(Bloomberg) — The cost of issuing catastrophe bonds is likely to rise as asset managers specializing in securities react to the effects of Hurricane Milton.
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While the post-Milton drop in cat bond portfolios is likely to be much smaller than initially expected, “any loss will pull risky capital from the market and reduce reinsurance capacity,” Plenum Investments said on Saturday. He told investors in an email update. As a result, risk premiums in the cat bond market are likely to rise again from levels that are already “historically high,” the report said.
This prediction was made despite evidence that investors may now be facing minimal losses. Milton, which hit Florida as a Category 3 hurricane early Thursday morning, may have caused less than $60 billion in damage, compared with previous predictions of more than $100 billion, according to Bloomberg Intelligence. That’s what it means.
“It ended up being a little bit better than we expected at one point,” Tanja Roche, head of cat bond portfolio management at Twelve Capital, said in an interview with Bloomberg TV on Thursday.
Current estimates suggest the cat bond market is down just 1.34%, according to Artemis, which cited weekend prices calculated by Swiss Re Capital Markets. The index focused on U.S. wind power fell 3.64%. Forecasters had warned earlier this week that losses could reach up to 15%.
According to Artemis, the risk premium was approximately 6.5% as of September 27, on top of which investors received a Treasury rate of approximately 4.6%.
Catastrophe bonds are issued by insurance companies, reinsurance companies, and governments to provide financial protection against the most severe natural disasters. Investors who purchase bonds can make a significant profit if a predetermined event does not occur, but they can lose much of their capital if the event does occur. That capital will be used to pay insurance claims.
The Cat Bond has thus far escaped any major trigger events in what meteorologists are calling one of the most active hurricane seasons in recent memory. This bond benefits from carefully calibrated terms calculated by the financial industry’s most sophisticated analysts.
Losses facing cat bond investors in the aftermath of Hurricanes Helen and Milton appear to be minimal, but the situation on the ground remains dire for millions of people. be.
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Cat bonds underpinned the most profitable insurance-related securities among hedge fund strategies last year, according to analysis provided by Preqin.
After Hurricane Ian hit in 2022, the Swiss Re index initially took a hit of more than 10%, but the market quickly recovered and the index ended the year down just 2%. These losses were still enough for investors to demand significantly higher risk premiums, leading to higher returns. In 2023, Swiss Re’s cat bond index soared a record 20%, outpacing the returns of all other major bond markets.
Plenum said its prediction that risk premiums will rise depends on a number of parameters, including the ultimate claims, meaning the final outcome remains “difficult to estimate”.
(Added Swiss Re chart)
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