Hurricane Delta unlikely to cause cat bond losses, but may erode aggregates: Plenum

Hurricane Delta’s impacts on the Yucatan Peninsula of Mexico and also the United States Gulf Coast are unlikely to cause direct losses for any catastrophe bonds, but could further erode some aggregate cat bond deductibles, according to specialist ILS investor Plenum Investments.

Catastrophe bond and insurance-linked securities (ILS) focused investment manager Plenum said that it too believes that the World Bank issued IBRD / FONDEN 2020 catastrophe bond transaction, that provides disaster insurance and reinsurance to Mexico’s Government’s FONDEN catastrophe fund, looks safe from losses as the minimum central pressure of hurricane Delta has risen, as we explained in our last update on the storm this morning.

Plenum explained, “Only one CAT bond covers hurricane risks on the Atlantic coast of Mexico. The bond, which is equipped with a parametric trigger, pays out if the storm’s central pressure falls below a geographically specified value. According to current data from the National Hurricane Center, the air pressure in the centre of the storm is currently well above these thresholds, so we do not expect a pay-out.”

Plenum also believes that catastrophe bonds are likely to be safe from hurricane Delta’s eventual landfall and impacts on the United States as well, saying that if the storm turns out to be similar in terms of impacts to recent hurricane Laura there wouldn’t be any direct cat bond losses.

“As the storm continues, it will travel through the Gulf of Mexico and hit the US coast in the region between Houston and New Orleans on Friday evening. Hurricane “Delta” will thus follow a similar course to Hurricane “Laura”, which hit the border region of Louisiana with Texas at the end of August as a strong category 4 storm.

“Forecasts are still subject to high uncertainty. If we take hurricane “Laura” as a benchmark for the impact on the CAT bond market, we do not expect direct defaults of CAT bonds,” the ILS investment manager explained.

While no per-occurrence impacts are therefore expected for catastrophe bonds by Plenum, the investment manager does expect that if hurricane Delta is a severe storm on landfall it could further erode some cat bond aggregate deductibles.

Like aggregate reinsurance contracts, some cat bonds cover losses on an annual aggregate basis across a year or season, with qualifying event losses building up beneath their attachment points.

As the aggregation from qualifying catastrophe loss events continues, it effectively reduces the amount of loss required for a triggering of a cat bond by a future event.

Some erosion of certain cat bond aggregate deductibles has been seen with recent hurricanes, so hurricane Delta could continue and perhaps accelerate this trend.

Plenum said that, “We assume that hurricane “Delta” will also lead to an increase in the loss amounts of CAT bonds with aggregate triggers, which will affect the prices of these bonds.”

As many of the aggregate cat bonds provide multi-peril reinsurance protection to their sponsors, these aggregates may also be eroded by other recent and ongoing catastrophe events, such as the wildfires in California, further increasing the chances of future losses for these bonds over the rest of their annual risk period.

For Plenum itself, the manager said that its cat bond fund does not hold any exposure to the Mexico cat bond and is also generally underweight on aggregate trigger catastrophe bonds, and so expects “only a marginal impact on the performance of our CAT bond portfolios,” from hurricane Delta.