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Cat bonds still unlikely to be hit by hurricane Laura: Plenum


Catastrophe bonds are still likely to escape the wrath of strengthening hurricane Laura unscathed, according to Zurich based ILS and reinsurance asset manager Plenum Investments.

Tropical storm Laura forecast path and tracking mapPlenum had said earlier this week that based on the forecasts at the time hurricane Laura may not have been strong enough to impact any outstanding catastrophe bonds in the ILS fund managers portfolio.

At the time, on Monday, Laura was largely being forecast to make landfall at around category 2 hurricane strength.

Now though, hurricane Laura is expected to make landfall at Category 3 or 4, major storm strength, pushing a storm surge of up to 20 feet in front of it.

But still, Plenum Investments remains confident that its portfolios of catastrophe bonds will not face losses from the hurricane.

The reason is the forecast path for hurricane Laura continues to take the storm into a relatively sparsely populated, wetlands region of the Gulf Coast, with Louisiana seemingly set to be more impacted than Texas and Houston perhaps escaping hurricane force winds completely (if this scenario plays out).

On that basis, Plenum Investments says, “There is a very small probability that the region around Galveston and Houston will be affected by hurricane-force winds. The strongest winds will therefore affect a very sparsely populated region on the coast, which is why we stand by our statement made on Monday that we do not expect any negative impact on CAT bonds.”

Plenum’s cat bond portfolio will contain slices of many of the outstanding market, given it is a long-standing UCITS cat bond fund strategy that it manages.

For the manager to be so confident Plenum will have done its homework, in assessing its portfolio of cat bonds against modelled outcomes for hurricane Laura and leaving it confident that cat bonds it holds will not be impacted.

Other reinsurance linked assets held by ILS funds that invest in collateralised reinsurance and retrocession will face some impacts, we’d imagine, even if Laura’s track holds for the less populated and less exposure-heavy regions of the Louisiana-Texas border area.

Catastrophe bonds tend to attach higher up in reinsurance towers, making a major hurricane hit on a highly exposure-heavy area of coastline the main scenario likely to trigger them in number.

Of course, there are numerous aggregate catastrophe bonds which will carry some exposure to hurricane Laura and could find their deductibles eroded somewhat by the storm, as these don’t require a one-shot hit to raise the risk they carry for investors.

Whether cat bonds are hit or not, hurricane Laura at near Category 4 strength is without a doubt going to have a devastating impact on lives, livelihoods and properties in the region where it makes landfall.

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