Clariden Leu catastrophe bond funds down after Japan quake

by Artemis on April 15, 2011

Most, if not all investment managers catastrophe bond funds have seen declines during March in the wake of the 11th March earthquake and tsunami in Japan. Clariden Leu are no exception and their March managers comment reports show just how big the impact of the disaster has been on cat bond funds.

Clariden Leu manage a number of different catastrophe bond funds and also funds which have a holding in cat bonds, insurance-linked securities and financial insurance contracts. The pure cat bond funds were badly affected by the likely default and total loss of the Muteki Ltd. cat bond.

Clariden Leu say that they usually hold an average of 1.5% in each cat bond they invest in, to minimise exposure to any single deal or peril and to keep the fund diversified. In the case of Muteki Clariden say their allocation to the bond was above average as Japanese quake is an important diversifying peril for the funds and access to it in a single peril deal is limited.

The Clariden Leu (CH) Cat Bond Fund saw a 4.7% decline in March. 3.6% of this decline they attribute to Muteki Ltd. with the additional 1.1% impact caused by mark to market pricing declines in other cat bonds they hold allocation of. Their Lux cat bond fund saw a 3.4% decline with 2.8% contributed by exposure to Muteki. The ILS Plus fund, which also holds financial insurance contracts, saw a 6.5% decline, with 1.6% attributed to Muteki and 3.9% attributed to losses in four FIC positions.

It’s a similar story across the catastrophe bond and insurance-linked security investment sector, with all managers suffering declines in their fund values. Those with exposure to Muteki Ltd. seem to have come off worse (unsurprisingly). For investors this is proving an attractive time to move funds into cat bonds as the drop in pricing means there should be some uplift as the market recovers from the events in Japan.

Clariden Leu have a positive outlook for the market despite recent catastrophe events. High Q1 losses for reinsurers mean that they have had to allocate excess capital to their reserves says the fund managers report, meaning that reinsurers will need additional protection for the rest of the year. They anticipate a number of new cat bond transactions at attractive premium levels as a result. Clariden Leu expect volatility in the market to be short lived and pricing to return to more normal levels over the next few weeks. They foresee a busy second quarter both in terms of number of deals and in volume issued but with significantly higher premium levels and intend to take advantage of market conditions to recover fund value and take positions in new deals at attractive terms.

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