Cat bond loss creep evident in Q1, but slowing (except for Akibare)

The catastrophe bond and insurance-linked securities (ILS) market continues to suffer loss creep from a number of prior year catastrophe events, which manifested again in the first-quarter in secondary marks and expected losses.

ILS focused consultancy Lane Financial LLC has usefully been tracking the loss creep that has emanated from recent catastrophe events and resulted in hits to cat bond and ILS portfolio positions.

As reinsurance loss expectations have risen, so too has the spillover of losses into catastrophe bonds, with a number of issues suffering mark-downs during the first-quarter of 2019, something that has also continued into Q2.

Most of the loss creep continues to come from 2017’s hurricane Irma, which has seen its industry-loss estimate roughly double since just after the event.

In addition, the California wildfires have also driven some creep, although mostly to aggregate cat bonds as sponsors ultimate losses have been reported. Topped off by the continuing loss creep associated with typhoon Jebi as well.

In its latest quarterly cat bond and ILS market report, Lane Financial explains that it has recorded roughly a 3.2% increase in lifetime cat bond market losses thanks to loss creep during Q1.

The firm previously had an estimate of the lifetime losses to the catastrophe bond market (so losses since the market’s inception) that stood at $2.446 billion as of the end of 2018.

In the first three months of 2019 this figure has increased by almost 3.2% to $2.523 billion, as loss creep continued to erode cat bond values and suggest higher losses for ILS investors and funds.

“Thankfully the rate of loss creep is finally moderating,” Lane Financial explain, suggesting that the degradation is decreasing in values of outstanding cat bonds still exposed to rising losses from prior year catastrophes.

The one wild-card to this, is the Akibare Re 2016-1 catastrophe bond, which as we explained recently has suffered loss creep from Japanese typhoons, primarily the rising loss expectations associated with typhoon Jebi.

This bond wasn’t factored into Lane Financial’s research it seems and as the Akibare cat bond continues to lose value, it suggests loss creep has not yet finished for the cat bond investment community.

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