Henri could contribute to aggregate cat bonds: Plenum

Despite having weakened to a tropical storm before landfall, Henri may still affect some aggregate catastrophe bonds, resulting either in some aggregate deductible erosion, or simply driving a price reaction in the secondary market, Plenum Investments has said.

Specialist catastrophe bond and reinsurance-linked investment manager Plenum, said that its modelling showed that Henri was still capable of causing a low single-digit billion dollar insurance and reinsurance market loss, even at its reduced tropical storm strength landfall intensity.

As we explained earlier, storm Henri’s main effects appear to have resulted from torrential rains and flash flooding so far, although some structural damage from wind and surge is anticipated nearer to the landfall region in Rhode Island and parts of New York state, we understand.

Plenum Investments update came after hurricane Henri had weakened back to tropical storm Henri and made landfall.

The investment manager noted that Henri slowed over cooler northern waters and that this had helped to weaken the storm.

However, the cat bond fund manager explained, “The storm brought torrential rain to parts of Connecticuts and New York and a state of emergency was declared in those states. The greatest danger continues to come from the heavy precipitation falling on the already moisture-saturated ground as well as storm surge. Storm surge, heavy rain and strong winds are also expected in parts of the northeastern US in the coming days.”

Plenum Investments expanded on the potential impacts to the ILS industry, “Based on our internal modelling on the basis of preliminary parameters of the storm, we expect losses in the low single-digit US dollar billion range.

“This means that a default of CAT Bonds is very unlikely, but the event will contribute to aggregating CAT Bond structures. Moderate price reactions are possible here.”

However, Plenum Investments noted that, “Since we underweight such positions, the impact of “Henri” on the performance of our funds should hardly be felt and we also expect only a minor impact of the storm on the overall CAT Bond market.”

Given the rain and flood focus of Henri’s impacts since landfall, it seems any aggregate deductible erosion would be minimal, while any secondary market cat bond price movement should be quickly recovered in the majority of cases.

As we explained on Saturday, ILS fund manager Twelve Capital also warned that the loss from Henri could be in the billions, but that impacts to its ILS funds would likely be restricted to aggregate deductible erosion.

It does seem possible that the industry loss comes out beneath the billion dollar mark, as losses increasingly look set to come from the flooding, rather than wind side of storm Henri.