Winter storm Elliott could erode some global cat bond franchises: Plenum

The recent winter storm Elliott, i.e. extreme cold, blizzards and severe extratropical winter storm that hit the United States approximately December 21-26, is likely to cause some deductible erosion of certain bonds global disasters.

winter stormSo says Plenum Investments AG, an investment manager specializing in Swiss catastrophe bonds, which noted that despite this, the winter storm is unlikely to have an impact on its own catastrophe bond portfolios.

Winter Storm Elliott pushed frigid Arctic air south across the United States in a polar vortex event, with temperatures dropping 20°F below average across much of eastern North America. country.

Sub-freezing temperatures also reached south to the Gulf Coast and also lingered in the southeastern United States, with tens of thousands of homes and businesses losing power due to strong winds that occurred on the warm side of the Arctic cold front.

Lake effect snowfall was a problem on the Great Lakes, while historic blizzard conditions lasted more than 36 hours in Buffalo, NY and on December 24, a powerful extratropical cyclone formed and set in explosively deepened by 24 MB in 24 hours, bringing high winds of over 40 mph to the Great Lakes Region and vicinity.

Impacts were felt in 42 U.S. states and Canada, leading disaster modeler Karen Clark & ​​Co. (KCC) to estimate an industry insured loss of approximately $5.4 billion for the winter storm.

Other industry sources have suggested billions in losses in the insurance and reinsurance market in the lower to mid-single digits, while some media have cited economic losses in the billions of dollars in the single digits.

In the catastrophe bond market, US winter storms are often a peril covered by global catastrophe bonds. The danger is not visible in per occurrence trades as the potential for higher losses is slim.

But for some cat bond sponsors, package deals that provide coverage against losses from winter storms, as well as other perils, are a very effective source of protection.

However, these have become less popular with cat bond investors of late, as some view these global trades as covering so-called secondary perils or less well-modeled catastrophic events.

Winter storms are often considered both, secondary and less robustly modeled.

Plenum said that “the event will likely lead to an increase in accumulated losses on the CAT bond aggregation.”

Plenum added that the investment manager “expects no negative impact from winter storm ‘Elliot’ in the US” as the company has chosen to avoid many global cat bond trades, saying ” we are very cautious about investing in such positions.”

Many global catastrophe bonds have an element of winter storm coverage for their sponsors and some of these outstanding bonds have already been eroded by other catastrophic events, from severe storms to hurricanes that have occurred during the year. .

Winter storm Elliott is unlikely to have caused a particularly large drag on outstanding cat bonds, given the relatively small size of the industry loss, but any erosion in overall deductibles effectively means that a cat is a little closer to becoming attached, so the perceived risk of attachment may increase.

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