Milton cat bond impact less severe than feared, but could drive risk premiums higher: Plenum

Hurricane Milton has had a less severe impact on catastrophe bonds than had been feared as the storm approached Florida last week, but this could still be sufficient to drive risk premiums higher according to specialist investment manager Plenum Investments.

Plenum Investments had put out a projection for potential catastrophe bond market losses from hurricane Milton prior to its landfall.

At that time, Plenum explained that the overall cat bond market could see a roughly 1.4% hit from Milton, which now seems quite prescient given the move now seen in the main benchmark index for the cat bond market.

As we reported this weekend, the Swiss Re Global Cat Bond Total Return Index is down by 1.34% on the potential for losses from Milton.

Plenum Investments has now analysed its portfolio and funds using post-landfall event set data on hurricane Milton and the modelling suggests the following impacts to its funds:

Plenum CAT Bond Defensive Fund: -0.2%.
Plenum Insurance Capital Fund: -0.4%.
Plenum CAT Bond Dynamic Fund: -0.7%.

Plenum Investments explained, “We have received the first post-landfall event set for Milton and modelling our funds resulted the following expected losses, which continue to be marginal and are also lower than our initial pre-landfall estimates.”

Adding, “Loss assessments are just beginning but it seems that the damage is less severe than initially feared. First indications of probable insured industry losses estimate that losses from Milton will be below those of hurricane Ian of 2022.”

The company continued to explain, “These post-landfall estimates are only a preliminary view and include only losses caused by wind. As mentioned in our fist newsflash for Milton, we expect the market reaction to exceed the modelled expected loss results. The initial mark-downs incorporate the uncertainty around the final outcome, which will take time to assess as insurance claims come in.”

Using pricing indications from broker sheets, Plenum has also estimated the mark-to-market impact before accrued coupon income and costs on the NAVs of its funds:

Plenum CAT Bond Defensive Fund: -48bps.
Plenum Insurance Capital Fund: -85bps.

Plenum CAT Bond Dynamic Fund: -120bp.

Looking ahead, Plenum suggests that losses from hurricane Milton may be enough to raise risk premiums in the catastrophe bond market.

“Every loss withdraws risk-bearing capital from the market and reduces reinsurance capacity, which is why an increase in premiums is usually observed after significant events.

“The extent of this increase depends, among other things, on the final claims and is therefore difficult to estimate, but risk premiums in the CAT bond market are likely to increase again, although they are already at a historically high level,” the investment manager said.

Read all of our hurricane Milton coverage.