Cat bond payback after Ian could be as fast as 6-8 months: Plenum

The catastrophe bond market and its investors could earn back losses from hurricane Ian in as fast as 6 to 8 months, given the higher yield environment, which is now approaching post-Katrina levels, according to Plenum Investments.

Discussing the state of the catastrophe bond market after hurricane Ian’s significant impacts in Florida, specialist insurance-linked securities (ILS) asset manager Plenum Investments said that it believes losses from the storm could be recouped relatively quickly through the reinsurance market’s “payback” mechanism.

“The yield levels from catastrophe bonds are now as attractive as after hurricane Katrina,” explained Daniel Grieger, Managing Partner and Senior Portfolio Manager at Plenum.

Since hurricane Ian, there have been evident declines in catastrophe bond prices and valuations, driven both by the storm’s losses and by the market’s pricing in of future yield expectations.

Reinsurance is broadly expected to harden, with property catastrophe reinsurance and retrocession likely to be the ground-zero for rising prices, which means cat bonds are going to rise in-line with this.

There are also macro-economic considerations, with the current status of capital markets also meaning investors are demanding higher returns from their investment allocations.

While the cat bond market is now expected to recover some of the initial valuation hit from hurricane Ian, which as we reported is already evident in the Swiss Re cat bond indices partial recovery, as well as in cat bond fund performance, the upshot is that losses from Ian may only be as little as half the initial mark-to-market hit.

This recovery of value, as actual losses are realised in the cat bond market, is set to occur at the same time as forward-yields and spreads rise significantly, it now seems.

Plenum has analysed primary and secondary cat bonds and concludes that premiums are set to increase dramatically in some cases, with possible 50% to 100% increases set to be seen on certain US wind issuances.

With major catastrophe loss events typically followed by a strong period of cat bond market performance, but this time the reinsurance market hardening perhaps being the most significant seen in 20 years at least, there is the potential for the cat bond market’s losses from hurricane Ian to be earned back relatively quickly.

Strong performance after major losses is driven by the reinsurance industry’s payback mechanism, Plenum said, with premium rate increases driving higher returns to compensate capital providers.

After hurricane Ian, Plenum Investments estimates that the coupon yield of the catastrophe bond market has risen to around 12%, excluding distressed positions.

After Ian, Plenum Investments is expecting yields will return to levels last seen after hurricane Katrina, with the potential for this to prove stickier for longer as well, due to reinsurance and capital market conditions.

“We expect elevated premium levels in the cat bond market similar to post hurricane Katrina, but without a quick return to lower premiums, a higher for longer situation,” Dirk Schmelzer, Managing Partner and Senior Portfolio Manager said.

As a result of the rising premiums and the fact these could be back to near historical highs, Plenum Investments believes the losses from hurricane Ian could be recouped through the reinsurance payback mechanism as quickly as in 6 to 8 months.

Of course, this is based on an analysis of currently available information, so any worsening in hurricane Ian’s losses, or any further events, or capital market dislocation, could affect the ability to earn losses back, but given the forward-looking yield indications from the cat bond market, this seems entirely plausible at this time.