Catastrophe bond investors are unlikely to be dealt massive losses as Florida dodges Milton's worst-case scenario

• Hurricane Milton's impact on Florida won't cause major losses for catastrophe bond investors, portfolio managers say.
• Catastrophe bonds help insurers transfer weather event risks to investors.
• Insurance companies still face significant losses, but cat bond investors aren't eyeing the worst-case scenario.

The impact of Hurricane Milton on Florida is unlikely to trigger massive losses for catastrophe bond investors.

The fixed-income securities allow insurers and reinsurers to transfer risks associated with major weather events to investors.

Investors who buy cat bonds can see big returns if it's a relatively quiet year for hurricanes and other natural disasters and damage from any event is mild.

Earlier this week, some cat bond portfolio managers were expecting big potential losses due to the back-to-back storm systems of hurricanes Helene and Milton.

But after Milton weakened slightly and tracked just south of Tampa when it hit Florida's west coast, it didn't deliver a massive storm surge to the area predicted in the worst-case scenarios. The losses for cat bond investors, therefore, might only be in the low-single digits.

"Our estimate is that a large portion of the insured losses will be retained by the insurance industry," Chin Liu, director of insurance-linked securities at Amundi US, told Business Insider.

He added: "The majority of cat bonds sit well above the current loss level and should not be triggered. There might be some short-term price volatility in the cat bond marketplace as it may take a few weeks for the market to fully digest the event."

Bondholders' losses were expected to be as high as 15% in the event of the most extreme damage from the storm.

"Cautiously, we'd say it's likely less. It played out in the end a little bit better," Tanja Wrosch, head of cat bond portfolio management at Twelve Capital, said in an interview with Bloomberg on Thursday.

That's not to say damage from the storm was light and that there won't be potentially massive losses for insurance companies. It just means cat bond investors may be well-insulated.

Icosa Investments CEO Florian Steiger told Business Insider that cat bond investors could actually see bigger returns going forward as insurance companies are likely to increase their risk premiums as they absorb a bulk of the losses from Helene and Milton.

"Although the cat bond market is expected to experience only low to mid single-digit losses, overall insured losses will still be significant, likely reaching well into the double-digit billions. This will drive an increase in risk premiums, leading to higher return expectations for cat bond investors moving forward," Steiger said.

Property and casualty insurance company stocks moved mostly higher on Thursday as investors assessed the damage from Milton.

Shares of Progressive, Allstate, Chubb Limited, and Travelers were all up about 1% in Thursday trades.

The Swiss Re Global Cat Bond index was up about 10% through August and surged 20% in 2023.