Hurricane Zeta may move aggregate cat bond prices: Plenum

The impacts and eventual insurance market losses from hurricane Zeta’s landfall on the Louisiana Gulf Coast is not expected to result in any direct losses to catastrophe bonds, but may move the price on certain aggregate cat bonds, according to Plenum Investments.

Zurich-headquartered catastrophe bond and insurance-linked securities (ILS) focused investment manager Plenum said that hurricane Zeta is likely to be a relatively minor insured loss event, in the scheme of hurricanes.

As a result, direct losses to any catastrophe bonds providing reinsurance or retrocession to carriers that experience impacts from hurricane Zeta are seen as very unlikely.

“Because of the low strength of “Zeta” we assume that the storm will cause only minor insured losses and will not cause any CAT bonds to pay-out,” Plenum Investments explained.

But the catastrophe bond market has seen some aggregate positions moving in price as their deductibles have been eroded in recent weeks, with the hurricane season one of the drivers of these qualifying losses that eat their way through the retention layer sitting beneath a re/insurers cat bond reinsurance coverage.

Hence, and as we explained earlier today, hurricane Zeta will likely exacerbate this erosion of aggregates for some of the cat bonds that cover insurers that take losses from the storm.

“Insured losses from “Zeta” will continue to fill aggregate covers,” Plenum explained, adding that “We anticipate further price reactions on these bonds, which have already seen from the previous storms.”

Many of the aggregate cat bonds in question provide multi-peril reinsurance protection to their sponsors, meaning these aggregates may also be eroded by other recent and ongoing catastrophe events.

These could include the wildfires in California, as well as August’s midwest Derecho storm event, further increasing the chances of future losses for these bonds over the rest of their annual risk period.

For the cat bond fund Plenum operates the impact from this is not expected to be significant, as Plenum said, “Our funds are generally underweight in these type of covers.”

Aggregate cat bonds typically provide their cover on a reinsurance or retrocession basis after the sponsor has assumed a portion of losses from multiple catastrophe events during an annual risk period. As losses build up, the amount of deductible left until the cat bond would trigger is reduced, effectively heightening the risk of attachment and so often moving the secondary market price for the notes, which can devalue them in ILS funds.