Early indications from catastrophe bond funds that price or mark their net asset values more regularly, or managers we’ve spoken with, suggest a roughly mid-single digit decline, on average, for the cat bond fund market in response to hurricane Ian.
We’ll know much more in a weeks time, when the latest pricing comes in for the Plenum CAT Bond UCITS Fund Indices, as many cat bond funds (even UCITS strategies) don’t mark as regularly or quickly as others, but at this stage we’ve seen some cat bond funds marked down as much as almost -9%.
It’s important to note that currency, fund structure and other effects, can make it hard to compare cat bond fund performance without a full set of comparable strategies, which isn’t available at this time. We should have that next week for you when the UCITS cat bond fund indices data is available for last Friday.
But for now, the indications we’re seeing, in terms of decline in the net asset value of some cat bond funds, fits well with certain other data points we’ve been gathering, such as Plenum Investments own disclosure that it anticipated a 4-6% hit to its more diversified, lower risk, flagship cat bond fund, but a possible 9-12% hit for its higher risk-return cat bond fund strategy.
It also fits well with the decline in Swiss Re’s cat bond index, which declined by 10% for its broadly diversified spread of market index.
You’d generally expect a fund manager to do a little better, than the broad all outstanding cat bond index, with a well-managed and diversified portfolio of cat bonds.
Then, with hurricane Ian and the declines cat bond funds are facing, it will come down to how aggressive a strategy is, in terms of target risk and return, plus how weighted its portfolio was towards US wind cat bonds and in particular to Florida cat bonds.
It will also come down to how a cat bond fund manager chooses to mark down their portfolio, as different pricing sheets may be used, while some may have a specific view on the risk to aggregate cat bonds, as well as the chances of certain bonds facing actual losses of principal, so more than just mark-to-market declines.
At this stage these remain mark-to-market declines in cat bond fund net asset values, as we won’t have clarity over actual and realised losses for some weeks or months.
As ever, this does mean that some of the decline could be clawed back over time, which is typical of any major event for the cat bond fund market.
But, it should also be remembered that if the industry loss estimates rise further, we can expect some additional mark-downs and that could take some of the higher-risk cat bond fund strategies to declines in the low double-digits, it seems.
The range of cat bond fund NAV declines seen so far appears to be roughly -3% to -9%, dependent on all the factors mentioned above.
A lower risk strategy, or more diversified, tends to be seeing declines of up to -5%, while higher-risk, or more US wind concentrated strategies are expected to see declines in the high single digits.
We’ll update you as additional data points of interest come to light.