Cat bond funds can still finish the year positively: Twelve Capital’s Wrosch

Despite the impact of now two US hurricanes that are set to drive losses in the double-digit billions each, being Helene and now Milton, Tanja Wrosch, Head of Cat Bond Portfolio Management at investment manager Twelve Capital has said that catastrophe bond funds can still finish the year positively.

We’ve been saying for some days that, unless hurricane Milton’s worst case scenarios played out, given the strong returns earned year-to-date we expected that many cat bond and insurance-linked securities (ILS) funds would be able to absorb losses from the storm within their gains made so far in 2024.

With the worst case scenarios avoided as hurricane Milton made landfall south of Tampa, and early estimates pointing to something below $50 billion for the industry-wide loss, cat bond funds certainly have a good chance of ending the year delivering a positive annual return still.

Interviewed by Bloomberg TV, Tanja Wrosch, Head of Cat Bond Portfolio Management at specialist investment manager Twelve Capital explained late yesterday that with Milton coming after Helene, it could dent catastrophe bond market returns.

“It definitely does have an impact. I very much doubt that we will reach the same height as last year,” Wrosch said, commenting on the record returns seen last year.

“We’re currently quite positive. Year to date, the index is up more than 10% so you have quite a buffer in terms of positive performance,” she continued.

Adding that, “We would expect, hopefully, that we still finish the year positively, but unlikely to be another 2023.”

Wrosch returned to Bloomberg TV again this morning, after hurricane Milton had made landfall, to discuss its impacts.

Having given a potential cat bond market loss range of up to 15% yesterday, Wrosch said this morning, “Now we have the latest information of how the event actually made landfall, luckily, this is not the worst case scenario in terms of insured losses, and I think also in losses and damages for the state.

“So it’s still very hard to estimate and give number ranges, but up to 15% was what we thought earlier. Cautiously, we would say it’s likely less, it played out in the end a bit better than at some point was forecasted.”

As we also reported earlier, the latest estimate we have for catastrophe bond market impact suggests something between 0% and 5%, while other sources suggest the lower-half of that range might be the eventual figure. Of course, the mark-to-market impact may be higher in the pricing sheets and the market Index later today, as there remains such uncertainty in the eventual losses at this early stage.

Asked what it means for catastrophe bonds that hurricane Milton is driving significant water-related impacts Wrosch went on to say, “Typically in the majority of catastrophe bonds, you only have the wind policies covered, so the flood should theoretically be not covered. However, in such a severe event, like we’re seeing with this hurricane, it’s very hard to tell in the aftermath from where the damages came. Was it flood or was it wind?”

She went on to highlight why this can add complexity to a loss event, saying, “There’s something that we call leakage. So when you assess the impacts of the storm, you will need to take into account that likely you will also have to cover some of the flood and storm surge losses, because you can’t really just distinguish them from wind.

“That said, there’s another segment in the cat bond market that, on the other hand, really covers exclusively the flood segment. So these are, of course, directly-linked to to the very extreme flood, surge and dangerous conditions that we’re seeing right now.”

Finally, Wrosch was asked about the secondary cat bond market and how it had performed through Milton’s approach.

Here it’s worth noting that very little actual trading occurred, as would always be expected where there is a pending loss event with a wide-range of potential outcomes.

But Wrosch felt the secondary market remained healthy, saying, “I think really good, really positive. I mean, the asset class is quite new, just a few decades old, so still developing, and we’ve seen around the events also before and likely after, lots of bids and offers of exposed names, which we think is very positive.

“So liquidity can be there if you want to trade. Also interesting is that we can observe that non-related catastrophe bonds, for example something that covers Japanese earthquake, so completely unrelated, is also still tradable, normal prices, no impacts. So you can rebalance parts of your portfolio despite an event ongoing.

“So it’s a very, very positive development that we’re seeing in terms of maturity of the secondary market.”

Also read:

– 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.