Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Oklahoma tornado may cause catastrophe bond price movements


The tornado which struck Moore, Oklahoma yesterday, causing many fatalities and devastating a wide swathe of Oklahoma’s suburbs, could result in a reaction in the secondary catastrophe bond market, according to investors. The tornado is expected to cause an insured loss in the billions of dollars (how high it is too early to say) and looks sufficient to cause price movements on exposed cat bonds with aggregate tranches covering tornadoes and severe thunderstorms.

According to Swiss based ILS and cat bond investment manager Plenum Investments the damage from yesterdays tornado will likely surpass the 1999 Moore tornado which caused approximately $1.4 billion in damage (in 2011 dollars).

Plenum said that it does expect to see price movements on some cat bonds in the secondary market, particularly those with tranches that aggregate losses from severe thunderstorms and tornadoes over time. Any affected aggregate cat bond tranches could see retention layers eroded making them riskier over the rest of their annual risk period, effectively reducing the attachment point.

Plenum itself does not expect a major impact to its fund from the tornadoes. It only holds two cat bond positions which are exposed to tornado risk in Oklahoma, and neither of those are aggregate tranches of notes. Therefore Plenum feels it is unlikely that they will suffer any loss of notional or experience a large price reaction.

Some of the USAA Residential Re cat bonds are exposed to aggregate tornado losses in Oklahoma and as a result could see some price reaction in the market.

Here are the cat bonds we have listed in our Deal Directory which cover severe thunderstorm and tornado losses and some thoughts on whether they could be impacted by the Oklahoma tornado. The ones we’ve highlighted in red appear most at risk of having aggregate deductible layers eroded.

Skyline Re Ltd. (Series 2013-1) – Unlikely to be affected as sponsor The Cincinnati Insurance Company has said before (regarding tornado losses) that it does not market its P&C products in Oklahoma area, only life insurance sold in the state.

Residential Reinsurance 2012 Ltd. (Series 2012-2) – Unlikely to be affected as all tranches provide protection on a per-occurrence.

Residential Reinsurance 2012 Ltd. (Series 2012-1)Potentially affected as has aggregate coverage in force.

Combine Re Ltd. (Series 2012-1)Potentially affected as has aggregate coverage in force.

East Lane Re V Ltd. (Series 2012-1) – Unlikely to be affected as all tranches provide protection on a per-occurrence basis.

Residential Reinsurance 2011 Ltd. (Series 2011-2)Potentially affected as has aggregate coverage in force.

Residential Reinsurance 2011 Ltd. (Series 2011-1)Potentially affected as has aggregate coverage in force.

East Lane Re IV Ltd. (Series 2011-1) – Unlikely to be affected as all tranches provide protection on a per-occurrence basis.

Residential Reinsurance 2010 Ltd. (Series 2010-II) – Matures in June, so despite having an aggregate tranche will not be a risk to investors.

Whenever a catastrophe event of this magnitude strikes it’s possible that exposed cat bonds suffer some kind of price adjustment in the secondary market due to investor nerves and live trading at reduced prices. This happened last year with certain tornado exposed cat bonds, which were downgraded due to qualifying losses that aggregated under the terms of the deal, however none saw any notional losses as a result of this. We expect that any affected cat bonds will come to light over the next few weeks and any rated tranches which see losses qualify could see a rating downgrade or be placed on a rating watch. We will update you as information becomes available.

Updates and new articles on this topic:

Credit Suisse: losses from Moore tornado under $5 billion, no ILS fund impact

Insured losses from Moore, Oklahoma tornado could surpass Joplin

LGT Insurance-Linked Strategies: No impact expected from Oklahoma tornado

CATCo: No impact from Oklahoma tornadoes if insured losses below $5 billion

Blue Capital: No material loss expected from Oklahoma tornado

EQECAT: $2Bn to $5Bn insured losses from recent tornado events, including Oklahoma

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