Swiss Re Insurance-Linked Fund Management

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Demand pushes secondary cat bond prices higher in September


Higher demand for secondary market catastrophe bond and ILS investment opportunities helped to drive prices higher in September, which alongside seasonality in the peak month of the U.S. wind season, drove attractive cat bond returns in the month.

September further underscored the low-correlation aspect of allocations to insurance-linked securities (ILS), catastrophe bonds and other reinsurance linked investments, with attractive returns coming at a time of significant financial market volatility.

Even some pure cat bond funds achieved returns of around 0.8% to 1.1% for the month of September, depending on currency, while those funds also allocated to private ILS deals and collateralized reinsurance fared even better.

The broader financial market volatility has helped, once again, to drive additional interest in the ILS asset class, with it outperforming many traditional financial benchmarks again in September.

September is often considered the peak month of the U.S. wind and hurricane season, with seasonal premium allocation driving returns. Typically considered the riskiest month for cat bonds, this September also saw demand dynamics driving prices as well.

“Once again the market saw limited supply, benign weather patterns, and increased demand leading prices higher for another strong month of total returns. Flows were quite reasonable as investors looked to put capital to work and sellers took advantage of these higher prices,” Craig Bonder, Managing Director at AK Capital explained.

Investment managers at Zurich, Switzerland based ILS and cat bond investment manager Plenum Investments echoed this, saying that low supply of primary cat bonds as well as no impactful catastrophes helped to ensure; “increased demand in the secondary market lead to higher prices.”

“Prices on US hurricane positions moved by a solid 1.4%, prices on US earthquake, Europe earthquake, Japan earthquake and Japan typhoon positions remained flat and European windstorm positions decreased by about 40 basis points,” the investment managers at Plenum explained.

Following on from a strong month in August for catastrophe bonds and other ILS investments, where they demonstrated their low-correlation to broader financial markets admirably, September looks like it could even beat the average return that ILS fund managers achieved.

According to the Eurekahedge ILS Advisers Index the average return of the 34 ILS funds that the Index tracks was 0.84% in August, the best month of the year and beating many benchmarks. September could be even better.

So far, with 50% of the ILS funds tracked by the Index having reported their performance, the average return for September is a little higher at 0.88%.

Seasonal spread tightening is expected to continue through the month of October, helping catastrophe bond funds to once again see a positive month. The performance may not be as high as that seen in August and September though, as prices can only go so far.

With some cat bond funds having suffered due to the below-par price experience of many outstanding catastrophe bonds through the first half of 2015, the last two months have been welcomed.

The uptick in performance, at a time when other financial assets have suffered, should serve to increase investor interest in ILS as an asset class once again, even though the achievable returns in cat bonds remain below historic averages.

Also read:

Cat bonds demonstrate low-correlation to financial markets in August.

Active cat bond trading in July, as performance turns positive.

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