Louisiana Braces for Francine's Aftermath: Catastrophe Bonds Remain Resilient

As Hurricane Francine made landfall in Louisiana, the insurance industry braced for the potential impact on catastrophe bonds. Twelve Capital, a specialist insurance-linked securities (ILS) and reinsurance investment manager, has provided an in-depth analysis of the storm's aftermath and its implications for the ILS market.

Weathering the Storm: Francine's Minimal Impact on Catastrophe Bonds

Sparing the Per-Occurrence Catastrophe Bonds

According to Twelve Capital's assessment, the losses from Hurricane Francine are not anticipated to cause any direct impact on per-occurrence catastrophe bonds. This is a positive sign, as these specialized financial instruments are designed to provide protection against individual catastrophic events. The investment manager's analysis suggests that the storm's relatively low severity, with a Category 2 classification and 100 mph sustained winds, has not triggered any losses for these per-occurrence bonds.

Aggregate Cat Bonds Face Continued Erosion

While the per-occurrence catastrophe bonds have emerged unscathed, Twelve Capital cautions that the losses from Hurricane Francine may be sufficient to cause further attrition for aggregate cat bonds. These bonds are structured to cover a portfolio of risks, and the cumulative impact of multiple events can gradually erode their deductibles, or attachment points, over time. The investment manager's report indicates that some aggregate cat bonds may be getting closer to their attachment points due to the continued erosion caused by Francine and other recent events.

Monitoring the FEMA-Sponsored FloodSmart Re Bonds

Twelve Capital also highlighted the potential impact on the Federal Emergency Management Agency (FEMA) sponsored FloodSmart Re catastrophe bonds. Given the heavy rainfall and storm surge associated with Hurricane Francine, the investment manager is closely monitoring the performance of these bonds, which provide protection for the National Flood Insurance Program. At the time of the report, Twelve Capital did not expect any losses to these notes, but the situation around the New Orleans metropolitan area will continue to be closely observed.

Building Code Concerns in Louisiana

While the early estimates of insurance industry losses for Hurricane Francine were relatively low, Twelve Capital raised a concern about the state of building codes in Louisiana. The investment manager noted that the state's building codes were only recently updated in 2023, compared to 2002 for Florida, where a higher proportion of buildings are constructed to stronger modern standards. Additionally, the enforcement of building codes in Louisiana remains uneven, and the state's infrastructure, particularly bridges, is in poorer condition than the national average. This could potentially lead to higher-than-expected losses in the event of a more severe storm.

Manageable Impacts for Insurers and Reinsurers

Analysts from RBC Capital Markets had previously stated that the losses from Hurricane Francine were expected to be manageable for property and casualty insurers, with minimal impacts anticipated for the reinsurance market. This assessment aligns with Twelve Capital's findings, which suggest that most of the insured losses from the storm are anticipated to fall within primary insurers' retentions under their reinsurance coverages.In conclusion, the aftermath of Hurricane Francine in Louisiana has been closely monitored by the insurance-linked securities industry. While the per-occurrence catastrophe bonds have emerged unscathed, the continued erosion of aggregate cat bonds remains a concern. The investment manager's analysis highlights the resilience of the ILS market, even in the face of a significant weather event, and the importance of ongoing vigilance in managing the risks associated with natural disasters.