After fearing the worst from Hurricane Milton, investors in catastrophe bonds appear to have sustained losses well below those predicted as recently as Wednesday.
Estimates that had indicated the bonds would lose as much as 15% have now been replaced by calculations showing investors are more likely to see a hit in the single digits. That’s after Milton made landfall as a Category 3 hurricane, weaker than originally forecast and battering Florida south of the densely-populated city of Tampa.
“Tampa was spared from the feared scenario of a direct hit,” Icosa Investments AG said in a statement on Thursday. “Thanks to strong wind shear and a more southerly track than expected, Tampa was less affected than it would have been if the storm had tracked slightly further north.”
Overall, losses are now expected to be in the range of $20 billion to $60 billion, meaning cat-bond investors look to be facing a maximum hit of 4%. On Wednesday, before Milton landed, Icosa warned that a direct hit to Tampa threatened to cause insured losses anywhere from $40 billion to $150 billion, resulting in cat-bond losses of 2% to 15%.
While losses look likely to be smaller than first indicated, the development still marks a stark turnaround from 2023, when cat bonds soared a record 20%, according to the Swiss Re cat bond index. In 2022, investors swallowed a 2% decline as the market absorbed the impact of Hurricane Ian.
Milton, which is estimated to have knocked out power for more than 3 million homes and businesses in Florida, came ashore south of where Hurricane Helene struck two weeks ago. The US mainland has been hit by five hurricanes so far this year, including Beryl, which battered Houston in July and knocked out power to millions of homes and businesses.
Cat bonds have so far been spared major losses this season, thanks to carefully calibrated terms that mean investors are only called on to pay out if specific conditions are met.
Icosa said it’s expecting losses in its portfolios won’t exceed low single digits. If that scenario pans out — assuming there are no further hits to the portfolio and with current cat bond yields above 10% — Icosa reckons the cat bond market could still deliver a “significantly positive return” for 2024.
If industrywide losses settle at the lower end of the expected range, it’s even possible that there’ll be no losses at all, the asset manager said. “However, since the fund is valued based on bid prices, we expect short-term markdowns, which are likely to normalize in the coming weeks.”
Twelve Capital AG, which has a $3.8 billion cat-bond portfolio, had also initially estimated losses as high as 15%. It, too, is now scaling back those predictions.
“Cautiously, we’d say it’s likely less,” Tanja Wrosch, head of cat-bond portfolio management, said in an interview Thursday on Bloomberg TV. “It played out in the end a little bit better.”
The insurance industry also appears to have avoided debilitating losses.
“Hurricane Milton’s weakening to a Category 3 storm before making landfall likely means the insurance industry and reinsurers such as Munich Re and Swiss Re may escape a worst-case scenario of more than $100 billion of losses,” according to analysts at Bloomberg Intelligence. Lower wind intensity suggests insured losses may instead be $35 billion to $45 billion, BI said.
That said, cat-bond risk premiums remain high as uncertainty persists. And the prospect of losses from Milton and damage from other potential hurricanes this season mean that investors are seeking — and getting — a considerable return for taking on natural disaster risk.
“Given the significant losses for the reinsurance industry, premiums are expected to remain at current high levels or even increase further in the coming weeks,” said Icosa. “This presents an attractive opportunity for investors to enter the cat bond market.”
This article was provided by Bloomberg News.