Hurricane Ian cat bond loss estimates significantly lower than expected: Plenum

Plenum Investments has slashed hurricane Ian loss expectations for its catastrophe bond investment funds, saying that initial estimates from sponsors are coming in “significantly lower than our original expectations”, leading it to believe the draw-down could be less than half the initial estimates.

We’ve been writing about signals that suggest the catastrophe bond market initial mark-down after hurricane Ian would be much higher than the actual losses suffered for some weeks now.

Back on October 20th, we reported that realised catastrophe bond losses from hurricane Ian could ultimately prove to be as little as half the initial, and still current at that time, mark-to-market decline in the outstanding cat bond market.

Increasingly, that seems likely to be the case, with the latest signal being a range of early hurricane Ian loss estimates from catastrophe bond sponsors that suggest their bonds are either set to be free from loss, or face much lower losses than had originally been anticipated.

As we reported earlier, the latest example of this comes in FEMA’s initial hurricane Ian loss projection for the NFIP, the upper-end of which is just below where its FloodSmart Re cat bonds would attach.

Specialist cat bond and reinsurance focused investment manager Plenum Investments has said that other estimates are also coming in lower than anticipated, which confirms what we’ve been hearing this week from a few other sources.

Plenum said that, “Initial loss estimates in relation to the CAT bonds we hold have now been received from almost all sponsors.”

Adding, “These are significantly lower than our original expectations, which we communicated to you two days after the event.”

Given the newly available loss estimate data direct from sponsors, Plenum Investments has revisited its earlier estimates of losses its cat bond investment funds might suffer after hurricane Ian.

Back on September 30th, soon after hurricane Ian’s landfall, Plenum had said that it estimated a possible 4-6% loss for its flagship Plenum CAT Bond Fund, 9-12% for its higher risk and return focused Plenum CAT Bond Dynamic Fund, and 7-9% for its Plenum Insurance Capital Fund which invests in cat bonds and other insurance-linked assets.

Now, having revisited its expectations for fund losses after receiving the latest sponsor estimates following Ian, Plenum has slashed those declines by more than half, with an expectation of a 2% maximum hit to the flagship Plenum CAT Bond Fund, 3% maximum hit to the Plenum CAT Bond Dynamic Fund, and 1% maximum hit to the Plenum Insurance Capital Fund.

Which implies, across the catastrophe bonds Plenum holds in each of these funds, the manager is anticipating the overall cat bond loss from hurricane Ian to be quite a bit less than half the initial mark-to-market mark-down.

FEMA’s announcement of its initial estimate for flood insurance losses due to hurricane Ian will be one driver, we suspect, given that came out late yesterday and likely saw a loss estimate delivered to cat bond investors at the same time.

But, we understand from sources, that some of the other cat bonds that were thought particularly exposed to hurricane Ian losses, have seen initial estimates from their sponsors that currently imply those cat bonds could be safe.

We’re told this includes the outstanding Integrity Re Ltd. catastrophe bonds, sponsored by American Integrity Insurance Company of Florida, Inc., and the outstanding Bonanza Re cat bonds sponsored by American Strategic.

In both these cases the initial loss estimates delivered to cat bond investors are understood to be below the cat bond attachment points.

We also understand that an early State Farm estimate of just over $1 billion of property line losses suggests the exposed Florida-named storm focused of its Merna Re cat bonds may also face smaller than expected losses.

Clearly though, it remains early very days with the hurricane Ian claims process and we’ve all seen how insured losses can creep in Florida, such as with Irma.

But, even at this early stage, this news is positive and the early claims announcements are very constructive for those investing in catastrophe bonds, suggesting a potentially much lower market impact from hurricane Ian than had been anticipated.

Plenum Investments highlighted that some uncertainty remains, saying, “Although we expect the prices of our portfolio positions to reflect this favorable development soon, we would like to emphasize that for some CAT bond positions it may still take some time before the final loss is determined.

“As a result, we continue to expect some price volatility.”

One final point. Plenum recently said the payback from hurricane Ian, for catastrophe bond investors, could be as fast as six months, given the higher spreads available on hardening reinsurance pricing.

Should the new lower loss levels prove to be the final levels of impact the cat bond market faces after Ian, the payback may be even quicker and this could prove very positive for those raising funds for cat bond strategies going forwards.