The recent severe winter storm losses in the United States are only expected to have an attritional effect on certain aggregate catastrophe bonds, while per-occurrence bonds are expected to escape loss, according to Plenum Investments.
The Zurich-headquartered specialist catastrophe bond and insurance-linked securities (ILS) investment manager noted that multi-peril aggregate cat bonds, providing reinsurance to primary insurance carriers, are expected to be the main source of impact to the catastrophe bond market.
As we explained yesterday, our analysis of broker secondary market pricing sheets showed that aggregate cat bonds sponsored by USAA are the names most in focus, as the primary military mutual insurers reinsurance arrangements once again come under scrutiny following a major catastrophe event.
Plenum Investments explained that early industry loss estimates for the US winter storms, part of which was storm Uri, have been put in a range from $12 billion to as much as $18 billion, the high-end being the KCC estimate from very soon after the storm struck.
As much as 75% of the insurance and reinsurance market loss is expected to come from water damage caused by pipes bursting in Texas, the state worst impacted by the weather event.
Plenum noted that at these levels of industry loss, the recent US winter storm event will be the most expensive winter event in recent US history.
Because of this, the impact to the catastrophe bond market is being assessed, Plenum said, explaining that winter storm losses are generally covered as a component within a multi-peril catastrophe bond, with no outstanding cat bonds covering winter storm losses on a single peril basis.
“Therefore this storm, even though a very severe event, will only add attritional losses to aggregate covers and is unlikely to trigger occurrence based Cat bonds,” Plenum explained.
The investment manager went on to note the secondary cat bond market price movements we highlighted yesterday.
Saying, “The bid prices on those positions are early bearish estimates to the storm and there is therefore recovery potential as the losses become more accurately evaluated over the coming weeks.”
That’s an important point.
As we explained in our article on USAA’s cat bonds, some have declined in value by more than 30% on the secondary market.
Some other aggregate cat bonds sponsored by Allstate and Nationwide are also considered to have exposure to the winter storms, although their secondary pricing has not moved anywhere near as significantly as USAA’s bonds.
However, given how early it is and how uncertain the eventual loss quantum remains at this stage, it’s uncertain whether the loss to the cat bonds could be that high, or perhaps much lower.
Often, cat bond prices decline significantly after a catastrophe event, but as clarity over the scale of losses emerges the prices can recover to reflect actual losses, rather than including an element of market nerves.
As a result it will be interesting to see how the USAA aggregate cat bond tranche prices move over the coming weeks.
Plenum explained that the intiial mark-to-market impact to aggregate cat bonds has dented its cat bond fund slightly.
Explaining, “The Plenum CAT Bond Fund reported a price correction of 96 basis points last week due to four multi-peril aggregate positions that contain winter storm risk.”
While Plenum’s fund that mixes cat bonds with insurance private debt saw a lower impact, “The negative performance contribution from the CAT bond allocation of the Plenum Insurance Capital Fund was 33 basis points.”
From Plenum’s comments it appears the cat bond market will not face a significant impact from the US winter storms, rather some attritional losses to aggregate cat bonds if the ultimates of carriers like USAA reach high enough.
For the broader insurance-linked securities (ILS) market the impacts will be more significant, but still for the majority of ILS funds the overall hit from the severe winter weather is expected to be more attritional, perhaps wiping out a months returns, with a handful of players seeing a more significant hit than this, which market sources suggest could be as much as two to three months of returns eroded in specific cases.