Florence is first major ILS market threat of year, fund impact estimates vary

by Artemis on September 12, 2018

While it’s still too early to estimate insurance and reinsurance industry losses from hurricane Florence, some insurance-linked securities (ILS) funds have been providing investors with an idea of their potential portfolio exposure, based on scenario loss totals.

The wide range of these estimates, which are said to be from low single digits to up to 10% of NAV, according to ILS Advisers,  reflect the uncertainty that remains in the hurricane Florence forecast as well as the wide range of risk and return strategies available to investors in the ILS market.

ILS Advisers, which operates an ILS fund-of-funds called ILS Diversified Ltd., has received some reports of potential exposure levels from some of the underlying ILS funds in its strategy.

Based on an industry loss estimate range of $8 billion to as much as $20 billion, ILS Advisers said that, “Some of the underlying funds do give us some estimates on their own portfolio. With the industry losses above, the potential impact of Florence ranges from single digit to up to 10% of the NAV of some underling funds of ILS Diversified Ltd.”

However, the ILS manager also noted, “The estimates are preliminary and highly dependent of the final track of the hurricane.”

Of course, the two ends of that potential loss spectrum reflect different strategies and the upper end of a 10% hit to NAV will be for a particularly high risk/return ILS fund we imagine.

ILS Advisers explained that, “For the ILS market, Florence is definitely the first major threat this year.”

The manager said that while a number of U.S. wind catastrophe bonds are exposed to hurricane Florence, “Whether they will be triggered or not highly depends on the wind speed and location of the landfall.”

On the NFIP’s flood reinsurance cat bond, the $500 million FloodSmart Re Ltd., ILS Advisers said it, “has the potential to be triggered if massive rainfall caused high flood loss.”

But, as in 2017, it is private ILS and collateralized reinsurance that will bear most of the ILS market’s losses from hurricane Florence.

“Similar to last year, it’s believed that private ILS bear more risk than cat bonds. Collateralized reinsurance, retrocession and quota share products will be more vulnerable since they sit closer to the risks. Some ILW products may also be triggered if the ultimate losses are USD 10bn or above,” ILS Advisers explained.

The latest on hurricane Florence: Hurricane Florence to make life threatening approach to North Carolina coast.

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