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Cat bonds face 'depletion' in wake of Ian losses

Initial loss estimates suggesting insured losses from the storm as high as $70bn in Florida will see a number of catastrophe bonds 'depleted', Twelve Capital says

Losses on Floridians’ indemnity bonds and potentially ‘significant erosion’ to aggregate bonds expected as brokers warn of ‘mid-single digit’ falls in fund valuations

Hurricane Ian will lead to losses on catastrophe bonds with aggregate bonds also facing “significant erosion”, a leading insurance-linked securities (ILS) fund manager has warned.

Initial loss estimates have pegged insured losses for Ian as high as $70bn in Florida. At this level, a number of catastrophe bonds will be “depleted”, Twelve Capital, the Zurich-headquartered ILS and reinsurance-linked fund manager, said.

Recent pricing data from brokers indicated valuation losses for most funds and the catastrophe bond market in the “mid-single digit area”, Twelve Capital said.

Twelve Capital highlighted the National Flood Insurance Program (NFIP)’s Floodsmart bonds and some of the indemnity bonds purchased by Floridian insurers as likely to be exposed.

The junior tranches of some index-linked catastrophe bonds could also be hit “should the industry loss total be at the higher end of estimates or grow beyond them”, Twelve Capital said.

In addition, the loss could add “potentially significant erosion” to any aggregate catastrophe bonds, Twelve Capital said. “[S]hould there be other meaningful events in the remainder of 2022… more catastrophe bonds could be at risk from an aggregation of events,” it said.

Hurricane Ian smashed into Florida last week as a strong category four hurricane, causing catastrophic damage, before moving out to the Atlantic and north towards South Carolina, where it made landfall again.

The toll of the damage has only just started to be measured, with Crawford & Company – just one of the loss adjusters involved in the region – reporting it has a near-record 1,000 loss adjusters deployed on the ground.

Another ILS investment manager, Plenum Investments, said the impact from Ian could be as much as one annual return cycle.

“Initial estimates suggest an industry loss of approximately $50bn, which would be almost twice the level reached by Hurricane Irma in 2017,” Plenum said in a note on September 30.

“At this level, we expect in our catastrophe bond funds a loss of approximately one annual target return in US dollars,” it added. 

Plenum Investments anticipates a 4% to 6% impact to its lower-risk catastrophe bond fund strategy, but a 9% to 12% hit to its more dynamically focused catastrophe bond fund.

It added, however, the range of modelled losses remains uncertain.

Aggregate bond covers that are not triggered will still experience a markdown to reflect the partial erosion of the deductible, Plenum said. “Assuming no further events will trigger the coverage, the ‘reset’ will occur after some time and pricing will revert close to par again.”

More widely, Plenum predicted the reinsurance market will see further tightening as a result of the loss.

“The catastrophe bond issuances expected in the coming months will accordingly be issued at higher spreads, which will affect the valuation of all outstanding positions in the market,” it said.

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