Catastrophe-Bond Funds See Risk Premiums Rising After Milton

The cost of issuing catastrophe bonds is expected to increase as asset managers specializing in these securities react to the impact of Hurricane Milton, Gautam Naik reported for Bloomberg News.

Milton, which struck Florida as a Category 3 hurricane, may have caused less than $60 billion in damages, compared to earlier estimates of over $100 billion. I Photo: NOAA NWS National Hurricane Center Facebook

Though cat-bond portfolios will likely experience a smaller loss than initially estimated after Milton, “every loss withdraws risk-bearing capital from the market and reduces reinsurance capacity,” Plenum Investments Ltd. told investors in an emailed update.

As a result, “risk premiums in the cat-bond market are likely to increase again” from an already “historically high level,” it said. This prediction comes despite evidence that investors may now be facing minimal losses.

Milton, which struck Florida as a Category 3 hurricane, may have caused less than $60 billion in damages, compared to earlier estimates of over $100 billion.

“It played out better in the end than was forecast at some point,” Tanja Wrosch, head of cat-bond portfolio management at Twelve Capital AG, said in an interview with Bloomberg Television.

Current estimates show that the cat-bond market dipped just 1.34%, according to Artemis, which cited end-of-week pricing calculated by Swiss Re Capital Markets.

The US wind-specific version of the index fell 3.64%. Earlier in the week, forecasters had warned of losses as deep as 15%. The risk premium was about 6.5% as of September 27, on top of which investors receive the Treasury rate of about 4.6%, according to Artemis.