Mark-to-market pricing implied losses to the catastrophe bond market from hurricanes Helene and Milton are estimated at ~$380 million, at which level actual losses to the cat bond market in 2024 are running below the expected level, suggesting pricing will remain in neutral territory or could even soften barely for the January renewals, in keeping with Lane Financial LLC.
Specialist insurance-linked securities (ILS) consultancy Lane Financial has analysed the mark-to-market effects of recent hurricane Helene and Hurricane Milton, how this has modified the implied pricing within the marketplace.
“The late season strike of Hurricane Helene and Hurricane Milton in Florida could have caused ILS prices to return again to HARD market pricing seen in the primary quarter of 2023. But like Ian in 2022, the hurricane tracks turned on the last moment to make landfall away from probably the most property wealthy a part of the coast (Tampa, Clearwater, and the Tampa Bay area),” the consultancy explained. “The 2 hurricanes caused significant, but manageable, losses for the reinsurance market and the ILS market. Prices are at neutral levels and absent any further natural catastrophes before 12 months end, we expect them to remain neutral or soften further for January renewals.”
Lane Financial also notes that external aspects even have an influence on the relative strength of pricing within the catastrophe bond and ILS market.
Saying, “It must be noted that this is just not only due to manageable losses within the ILS market but in addition due to compressed spreads within the US corporate bond market. ILS yields are inclined to float within the zone between High Yield debt and Investment Grade debt. Compression of US corporate spreads, attributable to feelings of no- landing or soft-landing scenarios for the economy, will spill into the ILS market as investors seek for yield.”
But, the inner dynamics of the ILS market tells the story and Lane Financial’s evaluation of multiples shows that secondary market pricing are “back within the neutral zone,” despite the visits of Helene and Milton.
Investors could have expected losses of $790 million to the catastrophe bond market in 2024, Lane Financial’s evaluation of expected losses suggests.
But, based on secondary market price moves, hurricane Helene added perhaps $55 million of estimated loss to cat bonds, based on end of Q3 data, while newer hurricane Milton added more.
“As of Oct 20 the implied ILS- estimate of loss attributable to the 2 storms was $380 Mn. Allowing for modest losses earlier within the 12 months – perhaps attributable to aggregate creep and loss development and rounding up for further loss development – say to $500 Mn. for the 12 months – it remains to be is below expectations. Hence prices will stick in neutral, or soften, absent recent Catastrophic events,” Lane Financial concludes.
It must be noted that these remain mark-to-market implied estimates of potential losses to the catastrophe bond market presently and as everyone knows, implied losses can go up in addition to down.
The image below, taken from Lane Financial’s latest trade note, shows cat bond market implied price trends within the black line with dots, plotted against where typical hard, neutral and soft market multiples have sat.
You may see the implied pricing of the market did tick up barely with Milton, but not significantly by any means.
As actual losses the catastrophe bond market are running below those implied as being expected, by the issuance expected loss metrics, it suggests no immediate return to a tough market state.
The query now could be where within the range between hard, neutral and soft cat bond market implied pricing might settle to over the approaching weeks, as seasonality from the wind season runs out, issuance picks up and potential capital inflows are seen again.