Hurricane Milton challenges US flood insurance bonds

Hurricane Milton's catastrophic impact on Florida's east coast has triggered a significant financial shock to the US National Flood Insurance Program (NFIP), particularly its catastrophe bonds.

These bonds, valued at $1.3 billion, dropped sharply, falling between 13% and 59% in just a week, according to insurance broker Aon.

The NFIP issues catastrophe bonds as a form of insurance-linked security (ILS), allowing institutional investors to hedge against the risk of extreme weather events like hurricanes

. Investors typically earn high returns from these bonds, but in the event of a disaster that meets predefined conditions—such as flood damage or powerful storms—the principal is forfeited to cover the costs.

With Milton causing widespread flooding and deadly tornadoes, the potential for these bonds to trigger payouts is high.

The hurricane’s direct path through densely populated areas left millions without power and caused the deaths of at least 16 people.

The extent of the flooding and infrastructure damage, particularly in hard-hit counties like St. Lucie, Volusia, and Pinellas, has made it difficult for analysts to assess the full scope of the financial damage.

This uncertainty is keeping investors on edge, with Twelve Capital warning that it could take weeks or months to determine if these bonds will be triggered.

In the meantime, bondholders face potential liquidity issues due to what analysts at UBS describe as “private trapped ILS capital.”

Hurricane Milton made landfall as a Category 3 storm, battering communities across Florida’s Gulf and Atlantic coasts. This disaster came just weeks after Hurricane Helene devastated parts of the southeastern US, killing 237 people.

Although Milton's toll was lower, much of the destruction came from tornadoes spun off by the storm, which killed residents in cities like Fort Pierce and destroyed homes and vehicles.

Despite the severe flooding, many lives were spared, in part because Milton's impact was less catastrophic than initial forecasts suggested.

Governor Ron DeSantis expressed relief, stating that Florida avoided the worst-case scenario despite the extensive damage.

However, the situation exposes growing vulnerabilities in the US insurance market as climate change intensifies the frequency and severity of storms.

The volatility in NFIP’s catastrophe bonds highlights the challenges investors face when trying to navigate the financial risks associated with extreme weather.

Analysts are calling for a reevaluation of how these risks are managed, as the increasing unpredictability of climate events threatens long-term stability in this market.

Hurricane Milton underscores the need for more robust risk assessments and improved strategies to address the economic fallout from natural disasters.

With climate change continuing to fuel more frequent and severe storms, both insurers and investors must brace for more volatility in the coming years.