Cat bond market drawdown expected, yields likely to rise after Milton: Elementum’s Davis

The catastrophe bond market is expected to fall in the wake of hurricane Milton. But, as with other historical events, at least some of that drawdown is likely to be recovered and after the storm cat bond market yields are likely to rise, according to Jeffrey Davis, Partner & Portfolio Manager, Investments at Elementum Advisors, LLC.

Davis was speaking in an interview with CNBC TV yesterday, discussing the catastrophe bond market fallout from hurricane Milton.

While the initial impact, in terms of the drawdown to the cat bond market index when it gets priced, is likely to be relatively meaningful, given the significant uncertainty that remains there is likely to be ground to recover.

We saw this with hurricane Ian in 2022 when the Swiss Re cat bond Index fell 10%, but the eventual hit to the catastrophe bond market was around 1%, or perhaps even less.

Speaking with CNBC, Davis explained why this tends to be the case and his expectations for how the catastrophe bond market will move after hurricane Milton.

“We have industry experts that are currently projecting insured losses anywhere from $25 billion to $70 billion plus, with an economic loss that is likely to be meaningfully higher. While it is a good guidepost, it does remain uncertain. It’s so close to the landfall just 24 hours ago,” Davis explained.

Adding, “We do expect that there will be a drawdown similar to the graphic that you had recently shown, like Hurricane Ian, where it was a 10% drawdown, hurricane Irma was a 15% drawdown, right after the events.

“Now, both of those drawdowns did subsequently recover as more information became available. It does take time to sort through the expected costs of the event, and so there is a wide range of uncertainty in the market.”

Davis went on to explain why uncertainty can take time to clear post-catastrophe event.

“The reason for that is, practically speaking, on the ground, the priority remains with the first responders who need to go help those that may not have evacuated and been in the storm’s path. It does take time for the homeowners to get in there and the insurance companies after that, once the impacted areas are stabilized, to come up with a more accurate cost estimate, and so that’s why you see the sharp drawdowns after events of this nature,” he said.

Moving on, the CNBC interviewer asked Davis for his expectations for catastrophe bond returns.

Davis of Elementum said, “If you think about the supply-demand dynamics, and the reason that the catastrophe bond as well as the insurance-linked securities market, exists in the first place, is it provides capital from the global capital markets to help insurance companies pay claims after events such as Milton.

“So, the supply of capital is going to be pulled down as insurers draw on it, to pay claims from the event and that is naturally going to increase the overall yield in the market.

“If you started in kind of the low teens, in terms of the overall yield for the catastrophe bond market, that is going to go up.”

He continued to explain, “But it is too early to say, given how close we are to the storm, exactly what that impact is going to be. The market is priced on a weekly basis, and so tomorrow, we will get the first look at the Swiss Re cat bond index following the storm, and that will ultimately tell us a little bit about where yields are likely to go after this event.”

Also read:

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– Mutual cat bond and ILS funds recover ground as hurricane Milton impact clearer.
– Milton loss below $50bn may not be sufficient to move pricing: Jefferies.
– Milton could drive property catastrophe reinsurance rates up at 1/1 2025: KBW.
– Most mutual cat bond & ILS funds slid a little further on Milton’s final approach.
– Cat bond funds can still finish the year positively: Twelve Capital’s Wrosch.
– Hurricane Milton losses likely below a 5% cat bond market impact: Icosa Investments.
– Hurricane Milton: Pre-landfall broker loss estimates ranged $15bn to $40bn.
– Hurricane Milton Cat 3 landfall in Sarasota. Worst case Tampa loss scenarios avoided.
– Hurricane Milton: Insurance, reinsurance, cat bonds, ILS ready to respond.
– Some mutual cat bond and ILS fund NAVs fall further on hurricane Milton threat.
– Hurricane Milton industry loss at $25bn+ changes pricing narrative: Goldman Sachs.
– Hurricane Milton cat bond loss potential still in wide range: Icosa Investments.
– Hurricane Milton seen denting cat bond market -1.4% (excl. surge): Plenum.
– 33% chance hurricane Milton loss above $50bn. Would drive hard market: Euler ILS Partners.
– Hurricane Milton Cat 5 again. Tracks slightly south. Uncertainty still high, loss range wide.
– Safe to say hurricane Milton likely a $20bn+ insurance market event: Siffert, BMS.
– Hurricane wind speeds forecast across entire Florida Peninsula as Milton approaches.
– Mexico’s catastrophe bond presumed safe from hurricane Milton.
– Stone Ridge leads managers cutting mutual cat bond or ILS fund NAVs on hurricane Milton.
– Hurricane Milton could be a huge test for the entire (re)insurance market: Evercore ISI.
– Hurricane Milton losses could amount to tens of billions, but uncertainty high: BMS’ Siffert.
– As hurricane Milton intensifies, Mexico’s catastrophe bond comes into focus.
– Material hurricane Milton losses could change 2025 property reinsurance price trajectory: KBW.
– Cat bond & ILS managers explore options to free cash, as hurricane Milton approaches.
– Hurricane Milton: First Tampa Bay storm surge indications 8 to 12 feet.
– Hurricane Milton is biggest potential ILS market threat since Ian in 2022: Steiger, Icosa.
– Hurricane Milton forecast for costly Florida landfall. Cat bond & ILS market on watch.