Based on the latest forecast information, catastrophe bond and insurance-linked securities (ILS) investment manager Plenum Investments believes that hurricane Laura may not be strong enough to impact any outstanding cat bonds in its portfolio.
As we explained earlier today, the Gulf Coast of the United States faces a twin storm threat over the coming days, with tropical storm Marco set to soak the Louisiana and eastern Texas region, while Laura is forecast to pose more of a threat as a more intense hurricane.
It’s important to note that with Laura, which remains a tropical storm for now, there is greater uncertainty over just how strong a hurricane Laura may become before landfall around the Louisiana to Texas border region.
But based on the latest forecast path and intensity, Plenum Investments believes that catastrophe bonds may not be affected.
Plenum highlights that the region where both storms are likely to impact, between New Orleans, Louisiana and Galveston, Texas, is characterised by wetlands and is relatively sparsely populated.
As a result, even at the Category 2 strength that hurricane Laura is forecast to make by some of the models, should its path remain as it is currently forecast, it is unlikely to drive particularly significant enough industry losses to trouble any catastrophe bonds covering Gulf Coast wind.
Most of the catastrophe bonds exposed to the Gulf Coast would require a storm to strike a much more populated and urbanised region, with far higher insurance and reinsurance exposure values.
“The moderate strength of “Laura” and the low concentration of values in what is likely to be the most affected region makes a negative impact on CAT bonds unlikely. Larger insured losses relevant for CAT bonds are generally only expected if severe Category 3 to 5 hurricanes hit densely populated coastal regions,” Plenum Investments explained.
Of course, a hurricane Laura hit to the Gulf Coast could still drive losses to other types of ILS assets and also certain collateralised reinsurance or retrocession contracts.
Often, the reinsurance and retro ends of the ILS market have lower attachment points than the fully securitised catastrophe bonds that provide similar coverage, making them more exposed to Laura.
In addition, many of the private collateralised reinsurance and retro deals that ILS funds allocate capital to can carry more exposure to inland flood damages, as well as the coastal surge and wind damage exposure which is what most of the cat bonds carry.
Of course, with a few days to go still before a landfall late on Wednesday or into early Thursday morning, hurricane Laura could have time to intensify further and some models still show a stronger storm potential just off the Texas coastline.
There is also a chance of some drift in the path of Laura, with any further west giving the storm longer to intensify as a hurricane over the open and very warm Gulf of Mexico.
However, wind shear remains a factor in many models forecasts and this could be the deciding issue that hinders Laura’s run towards becoming a major hurricane.
Great uncertainty remains though and the next 24 hours or so will be critical in determining just how much of a threat hurricane Laura will pose.
We’ll keep you updated and you can track the tropics over at our dedicated 2020 Atlantic hurricane season page.