Hurricane Milton seen denting cat bond market -1.4% (excl. surge): Plenum

While uncertainty remains over the eventual loss from hurricane Milton, catastrophe bond fund manager Plenum Investments has said it could be around Ian levels, but even then the impact to the cat bond market and its cat bonds funds would only be deemed “moderate” and projections show returns earned so far this year can easily absorb the losses.

“There is still a lot of uncertainty in the forecast and the ultimate losses will highly depend on the exact landfall location and the strength of Milton as it crosses Florida but it is possible that the losses could match or exceed the losses caused by hurricane Ian, which were around $50bn in insured losses,” Plenum Investments explained.

The investment manager said it has modelled the expected wind losses form Milton to its cat bond funds and the entire catastrophe bond market.

“Although we see a substantial part of the CAT bond market being potentially exposed to losses from the storm, the overall impact based on that pre-landfall scenario will lead only to moderate losses,” the company said.

Plenum details its modelled projections as the following hits to its funds and the cat bond market:

Plenum CAT Bond Defensive Fund: -0.8%
Plenum Insurance Capital Fund: -1.1%
Plenum CAT Bond Dynamic Fund: -1.6%.
CAT Bond Market: -1.4%

While some mainstream media sources are talking up the potential significant levels of cat bond market losses possible from hurricane Milton, a 1.4% hit is very manageable and easily absorbed within the on average more than 10% returns earned by most catastrophe bond fund strategies year-to-date.

Plenum Investments cautioned on reading too much into modelled estimations at this stage, saying, “We have to reiterate, that these pre-landfall estimates are only a preliminary view and exclude losses from storm surge, which are normally excluded from homeowners’ policies.

“Any potential losses from the National Flood Insurance Program (NFIP) are also not included in this estimate – we are generally underweight these bonds vs the market.

“Initial market reactions to major catastrophe events lead to price volatility that often exceeds those initial loss estimates.”

Storm surge impacts would certainly raise the hit to the catastrophe bond market, we imagine, even if the NFIP’s bonds remained free from loss, as there are bonds in the market with greater commercial risk exposure.

But still, even with surge impacts included, the hit to the cat bond market would likely be in the rather low single digit percent range.

Again, this is easily absorbed by just a few months of the recent high levels of cat bond fund performance seen, for the majority of strategies. There could be more heavily Florida focused strategies that felt a bigger hit, but even then we wouldn’t imagine it would be enough to drain full year-to-date returns.

Plenum is also wise to mention that market reactions can often drive significant price volatility, that is much greater than the actual losses faced.

Hurricane Ian from 2022 was a prime example, knocking the cat bond market down roughly 10% but then losses from that storm came in well-below 1% of the market.

It remains to be seen how hurricane Milton pans out, but given the levels where catastrophe bonds generally attach it will take one of the more damaging current scenarios of landfall to occur for the eventual percentage impact to the cat bond market to rise significantly.

The immediate hit to the cat bond market could be higher, of course, but as we’ve learnt it’s unwise to read too much into how the market reacts at its first pricing post-major catastrophe event.

Finally, Plenum has also concurred that the Mexico IBRD catastrophe bond has not faced any losses due to Milton, as we had reported.

You can track this and every Atlantic hurricane season development using the tracking map and information on our dedicated page.

Also read:

– 33% chance hurricane Milton loss above $50bn. Would drive hard market: Euler ILS Partners.

– Hurricane Milton Cat 5 again. Tracks slightly south. Uncertainty still high, loss range wide.

– Safe to say hurricane Milton likely a $20bn+ insurance market event: Siffert, BMS.

– Hurricane wind speeds forecast across entire Florida Peninsula as Milton approaches.

– Mexico’s catastrophe bond presumed safe from hurricane Milton.

– Stone Ridge leads managers cutting mutual cat bond or ILS fund NAVs on hurricane Milton.

– Hurricane Milton could be a huge test for the entire (re)insurance market: Evercore ISI.

– Hurricane Milton losses could amount to tens of billions, but uncertainty high: BMS’ Siffert.

– As hurricane Milton intensifies, Mexico’s catastrophe bond comes into focus.

– Material hurricane Milton losses could change 2025 property reinsurance price trajectory: KBW.

– Cat bond & ILS managers explore options to free cash, as hurricane Milton approaches.

– Hurricane Milton: First Tampa Bay storm surge indications 8 to 12 feet.

– Hurricane Milton is biggest potential ILS market threat since Ian in 2022: Steiger, Icosa.

– Hurricane Milton forecast for costly Florida landfall. Cat bond & ILS market on watch.