For this Preliminary Official Statement analysis, we’re on Texas’ Gulf Coast again, as we were last week for the Point Isabel Independent School District. In this week’s case, however, we can point to some level of recognition and frequency of systemic climate risk from the issuer — a pseudo-disclosure of sorts — in contrast to the prior week.
This week, a climate risk pseudo-disclosure distinction goes to:
The City of Seabrook, TX
the OS for which can be found here.
The city lies on the coast, southeast of Houston but still within Harris County. Our analysis projects Seabrook sustaining equivalent insured loss damages of 48% of the total property value by 2030, the last maturity in the issuance. This is in the worst 2% of cities nationally in terms of overall climate risk on property value, not to mention it is also in the worst 2% in terms of GDP impairment risk:
Unlike Point Isabel, the Official Statement, dedicates a full and detailed disclosure of “Severe Weather Events” on pages 32 and 33. This details that no less than four 500 year event floods caused by storms have impacted the city since 2015, and that these events have caused significant damage to city facilities and to the property representing the city’s ad valorem tax base. There are also acknowledgements that future events could substantially reduce the assessed value of property in the city, that there is no guarantee that residents will carry property insurance, and even if insurance was broadly in place, there would still be lengthy disruption that still impacts assessed values. Relative to what we’ve seen from other issuers, this is “disclosure” in the truest sense. The only consideration that could be mentioned is the impact of climate change and how frequency and severity of events are only likely to increase as a result.
Acknowledging the problem is the first key step. The next is what, if anything, is being done about it. In that sense, the OS is silent, so no evidence of programmatic climate adaptation or resilience to point to. Seabrook is part of the NFIP’s Community Rating System, having entered into the program in 2002 and now rated at a 7 on the 1-10 scale (lowest being best). This indicates a decent level of awareness and preparedness in case of flooding events but, consistent with the OS’s content, in all likelihood falls short of any concerted adaptation or resilience infrastructure investment. The scale of the problem is admittedly significant. A Category 3 hurricane making landfall at or around Seabrook has a 7.6% probability in the next 10 years and the resulting storm surge alone is projected to cause 84% equivalent cost losses for Seabrook’s property base. Stepping back from that severity, a Category 1 event has a would cause 21% equivalent value losses from the typical precipitation and storm surge flooding, and reaching this severity of event has a 17% probability in the next 10 years. This is not even considering non-hurricane perils. We’ve seen how common “500 year events” have actually been in the area. Even non-hurricane, 100 year coastal floods or inland floods each deliver around 14% overall damage.
Certainly can’t criticize the disclosure of climate risk in the case of Seabrook’s OS, but it nonetheless brings to light the severity of the problem and the lack of specific action discussed. We’re looking forward to working with issuers, bond insurers, sell-side, and buy-side market participants in disclosure, discussion and action on climate adaptation.