There’s likely to be some uncertainty in the secondary market pricing of the outstanding FloodSmart Re catastrophe bonds that provide reinsurance from the capital markets to FEMA’s National Flood Insurance Program (NFIP), after the remnants of hurricane Ida flooded north eastern US states, ILS investment manager Plenum has said.
As we explained right after hurricane Ida hit, a number of catastrophe bonds saw secondary market price declines in the wake of hurricane Ida’s landfall and impacts in Louisiana and the surrounding region.
That initially did include the FloodSmart Re cat bonds, issued on behalf of the US US Federal Emergency Management Agency (FEMA) as part of the backing for its NFIP flood reinsurance program.
But not every broker marked the FloodSmart Re bonds down after hurricane Ida’s initial hit.
Then, the remnants of hurricane Ida carried on towards the US north east and Mid Atlantic states, bringing record rainfall levels and causing significant flooding across New York, New Jersey, Pennsylvania and other areas.
As we then explained, the additional flooding from Ida’s remnants can qualify as part of the same loss event, under the terms of the NFIP’s catastrophe bond backed reinsurance protection, bringing the FloodSmart Re cat bonds and also the NFIP’s traditional reinsurance into focus.
Now, more of the cat bond broker pricing sheets have marked down the FloodSmart Re bonds, with the riskiest tranches down roughly 15%, depending on which sheet you look at.
With the north east US flooding from hurricane Ida’s remnants likely to add billions to the economic loss bill and a significant addition to the insurance industry loss as well, it’s no surprise to see the market discounting these cat bonds, for the moment at least.
Plenum Investments AG, the Zurich based specialist insurance-linked securities (ILS) and catastrophe bond investment manager, has provided a further update on hurricane Ida, specifically taking a look at the potential implications of the severe flooding from its remnants.
Plenum said that, “As it progressed, Ida brought record rainfall to New Jersey and New York with heavy rains, which is likely to increase the insured loss amounts somewhat further.”
However, the ILS investment manager also said that, “Flood losses are typically not covered by CAT bonds, but there are CAT bonds outstanding (about 4% market weight) covering flood risks for the National Flood Insurance Program NFIP.”
Which is a reference to the FloodSmart Re cat bonds and the fact they are under scrutiny now.
But Plenum continued by saying that, “New Jersey and New York have a relatively low insurance coverage through the NFIP, so flooding in these states should provide only a limited loss contribution to these bonds,” which is helpful to know and may explain the relatively low discounts applied to some of the outstanding bonds.
The FloodSmart Re cat bond tranches that are outstanding range from an expected loss at issuance of around 3.9% to as high as 7.2%, so the riskier (higher expected loss) notes are unsurprisingly the ones marked down by as much as around 15% below par, while the others are marked down by anything from around 2% to 10% below par at this time.
But, with the flood damage from landfall in Louisiana and surrounding states, all the way across the country to the Mid Atlantic all able to qualify under the terms of these cat bonds and likely the rest of the NFIP reinsurance program too, it could be a while before mark-downs are resolved and certainty enables the notes to recover lost value.
FEMA reported that it had received around 9,000 NFIP flood insurance claims just in Louisiana a few days after hurricane Ida’s landfall and that figure is likely to rise much higher. So once all the NFIP policy claims are factored in elsewhere the claims figure should escalate, but how high is challenging to know at this time.
Plenum noted that its catastrophe bond funds tend to be underweight these flood insurance linked issuances, which it expects will limit the negative impact to performance for its catastrophe bond focused funds.
In a Saturday update Plenum said that, “Based on the latest price indications, we expect performance losses of between 0.12% and 0.76%.”
That compares to 0.12% for the Plenum CAT Bond Fund, 0.08% for the Plenum Insurance Capital Fund and 0.60% for the Plenum CAT Bond Dynamic Fund, which the manager revealed on August 29th.
We suspect the two new figures, 0.12% and 0.76%, relate to the first and last, pure cat bond fund strategies that Plenum manages.
Which suggests Plenum is anticipating a little more mark-to-market pressure due to the marking down of the FloodSmart Re cat bonds for its CAT Bond Dynamic Fund, which is a higher risk and return fund strategy.
Positively, the rest of the catastrophe bonds that had been marked down in the wake of hurricane Ida’s landfall, which are exposed to Ida’s wind and surge related damages, have not been marked down any further at this stage, according to the pricing sheets we’ve seen.
But the uncertainty is set to persist and this could dent prices for a while on any cat bonds considered potentially exposed to hurricane Ida’s landfall and flood losses.
Plenum warned that, “For the coming weeks, we expect valuation uncertainties for the CAT bonds concerned, although the volatility at fund level should not be too noticeable.”
ILS and reinsurance focused investment manager Twelve Capital also reiterated this sentiment, saying in an update today, in relation to the NFIP flood cat bonds and other exposed positions that, “Twelve Capital is underweight in these Cat Bonds and does not hold any of the most junior tranches across its portfolios.
“However, it would not be surprising to see some continued volatility in the prices of these bonds and some other bonds in the coming weeks until the loss situation has become clearer.”