Cat bond funds lower expectations of Irma losses

As the magnitude of hurricane Irma’s impact to catastrophe bonds and the size of the eventual insurance and reinsurance loss became clearer yesterday, cat bond fund managers have reduced their expectation of suffering a major loss, with now just a handful of bonds thought most at risk.

As hurricane Irma approached the U.S. last Friday the modelled forecasts of potential catastrophe bond market losses showed a major hit to the sector, with as much as 30% to 40% of the market’s outstanding bonds deemed at risk from the major Miami impact the forecast models were showing at the time.

That led to a drop in the cat bond market of around 16% and some cat bond fund managers to warn their investors that losses of as much as 15% or more of their cat bond fund net asset values were possible.

As hurricane Irma tracked further west and it became clear that the worst case scenarios seen on Friday would not happen, the expectations of losses among cat bond funds and investors reduced and by Sunday some were suggesting a 5% hit to NAV, while others saying it could be anything in single digits.

Following the landfall and now there is more news and insight available on the real impacts to the Florida Gulf Coast, as well as the rest of the peninsula, some catastrophe bond funds have reduced their expectations of losses even more.

Plenum Investments, the Zurich-based cat bond fund specialists said that, if modelled loss assessments are correct, based on the latest data they now only expect a maximum hit of 1% to their portfolio of bonds.

Meanwhile Standard & Poor’s director Gary Martucci cited in the Wall Street Journal saying that they don’t expect any of the cat bonds they rate which were exposed, around $1.4 billion of the market, to suffer any principal reduction due to Irma’s impact.

Dirk Lohmann of ILS and reinsurance investments specialists Secquaero is also cited as saying that only “isolated hits” to catastrophe bonds are expected.

Everyone commenting on the impact to the cat bond market is careful to note that it will take weeks and even months to know precisely the outcome to every exposed cat bond.

It will become clearer as the days and weeks pass, but as most cat bonds exposed to Florida risks are indemnity trigger based there will be some uncertainty over the loss for a while to come.

Collateralised reinsurance and other private ILS are considered much more at risk than cat bonds, given the collateralised market often attaches much lower down. Collateralised quota share arrangements and some retrocession products appear to be considered most at risk of some losses, by many market participants.