Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Hurricane catastrophe bonds reverse typical seasonal price declines in May


The month of May has seen a reversal of the typical seasonal price declines that are seen in U.S. hurricane exposed catastrophe bonds during the first half of the year. These hurricane cat bonds experience seasonal declines in price as thoughts turn to the U.S. hurricane season which is approaching. This year however anticipation of the slowdown in issuance which coincides with the hurricane season has caused many outstanding cat bond prices to rise during May, earlier than is seasonally typical.

Swiss insurance-linked securities investment manager Plenum Investments said in their latest monthly fund report that demand caused by the anticipated slowdown in issuance (much of this activity will have come from ILS fund managers trying to balance their portfolios in advance of hurricane season we suspect) has led to firmer prices in the secondary cat bond market. Recently issued cat bonds were particularly in demand according to Plenum. So this unseasonal demand caused U.S. hurricane cat bonds to increase in price and both European windstorm and U.S. earthquake bonds were also sought after and so largely increased in price.

These positive price movements in the secondary cat bond market in the last few weeks of May will have pleased ILS and cat bond fund managers. It has offered them an unexpected chance to recoup some of the seasonal gains which were lost earlier in the year as the high primary cat bond issuance volume kept prices depressed in the secondary market. We wrote recently that April was the best month of 2012 so far for ILS fund managers and we expect May to be as good if not better.

Plenum Investments would vouch for this as they experienced their second best monthly performance since their ILS funds inception. Their fund returned 0.55% in May and they now believe they are well positioned to capitalise on any tightening of prices for hurricane bonds as the season progresses and have positioned their fund to take advantage of higher coupons afforded by recent cat bond deals.

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