It’s now or never for hurricane Laura live cat trading

With hurricane Laura bearing down on the Texas and Louisiana coastline as a strengthening Category 2 storm with winds of over 110 mph, pushing what is being termed a potentially catastrophic storm surge in front of it, the time for last minute hedging arrangements and so-called live cat trading is now, or never.

Hurricane Laura is forecast to make landfall as a Category 3, or possibly Cat 4, major hurricane landfall along the Gulf Coast tonight local time, with some forecasts suggesting that the storms sustained winds will be at least 120 mph when it draws closest to the shore.

With a chance of a further shift west that brings Houston into the frame and only a slight movement of hurricane Laura’s landfall west and south along the Texas coast set to bring hurricane force winds to what is the United States fourth largest city in terms of population, the potential for a major insurance and reinsurance industry loss are high with this storm. Update: The chances of a shift west to Houston have lessened with recent forecast model runs we understand.

That has got the industry talking about potential loss levels and we understand the modelling teams are churning out scenarios of potential losses, as well as how the hurricane could affect portfolios for insurance-linked securities (ILS) funds and their investors.

As we explained this morning in our latest update on hurricane Laura, the closer to Galveston Bay and Houston that hurricane Laura’s track and landfall position moves, the greater the potential for insurance and reinsurance market losses, as well as impacts to insurance-linked securities (ILS) positions.

The potential for this scenario has left some uncertainty, as a landfall in the less populated wetlands region into Louisiana would mean hurricane Laura encounters much lower insured values and as a result generate a lower industry loss impact.

Our sources in the reinsurance and ILS market have been discussing industry loss levels around the $10 billion to $20 billion mark, with landfall location a significant factor in how high this could be or whether it could even go above that.

For comparison, hurricane Ike in 2008 is estimated to have caused industry losses in the region of $20 billion at today’s values, so current forecasts for hurricane Laura appear comparable. Harvey could be another storm to compare, although clearly more water than wind in terms of driven damages, but again somewhere up to the $20 billion industry loss region at today’s values.

However, a more easterly track and landfall over a less populated area could bring the industry loss down below $10 billion, our sources said. So plenty of uncertainty left for today then.

Reinsurance and retrocession broking sources have explained that some interest and tentative quoting for industry loss warranty (ILW) based hedging instruments was seen yesterday.

Interest in live cat instruments such as this tends to erupt in advance of major hurricane landfalls and hurricane Laura certainly looks severe enough to generate interest in acquiring last minute reinsurance or retro protection.

With live cat interest yesterday seen at $10 billion to $20 billion according to sources, we’re told this mornings forecast may narrow that range to $15 billion and $20 billion industry loss triggers.

The cost of this type of live cat, ILW based, protection at those specific triggers is not expected to be cheap though, in fact significantly more expensive than it would have been a year ago we understand.

While live cat interest was seen yesterday, we’re told this morning the interest is shifting towards firmer interest in buying protection, with some interest seen between ILS funds, our sources said.

With reinsurance and retrocession market exposure significant in the Galveston and Houston areas, minds are focusing on the potential for industry losses and this is likely to drive interest through today.

Especially as it is now or never to secure any hedging or live cat capacity, with hurricane Laura forecast to make landfall later tonight.

It will be interesting to see whether any ILW trades take place today, or whether the price is too high for anyone to bear the costs at this late stage for an instrument that, of course, may not even get triggered.

We’ll keep you updated over the course of today and you can track the tropics over at our dedicated 2020 Atlantic hurricane season page.