Cat bond & ILS managers explore options to free cash, as hurricane Milton approaches

We understand from sources that, as early as yesterday, some catastrophe bond and insurance-linked securities (ILS) investment fund managers began exploring their options to free up cash from their portfolios in order to be ready for any potential losses, or to take advantage of market opportunities that emerge, due to now major hurricane Milton.

The NHC has just upgraded Milton to a major category 3 storm, with sustained winds of 120 mph and a rapidly falling central pressure to now 954mb.

Sources have told us this morning that enquiries were coming in to catastrophe bond trading desks from clients yesterday, after tropical storm Milton formed and with the forecast looking particularly concerning from the start.

That was a Sunday, a day when it is not possible to trade catastrophe bonds in the secondary market. But, we’re told enquiries were less about wanting to sell cat bonds potentially exposed to losses due to now hurricane Milton’s future possible impacts in Florida, rather more about how investment managers could sell other cat bond positions to free up cash.

As we explained in our article yesterday and this morning on hurricane Milton, see all our coverage of the storm here, this is a situation where live cat trading as hurricane Milton approaches Florida is probably unlikely, given the severity of some scenarios.

Whenever hurricane forecasts are suggesting a potentially meaningful insurance and reinsurance market loss event, the cat bond market tends not to trade much if at all, as it is especially hard to find a common ground on price and get trades completed.

That’s not to say there won’t be some investors willing to shed positions at a significant discount, but it really seems yesterday would have been the day for that kind of trading to occur, where as now, with hurricane Milton forecast to rapidly intensify and a significant storm surge predicted for Tampa Bay, it might be very hard to find any buyers.

However, there are other reasons ILS and cat bond fund managers might look to free up some cash when a potentially damaging hurricane is in the water.

Cash can help in paying any claims and losses that emerge for their portfolios, while also meaning an ILS manager has some liquidity available for any opportunities that might emerge.

When a hurricane threatens land in the way we’re seeing with Milton, sometimes opportunities to provide capacity for last minute hedges can come up. Although, while live cat industry loss warranty (ILW) trading isn’t out of the question, again we feel that yesterday might have been the day this could have feasibly occurred, while today might now be too late given the forecasts out there.

So, instead of pre-landfall opportunities, in providing capacity to help concerned parties hedge their insurance, reinsurance or ILS portfolios, it’s more likely freeing cash would be seen as a potential post-landfall opportunity, which is when we could see some trading related to hurricane Milton.

During the period of uncertainty post-landfall you can see some trades coming to market where parties want to shed positions they feel could be exposed, but another party might take the view that the exposure to the event is relatively minimal, and so a price may be found and agreed on.

In addition, after a landfall you might find some ILS managers needing cash, if it proved impactful to them and so looking to sell cat bonds, as the instruments with the most liquidity, in the wake of a storm, which can again present attractive buying opportunities.

Freeing cash can also be about selling catastrophe bond positions unrelated to the catastrophe event that is unfolding and in the case of Milton we suspect this might have been the main driver of the enquiries we’ve been told about.

That can also make for an attractive buying opportunity for any cat bond fund managers with cash to support another’s desire to get out of some non-US wind related, or at least non-exposed to Milton positions.

This morning we are told the trend has continued, with cat bond fund managers looking at their portfolios to see what could be freed up and making enquiries of the market’s secondary trading broker-dealer desks.

It’s never all that clear whether much in the way of trading occurs while a hurricane is in the water and the experience seen with hurricane Ian in 2022, when little trading occurred. Of course, it turned out that losses to cat bonds were minimal as well, justifying managers holding their nerve and their positions.

It’s worth also pointing out that after hurricane Ian in 2022, given the uncertainty over how wide-reaching losses from that storm could be in the catastrophe bond and broader insurance-linked securities (ILS) market, sales of diversifying peril cat bonds rose, as managers looked to cash at that time.

Depending on what happens with hurricane Milton a similar situation could be seen and once again this can result in buying opportunities, for those with the cash and liquidity to take advantage of them should any emerge.

Catastrophe bonds are the ILS instrument with the greatest liquidity, having a well-functioning secondary marketplace operated by expert broker trading desks. This helps the full-range of ILS managers at times of stress, or when losses appear to be likely, as so many ILS funds hold some cat bonds as a way to provide cash when liquidity is needed.

Also read:

– 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.