A vehicle gets stuck in a hole in Boca Grande, Gasparilla Island, Florida, USA, on Tuesday, October 15, 2024. The barrier island community of Boca Grande on Florida’s west coast was severely damaged by Hurricane Milton. (Credit: Marco Bello/Bloomberg)
In fact, bondholders could be looking at returns of up to 12%, according to Plenum Investments, a Zurich-based asset manager and catastrophe bond specialist.
Before Milton hit just south of Tampa as a Category 3 hurricane on October 9, the catastrophe bond market was bracing for losses of up to 15%, dwarfing losses from Hurricane Ian two years ago. Ta. In this case, Milton’s loss could be close to 1%, and possibly less.
“The underlying dynamic is that spreads remain high,” said Dirk Schmelzer, managing partner at Plenum, which manages more than $1.2 billion in insurance-related securities and insurance liabilities, including about $900 million in catastrophe bonds. It means,” he said.
He said in a webinar Thursday that further losses are unlikely this year’s hurricane season, and he expects “very attractive returns over the next 12 months.” Hurricanes in November tend to form in lower latitudes, and the chance of a major storm making landfall in the United States is “nearly zero,” Schmelzer said.
Catastrophe bonds, or cat bonds as they are often called, are issued by insurance and reinsurance companies to transfer some of their risk to the capital markets. Investors in bonds can make a profit unless a predetermined disaster occurs, but they can lose much of their capital if a disaster occurs.
Swiss Re’s Global Cat Bond Index has climbed since the start of the year, with investors largely unscathed despite meteorologists warning of what would be one of the most active hurricane seasons in recent memory. It has increased by more than 13%.
Market-beating returns are a recurring theme in the cat bond market. Last year, these products underpinned the most profitable insurance-related securities among hedge fund strategies, according to Preqin, which provides data on the alternative asset management industry.
Analysts monitoring the market say the parameters that determine cat bond payouts are unlikely to be relaxed in the future. Morgan Stanley analysts said earlier this year that they expected cat bonds to “adjust the triggering criteria for payouts to cover only the most severe storm types.”
Milton’s insured losses are expected to be between $22 billion and $36 billion, according to Moody’s RMS Event Response. By comparison, Ian’s insured losses amounted to $50 billion. At the time, cat bond investors initially feared losses of at least 10%, but even then Swiss Re’s cat bond index only fell by about 2%.
Schmelzer said that although Milton made landfall near the Tampa metropolitan area, losses from the storm were lower than expected because the hurricane’s wind field was smaller, there was less storm surge, and it was moving much faster, so it took less time. said that it was done. to cause damage.
Plenum said the dynamic cat bond fund, which has approximately $180 million in assets, has returned 11.5% so far this year. It is highly likely that it suffered a dent of less than 0.8% due to Milton.
The asset manager’s defensive cat bond fund, which has about $400 million in assets, has yielded 10% over the same period, and Milton’s is down 0.3% at most. Plenum said the fund’s double-digit returns are expected to continue next year.
Regarding the cat bond market, “absolute returns should remain strong as risk coverage remains very attractive and interest rate declines should moderate,” Plenum said.
At the same time, the cat bond market continues to grow, with funds sold under the European UCITS label adding about 7% of assets in the third quarter, reaching a peak of $13 billion in assets under management. Artemis reports that. ILS industry.
Artemis said it expects the UCITS Cat Bond Fund’s assets under management to grow further through 2025 as cat bond yields remain at historically high levels and the wave of new issuance continues.
