Hurricane Laura ILS fund hit not significant, income to offset loss for some

At current industry loss estimate levels, the impacts to insurance-linked securities (ILS) funds from hurricane Laura is not expected to be significant, with some funds even able to offset the hit with the income their reinsurance and retrocession positions earned them in August.

Early estimates for the insurance and reinsurance market loss from last week’s hurricane Laura, which made landfall on the Louisiana Gulf Coast as a Category 4 hurricane with 150 mph sustained winds, suggest an industry loss of perhaps less than $10 billion, for the onshore property insured costs.

That’s lower than had been anticipated, as it transpired that given the low population density in the region most affected by Laura’s landfall winds and the fact the storm surge was not as high as anticipated, the financial costs are expected to be a little lower than at first thought.

Estimates received so far include our own market sources who continue to point to $8 billion to $14 billion for the total insurance market loss from hurricane Laura, that includes the offshore energy impacts and some inflation effects for the pandemic.

AIR Worldwide at $4 billion to $8 billion for onshore insured property losses only, which is lower than its unofficial and preliminary estimate of $4.8bn to $9.2bn.

Karen Clark & Company’s estimate for up to $8.7 billion for property and auto onshore insured losses in the U.S., with another $200 million of insured damages in the Caribbean.

As well as CoreLogic, who were the first to report, saying between $8 billion to $12 billion for wind and surge damages.

All of which points towards perhaps $10 billion, perhaps a little higher, being the upper-end for the market-wide insured loss, some of which will fall to reinsurance capital.

A number of ILS fund sources have told us that, at these levels, the from hurricane Laura impact to ILS funds and other collateralised reinsurance investment strategies or structures is not expected to be particularly significant, more attritional in nature for many of their exposed positions.

Many insurance carriers will retain the loss without reinsurance support, but some will pass on a share of their losses through reinsurance arrangements.

For some, there is expected to be an erosion of annual returns, as the losses from hurricane Laura may wipe out any gains made in August.

But for others, more broadly diversified or less exposed to some specific reinsurance contracts, hurricane Laura may just about use up the income they gain in the month, given August is a month of higher seasonal returns.

There are likely to be some outliers, who report positive returns for August, as well as a handful who do have higher losses, given their fund’s exposure profile.

But in the main, for the ILS fund market that invests in private ILS and collateralised reinsurance transactions (catastrophe bonds certainly won’t be affected at this loss level), the event viewed on its own will not be a particularly significant loss.

One caveat there is how this loss falls to aggregate reinsurance programs and how much in the way of losses cedants have taken from other recent U.S. severe weather events such as the recent Iowa and Illinois derecho, or the ongoing and increasingly impactful California wildfires.

As losses from all these August events add to severe weather throughout recent months, plus losses such as hurricane Isaias, there is a chance some major carriers trigger their aggregate reinsurance programs, which could drive additional losses to reinsurers including some of the ILS funds.