Tornadoes to affect some aggregate cat bonds: Plenum

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The weekend’s significant tornado activity in the United States could affect some aggregate catastrophe bonds, according to insurance-linked securities (ILS) asset manager Plenum Investments.

plenum-investments-logoPlenum explained in an update that the weekend tornado outbreak across southeastern US states is relatively rare, with severe tornado impacts more typically expected in April or May.

As we noted in a Saturday update after the storms struck and in more detail this morning, the insurance and reinsurance market loss from the tornadoes and associated severe weather is expected to rise into the billions of dollars, although how high remains uncertain at this time.

Plenum said that it believes, “The losses reported so far are reminiscent of the severe tornado event in spring 2011, which mainly affected the city of Joplin in Missouri and caused insured losses of about $2.8 billion.”

It seems likely this event will at least get close to that kind of an insurance and reinsurance market loss total, perhaps even surpass it.

According to Plenum, some effects from the tornadoes and severe thunderstorms will be felt in the catastrophe bond market.

“Severe storms and tornado events are covered in a variety of CAT bonds,” Plenum said. Adding that, “We expect the weekend’s storms to make a further contribution to the losses accumulated to date, particularly on loss-aggregating bonds.”

Here, Plenum is referring to the erosion of deductibles, as losses aggregate towards the trigger of a catastrophe bond, either in reinsurance or retrocession form.

There are numerous aggregate cat bonds in the outstanding market that cover severe thunderstorm losses, so this tornado outbreak is likely to qualify as a covered event and so add to the aggregation of losses experienced during the current risk period for some of the exposed cat bonds.

There are a number of aggregate cat bonds that have already been marked down due to previous catastrophe events in the United States this year, so these are likely to be the ones seeing the largest price movements.

With it being very soon after the tornadoes struck it could be challenging for cat bond brokers to mark prices down, so there could be some development to prices of any exposed cat bonds for a while, as the picture clears or prices recover where marked down to heavily at the start.

Erosions of aggregate deductibles effectively make cat bonds a little more risky through the remainder of their annual risk periods, with the threat from this largest for those cat bonds whose risk period runs into the second quarter of 2022, we would imagine.

Plenum noted that, where its own cat bond portfolio is concerned, “In our funds, we have significantly underweighted loss-aggregating CAT bonds covering secondary perils such as tornadoes, so we do not expect any noticeable impact on the prices of the positions held in the funds at this stage.”

On per-occurrence catastrophe bonds, the eventual industry loss from the tornado outbreak is not anticipated, at this stage, to be significant enough to cause any impacts.

“For per-event covers, we consider it rather unlikely at this stage that the losses will reach a level that would trigger claims payments on these bonds,” Plenum explained.

As we explained earlier today, for the insurance-linked securities (ILS) market direct losses from these tornadoes are most likely to come from quota share reinsurance arrangements, or any excess-of-loss exposure to insurers that have a significant risk concentration in the affected US states.

Outside that, some price pressure on cat bonds, as Plenum explains, as well as the potential for some aggregate reinsurance or retro exposure, for contracts already on-risk after previous catastrophe events this year, seems like the most likely source of attrition for any ILS funds with exposure.

Also read:

Weekend tornado & storm losses to run into billions of dollars.

Significant tornado outbreak damages multiple U.S. states.

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