Swiss Re Insurance-Linked Fund Management

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ILS fund values fluctuate on Florence, threat now reduced


The valuations of investments in some of the listed and mutual ILS funds have been fluctuating as hurricane Florence approaches the United States, but the latest forecast now suggests the threat has lessened somewhat.

As hurricane Florence has approached the Carolina’s coastline the forecasts have been shifting and as a result uncertainty has been present, resulting in valuation difficulties.

At one stage it was thought hurricane Florence would barrel straight into North Carolina as a Category 4 or even 5 major storm.

Now a lower category hurricane impact, but with prolonged rainfall is expected, lessening the threat to many ILS assets and catastrophe bonds.

It’s possible to track a number of insurance-linked securities (ILS) funds that provide regular valuations, due to their mutual fund or exchange listed nature and they provide an insight into market sentiment.

First, the Stone Ridge Reinsurance Risk Premium Interval Fund, which given its $7 billion sized portfolio will have one of the broadest exposures to any major hurricane.

This fund saw its reported valuation dropping over -5% from the 7th to the 10th, but then recovering 3.3% by the 11th, followed by a slight drop of -0.11% yesterday.

Stone Ridge’s more catastrophe bond focused High Yield Reinsurance Risk Premium fund followed the pattern, dropping -3%, recovering 2.27% and then declining -0.63% yesterday. The steeper decline yesterday could be due to holdings of the FloodSmart cat bond, potentially, or just an anomaly as the Interval fund would remain more broadly exposed through its quota share reinsurance investments.

Pioneer’s ILS Interval Fund, which also invests in cat bonds, private ILS and collateralized reinsurance, stayed flat through until a -0.1% drop yesterday, likely on the forecast that showed a strengthening Cat 4 Florence landfall earlier during Wednesday.

Markel CATCo’s retrocessional reinsurance focused CATCo Reinsurance Opportunities Fund had dropped -1.22% on the 10th, then -3.63% on the 11th and again by -1.37% on the 12th.

This fund, being the retro reinsurance pillared product, will be broadly exposed to a higher hurricane Florence loss, so now the winds have lessened we’d expect a chance of some recovery in valuation today.

Providing an indicator for the broader reinsurance market, the Stoxx European reinsurers index had fallen on the 11th, but recovered almost all of this decline by this morning, suggesting the outlook for the reinsurers is considered less severe.

Finally, cat bond and ILS investment manager Plenum Investments said this morning that the threat to catastrophe bonds has now lessened,”Based on our internal modelling, we currently believe that the expected losses of hurricane Florence will not result in losses in the Plenum CAT Bond Fund’s portfolio. This assessment is also supported by the fact that hurricane Florence is significantly weaker than hurricane Hazel in 1954 and hurricane Hugo in 1989, which each hit the area threatened by Florence as category 4 storms and for which we also model only minor losses on the portfolio.”

That will result in some market to market fluctuations and valuation increases for funds holding exposed cat bonds, we’d expect.

Also of note, yesterday when hurricane Florence was still a Category 4 storm, ILS manager Twelve Capital suggested that the hit to ILS funds could be between 0% to 4% of NAV, based on the forecast at the time.

That will have changed now, with a lower impact expected, suggesting many ILS funds may feel little in the way of impacts from a slightly weaker hurricane Florence.

Importantly also Twelve Capital noted, “Given that aggregate deductible limits across most bonds have not suffered from any erosion post their annual resets, the loss absorption capacity of these structures protecting the insured layer is near or at its annual maximum.”

Even at up to a $15 billion market loss, Twelve said its modelling suggests only a 2.5% hit to even the opportunistic or higher risk ILS fund strategies.

Twelve also noted, “Predictability for this event has deteriorated due to a coastal ridge building up. Given the uncertainty in the landfall location and intensity, the actual observed loss could vary significantly compared to the pre-landfall estimates stated above.”

As we’ve been saying though, one impact to the cat bond market may be from a triggering of the FloodSmart Re NFIP flood cat bond, if the losses to the NFIP are high enough.

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