Once again, Swiss insurance-linked securities investment fund manager Plenum Investments is proactively updating its investors on the developing hurricane Sandy situation and the potential impact the storm could have on exposed catastrophe bonds and its ILS fund. In their latest update Plenum acknowledged the uncertainty that exists over the insured losses from Sandy and says that they have noticed some cat bond prices being marked down by as much as 25% this week.
Plenum says that this uncertainty, around the magnitude of insured losses resulting from hurricane and post-tropical storm Sandy and any losses to exposed cat bonds, is weighing heavily on the secondary cat bond market and has caused some bonds to be marked down by as much as 25% this week.
The uncertainty is due to the fact that most of the sponsors of cat bonds with northeast U.S. exposures have not published a loss estimate yet, and so the market is basing sentiment on the industry loss estimates that have so far been produced by modelling firms. Plenum note that two cat bond sponsors have published estimates, USAA for their Residential Re bonds (which we covered here and here with S&P’s comments) and Country Mutual for Combine Re (which we covered here). Both of these loss estimates only represent around 15% of the cat bonds respective trigger levels, so it seems clear that these two sponsors cat bonds will not be triggered by Sandy.
Plenum says that assuming that industry losses do not exceed the current upper estimate of $20 billion they do not anticipate notional payout on any of the other exposed cat bonds. That’s in line with the sentiment within the insurance and reinsurance market and the $20 billion industry loss figure is being watched closely as losses above that will impact reinsurers much more as well as potentially cat bonds and private ILW or ILS transactions.
Plenum have disclosed the impact to their ILS funds various share classes from the mark-to-market losses on secondary cat bonds. The downward price movements have caused a 1.39%, 1.41% and 1.45% in the USD, EUR and CHF decline in the share prices of the Plenum Cat Bond Funds USD, EUR and CHF classes respectively over the last two weeks.
We expect other ILS funds will be looking at similar declines, although some who have a larger exposure to private transactions and collateralized reinsurance contracts could see greater declines than that.
Plenum said that their funds performance remains in line with targets. The healthy returns that funds have made in recent months will help them to absorb any decline due to Sandy mark-to-market losses. Plenum expect to be able to recover these mark-to-market losses once the uncertainty around the industry loss from Sandy is cleared up.