after super typhoon Rai (Odette).

In that case, the Philippines government received a US $52.5 million payment from the cat bonds principal, representing a 35% payout from the $150 million of Class B cyclone risk exposed cat bond notes.

After that payout from super typhoon Rai, the Philippines government still has $97.5 million in catastrophe bond principal outstanding to provide cyclone protection against future storms and it is this principal that is now at-risk from losses due to super typhoon Noru.

The Bureau of the Treasury has now officially sent notice to the calculation agent Verisk (AIR Worldwide) to perform an event calculation based on this storm, we’ve now learned from our sources.

The Philippines World Bank issued cat bond covers it against impacts from both tropical cyclone winds and rains via the remaining Class B layer of notes, with the wind trigger typically the first to be calculated, although still taking a number of weeks, after which rainfall totals are run through the model as well.

The cat bonds trigger is a modelled loss structure, so a form of parametric but requiring the data parameters about the qualifying event to be run through a model to identify whether it is deemed to have had a significant enough impact to exposures to warrant a payout.

Depending on the calculated modelled loss amount following any tropical cyclone event (or earthquake for the Class A notes that are also still outstanding), the principal of a tranche can be reduced by 0%, 35%, 70%, or 100%. Hence the severity of a catastrophe will denote how large a payout comes due.

The calculation process does not always result in a payout therefore, as was seen with typhoon Megi earlier this year.

With the event notice for super typhoon Noru (Karding) now officially submitted by the Philippines government, Verisk will now run the documented calculation agent process and report back to the Bureau of the Treasury, as well as to investors in the catastrophe bond, whether any payout of principal is due.

We’ll update you when we hear more on the fate of the Philippines tropical cyclone cat bond notes.

You can read all about the landmark Philippines catastrophe bond, the IBRD CAR 123-124 issuance, in our comprehensive catastrophe bond Deal Directory that features details on more than 850 cat bond transactions.