The insurance-linked securities and reinsurance-linked investment unit of investment manager Credit Suisse continued to move its capital out of catastrophe bonds and into reinsurance-linked assets with better underlying returns during the month of July.
Credit Suisse has been following this strategy since May, as a reaction to the lower returns available on recent cat bond issues and the unseasonal mark-to-market gains which many outstanding cat bonds saw over recent months. The unseasonal gains meant that many outstanding cat bonds were priced above par, enabling savvy investors to offload positions for a small profit versus the price paid for the notes.
Credit Suisse has repeatedly said in recent months that it finds the risk adjusted pricing of industry-loss warranties (ILW’s) and other reinsurance contracts more attractive than catastrophe bonds at the moment.
In July, according to a managers report on its CS Iris Low Volatility Plus Fund, the ILS investment manager strategically moved out of a number of cat bond positions to lock in more mark-to-market profits. It timed these sales so as to be able to reinvest the capital into a number of ILW trades with exposure to the U.S. and to Europe.
At the same time, Credit Suisse saw an opportunity in other regions of the world and deployed some capital from the Iris Low Volatility Plus Fund into a reinsurance contract covering Australian perils. It took a small position in the remote top layer of this Australian reinsurance program because it found the risks well priced and diversifying, it said.
The mix of assets within Credit Suisse’s ILS fund has changed considerably this year. Looking at its February report, the fund was 20% invested in insurance-linked securities (catastrophe bonds) and 57% allocated to insurance-linked swaps (largely ILW’s we would imagine). At the end of July that mix had changed to 12% ILS and 74% swaps and ILW’s.
As we understand it Credit Suisse is not the only investment manager to have been following this strategy in recent months, reducing allocations to cat bonds and increasing allocations to collateralized reinsurance contracts in the form of ILW’s or insurance-linked swaps. The chance to profit by offloading cat bonds for mark-to-market gains has been too tempting for some to resist and the recent reinsurance renewals have proven a good chance to reinvest into higher performing reinsurance contracts.