Some hurricane Milton cat bond losses likely, but uncertainty over aggregate structures: Icosa

Catastrophe bond fund manager Icosa Investments has highlighted current uncertainty over the level of losses the market may face from hurricane Milton, but notes that while some principal losses seem likely there remains a high level of uncertainty over certain structures, especially aggregate cat bonds that have much of their risk periods left to run.

The investment manager says that greater clarity over potential losses should emerge over the coming weeks and that the outcome could be more binary, in terms of no loss or a potentially meaningful impact, for certain catastrophe bonds.

Breaking the potentially affected cat bonds into four defined clusters, Icosa Investments said it has analysed the mark-to-market impacts already seen to try and better understand market-implied loss expectations and also identify any trading opportunities.

First, the company looks at Florida focused indemnity cat bonds, on which it says, “with Milton hitting Florida, some actual losses are likely.”

Icosa Investments continued, “Currently, the market is struggling to differentiate between individual cedants, which is understandable given the lack of loss reports. This cluster may take months to settle toward the final loss numbers, with movements expected in both directions.”

Next, the investment manager looks at the National Flood Insurance Program (NFIP) series of FloodSmart Re catastrophe bonds, which as we noted in our article earlier this week have received a range of in some cases relatively significant mark-downs in pricing sheets we’ve seen.

Icosa said on these flood-only indemnity cat bonds, “The outcome here is likely to be more binary, as we’ve seen in past events like around Hurricane Ian. We expect to gain more clarity before year-end. We also see significant dispersion between different brokers in their pricing indications for these bonds.”

Moving on to discuss catastrophe bonds with indemnity triggers that provide coverage across multiple US states, Icosa Investments highlights the uncertainty related to aggregate structures and how hurricane Milton might affect them.

“These bonds often have aggregate structures where erosion of the attachment point is a concern, particularly for bonds that reset only in mid-2025,” the investment manager explained. Adding that, “Next spring’s tornado season could quickly turn attachment erosion into actual capital losses.

“The market seems to be underpricing this increased risk for some riskier aggregate indemnity bonds, which still have months left in their current risk period.”

Finally, Icosa Investments looked at industry-loss index trigger catastrophe bonds, of which it believes the majority should prove to be more remote-risk than an event like hurricane Milton would attach to.

The manager explained, “Most of these bonds are sufficiently risk-remote and should remain unaffected by Milton. The few exceptions showing pricing volatility in the chart are either Florida-only or high-risk layers, particularly aggregate index-linked bonds, that may face real attachment risk should losses only slightly exceed current expectations.”

Summing up, Icosa Investments said, “Over the next few weeks, we expect more clarity on the final loss numbers. For many bonds, the outcome is likely more binary than current pricing suggests—either full recovery or significant loss of principal. We urge investors to be cautious, especially with aggregate bonds that include secondary perils and still have substantial time before reset.”

These are helpful insights into the different categories of catastrophe bonds that have seen mark-downs in their prices after hurricane Milton.

Previously, soon after hurricane Milton’s landfall last week, Icosa Investments had said the impact to the catastrophe bond market from the storm would likely be less than 5%, which was borne out in the initial marking of positions and the fact the Swiss Re Global Cat Bond Index fell by just 1.34%, while the US wind version of the Index fell by 3.64%.

Read all of our hurricane Milton coverage.