U.S. winter storm could contribute to aggregate erosion for certain cat bonds: Twelve Securis

The ongoing winter storm event and freezing temperatures that are affecting tens of millions of people across the United States have the potential to contribute to the gradual erosion of aggregate limits in certain catastrophe bonds, investment manager Twelve Securis has highlighted.

With winter storms a covered peril in the catastrophe bond market, largely in US regional and nationwide transactions, the scale and scope of damage expected from what has been named winter storm Fern is naturally on the mind of cat bond fund managers.

Specialist insurance-linked securities manager Twelve Securis reported that the winter storm event has been designated as a catastrophe by Property Claim Services (PCS), across the states of Alabama, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Texas, Virginia, and Possibly Other Areas. The ILS manager noted that the scope could increase as further information emerges.

Twelve Securis provided some helpful information as to how it thinks about such a winter storm event, in the context of its management of portfolios of catastrophe bonds and other ILS or reinsurance assets.

“While a significant and impactful event, current information does not currently suggest last weekend’s outbreak will lead to insurance losses on par with the famous historic winter storm events such as the Storm Uri in 2021 and the 1993 ‘Storm of the Century’. These two events are the only winter storm events in the last 40 years where the normalised present-day value of insurance loss is estimated to exceed > USD 10bn for a single outbreak,” Twelve Securis stated in an update.

The ILS manager continued to explain, “The December 2022 winter storm (known unofficially as winter storm Elliot) is potentially a more reliable, albeit likely conservative, benchmark. Elliot was estimated to have caused USD 7.7bn in insured losses across 38 states. Based on current information Elliot’s impacts were however more widespread and severe, with a larger number of fatalities and more people impacted by extended power outages.

“For context over the last ~40 years, there are on average 4 PCS declared winter storm events per year with an average loss from each storm of just over USD 1bn (USD, normalised to 2026 property values and exposure).”

Early indications from industry executives discussing the winter storm event are that industry insured losses could also end up in the low-single digit billions of dollars, with many saying the event is not expected to be as costly as initially feared.

Update: Andrew Siffert, Senior Meteorologist at broking group BMS has just published one of his insightful updates into this event.

But, as ever with winter storm events with a large freeze component and Fern has seen widespread freezing rainfall experienced, claims can take time to come in and damage can occur over a number of days. Not every winter storm exposed cat bond would cover all freeze related impacts and knock-on effects either. It’s worth noting though, that at this time much of the US remains well-below freezing.

Twelve Securis further explained that it is not expecting any material impact to its own investment portfolios, from US winter storm Fern.

But the ILS investment manager did caution that, “Indirectly, the event may contribute to a gradual erosion of aggregate limits in certain cat bonds, which could marginally reduce remaining protection for subsequent events in 2026.”

Qualifying this in the context of its own portfolios to say that, “As a reminder, we remain underweight junior aggregate structures, which helps limit exposure to this type of loss accumulation.”

Within the catastrophe bond market there are a number of aggregate cat bonds that carry winter storm risks as a covered peril.

Of those with an industry-loss trigger, it looks like the event would need to result in an industry loss that rises towards the mid-to-upper single digit billions of dollars in order for franchise deductibles to be breached.

For aggregate indemnity trigger cat bonds, it comes down to the occurrence or event deductible that is typically in-force for a specific sponsoring insurer or reinsurer. With a number of these deals in the market, it feels more likely that these structures would be the ones that could see losses from the winter storm contributing to erosion of the attachment deductibles sitting beneath the reinsurance coverage they can provide.

There are also some per-occurrence cat bonds in the market which provide winter storm reinsurance for their sponsors. In general, these kinds of transactions would likely require a more significant loss event than the industry is currently anticipating for them to come into focus as facing any risk from this particular winter storm event.