Hagibis hammers some private ILS positions in October

It’s becoming clear that typhoon Hagibis’ impacts in Japan have hammered the performance of some private insurance-linked securities (ILS) positions in October and this could be sufficient to overshadow what has been another positive month for the catastrophe bond market.

While typhoon Hagibis did dent some catastrophe bond positions, with a number of cat bonds exposed to Japanese typhoon losses marked down on the market uncertainty over the eventual industry loss from the recent storm, its impacts are going to be most strongly felt in the private ILS and collateralised reinsurance segment of the market.

It appears that a number of ILS funds focused on private collateralised reinsurance and retrocession investments are set for particularly negative performance for October 2019, as the impacts of initial loss estimates and side pockets established for typhoon Hagibis dent returns for the month.

We’re told some positions are being written down almost completely, largely the collateralised aggregate retrocession transactions that have found themselves exposed to a number of events including hurricane Dorian, typhoon Faxai and typhoon Hagibis.

But it is Hagibis that is largely responsible for the hammering of some ILS positions, with the wide range in loss estimates (around US $8bn to $16bn) and the uncertainty over the final figure causing some fund managers to establish large side pockets to account for the uncertainty and to cover any risk of potential loss creep.

As a result, some ILS funds are expected to be down 2 percentage points or more for October.

Typhoon Hagibis will be one of the two most costly typhoons to ever hit Japan, alongside 2018’s typhoon Jebi, with the insurance and reinsurance market loss set to be also in the top two occurrences.

As a result the impact to the reinsurance and ILS fund market will be relatively significant, for those companies and strategies that have the greatest exposure to Japanese risks, as well as for those that wrote any aggregate worldwide non-marine retrocession transactions this year.

We’re told there is some consternation in the market at the size of some initial loss picks by ceding companies, that could again result in some significant collateral being held on some transactions. One source told us this could result in full limit collateral retention on some live and exposed transactions.

While October’s ILS fund performance will without a doubt be dented thanks to Hagibis’ impacts on private ILS funds, the catastrophe bond performance during the month has again been relatively strong in many cases.

Cat bond fund managers have been recovering mark-to-market losses ever since the end of August when Dorian almost hit Florida, with this continuing into October for some funds.

Some cat bond funds have also been catching up on seasonal premium contribution in October as well, resulting in a strong month for some cat bond fund strategies.

However, it looks like the overall ILS fund market will be slightly down in the end for the month, again largely due to the influence and impact of typhoon Hagibis.

We’ll bring you a clearer picture of this when the data for October comes available from the Eurekahedge ILS Advisers Index of insurance-linked securities (ILS) funds, which is already reporting a -0.12% decline for the month after almost 85% of reports are in.