Cat bond loss expectations rise on ongoing creep

Catastrophe bond losses from the 2017 hurricanes and catastrophes have been seen to be rising over the last quarter of 2018, as continued loss creep and aggregation raises investor expectations for the eventual loss bill the sector will face.

For the 2017 catastrophe events the increase has been most evident, not helped by the increased industry estimates and indemnity claims associated with hurricane Irma.

Zurich based specialist catastrophe bond and insurance-linked securities (ILS) fund manager Plenum Investments said that its expectations for cat bond market losses from the 2017 catastrophes had risen by 30% from September to the end of the year.

It’s a significant increase that reflects the huge amount of uncertainty associated with the loss creep from 2017 events.

It also mirrors the difficult situation some ILS funds focused on collateralised reinsurance have found themselves in, with having to strengthen reserves as the expectation of losses kept rising through last year.

In Plenum Investment’s view, there are 10 cat bonds facing a total loss of principal following the 2017 catastrophe year. All of these are listed, along with others considered at-risk, in our directory of cat bond losses and at-risk cat bonds.

These 10 cat bonds would amount to a market-wide loss of $650 million, Plenum Investments said, a figure that is 30% above where cat bond losses from 2017 events had been viewed back in September 2018.

In addition, Plenum Investments also sees the PG&E sponsored California wildfire cat bond as particularly exposed to a total loss, which would add another $200 million to the total.

Plus the investment manager sees another five cat bonds facing losses due to the aggregation of losses eating into their risk capital resulting in a partial loss of principal, from which it suggests another $200 million of risk capital could be lost by the market.

Hence, in total Plenum Investments suggests around $1.05 billion of cat bond losses from 2017 and 2018 catastrophe events, which it notes is double the amount of loss the cat bond market faced in 2011 from the Tohoku earthquake and Joplin tornado.

Cat bond fund managers have had to grapple with loss creep in just the same way as the retro reinsurance funds and collateralized reinsurance underwriters, with mark-downs having to be made to cat bond positions as loss expectations have risen across the last year.

Few people investing in catastrophe risk and reinsurance have found themselves immune to the loss creep and Plenum’s estimate of a 30% hike in expected cat bond losses from 2017 events between September 2018 and the end of the year is a reflection of just how challenging the loss estimation process has been thanks to the ongoing creep.

Investors will be hoping that all of the loss creep is now factored into the secondary marks of at-risk cat bonds, to prevent them needing to mark-down positions exposed to the losses from over a year ago any further.

All of the losses and potential losses from catastrophe bonds stricken by catastrophe events through the years are detailed here in our Deal Directory. We currently count up to $1.3 billion of potential cat bond losses, including to private bonds, from 2017 and 2018 catastrophe events, based on available information and current pricing.