SCS and tornado activity puts aggregate cat bonds under pressure again: Plenum

A number of annual aggregate catastrophe bonds that cover severe convective storms and severe thunderstorms in the United States are again coming under pressure in 2023, as elevated levels of losses push prices for a number of cat bonds lower.

Severe thunderstorm is a common peril category for US annual aggregate catastrophe bonds and so this covers events that are often categories under severe convective storms (SCS), so tornadoes, hail, straight-line wind events, plus related perils that cause losses.

Being annual aggregate in nature, the cat bonds that cover these perils are industry loss in nature and while the terms and conditions have improved, with a shift towards event deductibles over franchise, in a year like this where we’ve seen numerous billion dollar events, the same group of cat bonds is under pressure again.

Specialist catastrophe bond and insurance-linked investment manager Plenum Investments explained that, “Even though the structure of those CAT bonds has improved over the past few years with the addition of event deductibles and event caps, some tornado CAT bonds keep coming under price pressure year after year.”

The investment manager also said that this year there are 6 tornado-exposed catastrophe bonds that are priced below 90 in the secondary market, with 3 priced below 80.

Priced down below 90 currently are aggregate cat bonds with US severe thunderstorm exposure from Arch Capital (Claveau Re Ltd. (Series 2021-1) Class A), Fidelis (Herbie Re Ltd. (Series 2021-1) Class A), USAA (Residential Reinsurance 2019 Limited (Series 2019-1) Class 12 and Residential Reinsurance 2021 Limited (Series 2021-1) Class 11 and 12), Allstate (Sanders Re II Ltd. (Series 2020-1) Class B, Sanders Re III Ltd. (Series 2022-2) Class B and Sanders Re II Ltd. (Series 2021-2) Class B).

Note, some of these are also affected by other previous events, including hurricane Ian.

There are another 17 or so tranches of outstanding aggregate cat bond with US SCS exposure that are priced below 95 as well.

There is clear evidence of many of the names above trending down in price since June, as the severe thunderstorm activity picked up and we saw some of the most significant loss events of the year so far.

Plenum Investments said, “The reason for this is the large number of tornado events which contribute to the annual loss total; some sponsors have reported up to 30 loss causing tornados for the 1st half of 2023.”

Going on to explain, “The modeling of those structure tends to underestimate the risk when compared with the experienced loss, which makes it more difficult to evaluate the risk of those bonds. The scientific community is still unclear as to whether climate change influences tornado activity as no clear trend is observable on the number of tornados by year.

“Nevertheless, given the above facts and to reduce price volatility, we are keeping our allocation to tornado exposed bonds, especially to those on an annual aggregate basis, to a minimum.”

As we reported recently, the SCS peril dominated H1 catastrophe losses for the insurance and reinsurance industry.