Swiss Re Insurance-Linked Fund Management

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Cat bond portfolios benefit from January price recovery


Catastrophe bonds experienced a price recovery in January, promising to help cat bond funds and investors to a stronger month of returns following a quarter where active selling drove prices lower and the cat bond market’s total-return had suffered.

up-chartSome cat bond funds have reported better than 1% returns for the single month of January 2019, which is higher than a normal January’s performance for a portfolio of cat bonds would have been expected to achieve.

The rapid selling of catastrophe bonds through the final quarter of 2018 has been attributed to the need for ILS fund managers to free up capital for reinvestment into January reinsurance renewal transactions.

As we explained before, this once again helped to display the benefits to the ILS market of their being a liquid investment asset that managers can trade during times of stress, or just when capital needs to be moved around.

After three months where the total-return of the catastrophe bond market fell to negative or near negative, depending on whose numbers you use, the bounce back in January is a welcome start to 2019 for cat bond funds and their investors.

Secondary trading of catastrophe bonds slowed down in January, but still around 50 cat bond names were recorded as changing hands on the Trace system during the month. However that is half the number of individual cat bonds that traded in December.

Improved prices were seen across almost all of those traded names, compared to prior months, and the majority of the outstanding cat bond market saw some price appreciation during January.

Improved pricing was also seen across most secondary marks that didnt’ trade during the month as well, so a considerable factor in January’s cat bond fund returns will also have been mark-to-market related.

Of course, some portfolios will have fared better than others depending on which cat bond names are invested in and not every cat bond fund managed more than 1% return for the month of January 2019.

There was also some price recovery in a couple of aggregate cat bonds considered exposed to the California wildfires, but also further declines in some others where the market considered them increasingly at-risk.

Among the recoveries was the Caelus Re aggregate cat bonds sponsored by Nationwide Mutual, which saw the sale of subrogation rights to claims related to the wildfires by Nationwide reducing the aggregate total losses currently reported by the firm. As a result, some Caelus cat bonds recovered a little of their pricing. Details of cat bond losses and expected payouts can be found here.

What is required now is more primary cat bond issuance, as the market remains quiet and investment managers are keen to find ways to deploy new capital and to invest in names with longer maturity dates.

Finally, for those investors who took the opportunity of bulking up their cat bond portfolios during the last quarter of 2018, taking advantage of the price decline brought on by secondary selling, the recovery in January promises to deliver a great start to 2019 for their funds and cat bond portfolios.

Don’t forget, you can view details of every catastrophe bond in our Deal Directory and analyse outstanding issuance using our cat bond market Dashboard and selection of charts breaking down and allowing you to analyse market issuance.

Register today for ILS Asia 2023, our next insurance-linked securities (ILS) market conference. Held in Singapore, July 13th, 2023.

Artemis ILS Asia 2023 - Insurance-linked securities conference in Singapore

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