More than half of the money invested in catastrophe bonds could be wiped out by a single hurricane, according to catastrophe modelling experts AIR Worldwide.

Although such a storm is considered likely to happen only once in 10,000 years, the findings illustrate the concentration of catastrophe bond exposure in US wind-related risks.

AIR’s simulated hurricane would cause about $386 billion in insured losses — about eight times the cost of Hurricane Katrina — and would trigger more than two thirds of tranches in the cat bond market today, wiping out 60 percent of principal invested in property-catastrophe bonds.

Bermuda emerged in 2013 as the leader in insurance-linked securities (ILS) such as catastrophe bonds, with more than $9.3 billion of ILS now listed on the Bermuda Stock Exchange in a total global market of more than $20 billion.

Catastrophe bonds linked to specific risks, such as Florida hurricane or Japanese earthquake, give investors an attractive rate of return and do not correlate with the wider financial markets. However, investors risk their capital being wiped out by an event that generates the level of insured losses necessary to trigger the cat bond. According to some analysts, cat bonds now make up around 15 percent of the property-catastrophe reinsurance market.

AIR’s simulated event is a category five hurricane making landfall in southern Florida, striking Miami on its way back out to sea. It then makes a second landfall in North Carolina as a category four storm and wends its way up the US east coast to make a third landfall in the New York area at category three intensity.

AIR states: “The event triggers 68 percent of tranches in the market today (ie causes at least $1 of loss) and causes 60 percent of principal loss to a roughly $17 billion asset class of property catastrophe bonds.”

The modelling firm also ran three other scenarios through the computer to estimate their impacts on the cat bond market. The second event takes a similar path to the first one described above. However, due to a lesser concentration of insured properties affected, this event would trigger 21 percent of tranches and wipe out 12 percent of principal.

The third event would be more damaging, even though it is a much weaker category one hurricane, skirting the west coast of Florida, before finally making landfall at the panhandle. Damage caused in the heavily inured cities of Naples and Tampa would cause this event to trigger one third of catastrophe bonds and wipe out 19 percent of capital, according to AIR.

Event four is a category three hurricane that would bypass Florida’s southern tip, triggering more than a quarter of cat bonds and causing some 21 percent of principal loss.

AIR’s data graphically illustrate the concentration of the catastrophe bond market in US — and particularly Florida — storm risks. The modelling company’s research finds that 64 percent of cat bonds include some element of Florida wind risk.