ILS fund values stabilise, some recover, after hurricane Florence

by Artemis on September 20, 2018

Valuations of some of the listed and mutual insurance-linked securities (ILS) fund strategies have stabilised or even begun to recover after hurricane Florence’s impacts proved to be less severe to ILS investments than had initially been anticipated.

We explained a week ago that valuations of investments in some of the listed and mutual ILS funds had been fluctuating as hurricane Florence approached the United States.

But those fluctuations tended to stop and prices for the ILS funds stabilised, as the hurricane Florence forecast outlook dropped from a major category storm landfall to one with lower category winds and more of a focus on flooding as the major impact.

Now, the majority of the insurance-linked securities (ILS) funds that provide regular valuations due to their market listing or  mutual fund nature, are largely stable or seeing their values increase as the Florence threat has decreased to their particular strategies.

These ILS fund values are a good indicator of market and investor sentiment, as well as the managers views on potential exposure to the industry losses that Florence has caused.

The Stone Ridge Reinsurance Risk Premium Interval Fund, which has the broadest reinsurance market exposure to any major hurricane given its significant portfolio and numerous quota share investments, has largely stabilised now.

On the 10th September this fund saw its value dropping -5% from the 7th, but then recovered 3.3% by the 11th, followed by a slight drop of -0.11% on the 12th, then an almost 1% recovery on the 13th, another -0.5% dip on the 14th, before finally declining -0.76% on the 17th and then remaining stable since.

The way the Stone Ridge Interval ILS fund reacted is a clear demonstration of the uncertainty associated with hurricane Florence as the storm approached, but the continued fluctuation through beyond landfall also shows how difficult valuing reinsurance assets such as quota shares can be while a catastrophe event is still unfolding. The Interval fund remains down -2.6% since before Florence.

Stone Ridge’s more catastrophe bond focused High Yield Reinsurance Risk Premium fund followed a similar pattern, dropping -3% on the 10th, recovering 2.27% on the 11th and then declining -0.63% on the 12th. This fund also saw its valuation or price fluctuate, rising 0.74% on the 13th, before declining the same amount on the 14th, but since then it has remained flat, suggesting more clarity on the potential for loss has emerged, however this fund remains -1.4% lower than prior to Florence.

Pioneer’s ILS Interval Fund, which invests across cat bonds, private ILS transactions, sidecars and collateralized reinsurance quota shares, was flat until a -0.1% drop on the 12th, flat on the 13th, but then declined -1.2% on the 14th, since when it has remained flat. The Pioneer ILS Interval fund remains down -1.3% since Florence.

Another mutual ILS fund, the City National Rochdale (CNR) Select Strategies interval fund that invests in industry-loss warranties (ILW’s) showed that market expectations are not for a major industry loss instrument triggering loss from Florence.

The CNR ILS fund only experienced one decline during hurricane Florence’s approach, of -0.1% on the 12th. But since then it has continued to climb and actually stands 0.9% higher than before Florence. However, it should be noted that this ILS fund has been recovering value ever since the 2017 hurricanes and continued to do so once the Florence threat of a major industry loss event disappeared.

Onto the Markel CATCo listed ILS fund, the CATCo Reinsurance Opportunities Fund, which given its retrocessional reinsurance focus is always exposed to major catastrophe events such as hurricanes.

This funds main share class had declined -1.22% on the 10th, then -3.63% on the 11th and again by -1.37% on the 12th. It then dropped a further -2.6% on the 13th, but stayed flat through the next few days as Florence became more of a water threat. This CATCo fund then jumped 7% yesterday on the 19th, recovering a significant amount of the Florence related decline. Its share price now stands just 2% down from prior to hurricane Florence.

The C Shares of the CATCo Reinsurance Opportunities Fund also fluctuated thanks to Florence and the share price for this class sits 2.5% below where it was prior to Florence.

Another reinsurance linked investment strategy that is trackable is the stock exchange listed Blue Capital Reinsurance Holdings Ltd., operated by Sompo International owned ILS specialist unit Blue Capital Management.

Blue Capital Re also saw its share price decline by almost 4% from the 11th to the 12th September as Florence approached the U.S., but by yesterday all of the decline had been recovered.

These ILS and reinsurance focused investment strategies will likely continue to recover a little ground, now that the expectation is that the private insurance market loss from hurricane Florence could be less than $5 billion.

The way the prices have reacted since the threat from Florence shifted more to water demonstrates that the ILS market understood this would not be a market-changing loss event.

Pure catastrophe bond funds will likely recover most of their values when the next set of pricing sheets are released at the end of this week, although some may continue to mark down any positions in the NFIP’s FloodSmart Re cat bond for a potential loss, as the fate of that bond remains uncertain for now.

It’s also important to note that some of these strategies will also have had some exposure to typhoon Jebi’s impacts on Japan, for which an industry loss estimate came out in recent days, as well as typhoon Mangkhut’s impacts in Asia, particularly Hong Kong and China.

As a result the valuations of some of these funds may not only have been reacting to Florence’s threat, but also to realisation that Jebi could be a bigger than expected loss, while Mangkhut has caused significant economic impacts as well.

Also of note, following a brief decline of the Stoxx European reinsurers index, which provides an indicator for the broader reinsurance market, this index has risen strongly and now stands at almost a three-month high again.

That suggests the broader financial market and equity investors appreciate that losses from Florence will not pose a major threat to reinsurance firms.

Also read:

– ILS industry recognised Florence would not be market-changing.

Hurricane Florence wind & storm surge loss up to $4.6bn: AIR.

FedNat won’t tap reinsurance for hurricane Florence losses

Florence saw less ILW and live cat activity than other recent storms.

Hurricane Florence loss only $2.5bn (ex-NFIP), says Karen Clark & Co.

Reinsurance & ILS market share of Florence loss likely minimal: Analysts.

Cat bond index only fell 1.15% on hurricane Florence threat.

Hurricane Florence’s 1,000 year rains flood the Carolina’s.

Model mean projects $3bn to $3.5bn wind loss from Florence.

Hurricane Florence re/insurance losses will be manageable: S&P.

Hurricane Florence wind & surge insured loss potential put at $3bn to $5bn: Corelogic.

A handful of cat bonds traded on hurricane Florence approach.

ILS fund values fluctuate on Florence, threat now reduced.

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