Some cat bond prices to recover from initial Ian hit, but market to be volatile: Plenum

The prices of some catastrophe bonds that have been marked down after major hurricane Ian slammed into Florida will recover, Plenum Investments believes, but it may take time and the cat bond market is expected to remain volatile over the coming weeks.

Specialist catastrophe bond and insurance-linked investment manager Plenum said that while its cat bond fund markdowns have been relatively modest compared to the severity of hurricane Ian, it also believes some of the value lost will be clawed back over time.

Plenum had previously said that at an industry loss estimate of around $50 billion for hurricane Ian, it expected markdowns of its cat bond funds and its mixed cat bond and insurance bond fund.

Of course, the price activity seen in the cat bond market after hurricane Ian is based on estimates and expectations for potential losses to impact certain cat bond positions, but this went much wider than just those notes specifically exposed, Plenum said.

“The process of accounting for the event into the pricing of cat bond positions is far from perfect, especially just after the event unfolded,” the investment manager explained.

The first observation is that almost all outstanding cat bond positions were marked down, at least a little, even those with no exposure to the region impacted by hurricane Ian.

This is due to a market expectation of selling pressure across cat bonds, partly due to the need of certain investors and cat bond fund managers to raise liquidity quickly.

As we reported yesterday, there has been some of this selling going on, in cat bonds unconnected to Florida or hurricane risk, but that have been sold at slight discounts, as investors or managers sought cash.

“Those position will recover quickly in the coming weeks and months as selling pressure eases,” Plenum Investments explained.

Another observation is that some cat bonds that only have a limited exposure to Florida hurricane risk and in Plenum’s view almost certainly won’t be affected by losses from hurricane Ian were marked down much further than normal supply and demand factors would suggest necessary.

Plenum notes that, in part, this reflects and anticipation of increasing reinsurance rates going forwards in the wake of hurricane Ian.

“These positions also have a very high likelihood of full recovery, which will contribute positively to our funds,” Plenum further explained.

For those cat bonds which do have a high likelihood of suffering a default because of hurricane Ian, these are already marked down and so further significant downward price movement is unlikely, at least until recoveries begin to be understood.

As a result, some partial recovery of lost value is anticipated, as the catastrophe bond market works out where the losses from hurricane Ian really lie.

Things will remain volatile for a time though and it’s possible we also see some capital supply and demand induced movements in spreads across the rest of this year and into 2023 as well, dependent on what happens with inflows to cat bond funds, but also global macro factors.

Read all of our coverage of hurricane Ian, and our analysis on the potential market losses, here.