Cat bond funds see record monthly returns on Dorian recovery

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Catastrophe bond funds are reporting bumper September returns, in some cases beating their records, as they benefit from the full recovery of hurricane Dorian exposed cat bond valuations.

When hurricane Dorian was intensifying rapidly on approach to the Bahamas right at the end of August the main risk models were suggesting a high probability of the storm barrelling straight into Florida as an intense storm.

As a result catastrophe bonds exposed to Florida hurricanes saw significant markdowns right at the end of the month as we reported at the time, as all secondary market broking desks had to go on was the latest market sentiment that a landfalling hurricane Dorian was likely to threaten some exposed positions.

Within 48 hours the forecast had changed dramatically and hurricane Dorian’s focus on Florida had gone, leaving the mark-to-market decline in cat bond valuations able to be fully recovered.

The result was a poor August for the catastrophe bond fund market, despite their being no actual losses, but with the recovery in affected cat bond values comes a bumper September, with some cat bond funds reporting their strongest monthly return in years.

A number of cat bond fund strategies have reported monthly returns of over 2% for September, while many others have returns above 1%.

This is set to drive a very positive month on the cat bond side of the insurance-linked securities fund market, while on the collateralised reinsurance and private ILS side certain funds and vehicles are likely to see some valuation declines on the back of Dorian and Japanese typhoon Faxai.

Plenum Investments, the Zurich headquartered catastrophe bond fund manager, said that its fund experienced a record month in September 2019, thanks to the recovery of Dorian impacts and also peak wind season spread tightening, reporting a huge 1.93% return in its USD share class.

This led to “the best one-month performance in the history of the Plenum CAT Bond Fund” the manager explained.

A number of other catastrophe bond funds had record monthly returns in September thanks to the post-hurricane Dorian recovery as well.

While some others had not marked down their portfolios quite as heavily in August, likely timing related, so had less of a recovery to report.

But still, most cat bond funds in the market seem to have managed strong September performance thanks to seasonality, as well as what Dorian recovery they experienced.

The entire ILS market could see a strong September as a result of this post-Dorian cat bond fund bounce, although that does depend on the size of any valuation impacts due to the hurricane and typhoon Faxai for the private ILS fund strategies.

So far and based on having received reports from 45% of ILS funds it tracks, the ILS Advisers Index shows an impressive 1.61% average ILS fund return for September 2019.

Interestingly, a 1.61% return for a single month would be the highest in the history of the ILS Advisors Index.

However, it’s unlikely to stay that high as once the rest of the reporting ILS funds have been accounted for it is almost certain to fall below this level, although there’s a good chance September 2019 will become one of the (perhaps the) strongest month across the ILS fund market for some time.

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