Insurance-linked securities (ILS) funds that are either mutual funds or listed vehicles saw their prices decline less than the share prices of global insurance and reinsurance funds as hurricane Michael made its devastating Category 4 hit on Florida.
There has been no significant decline of the usual mutual fund ILS suspects in the face of this storm, which is perhaps a little surprising given some of them dropped by -5% in the face of a weaker hurricane Florence.
In the case of hurricane Michael, the Stone Ridge Reinsurance Risk Premium Interval Fund, which at $7 billion in size has one of the broadest exposures to any major hurricane, is only down -0.76% since before Michael spun up into a major storm.
In the case of hurricane Florence, this mutual ILS fund had declined by more than -5%.
Other mutual funds, including Stone Ridge’s more catastrophe bond focused High Yield Reinsurance Risk Premium fund, the Pioneer ILS Interval Fund and City National Rochdale Select Strategies industry-loss warrant (ILW) strategy, have not declined at all while hurricane Michael approached.
This suggests that these mutual ILS funds did not feel particularly heavily exposed to major hurricane Michael, although it is also possible that the fund valuations did not have time to move significantly given the late intensification of Michael, so it will be interesting to see what they do today.
Markel CATCo’s retrocessional reinsurance focused CATCo Reinsurance Opportunities Fund, which is listed on the stock exchange, also did not react much to hurricane Michael, now with its Ordinary share class only sitting down -1.7% since before Michael approached and its C share class being flat after a small -0.4% fall but then recovering the same amount back again.
Insurance and reinsurance equities have exhibited much stronger declines in the face of the hurricane Michael threat, as evidenced by some of the share price indices that track the re/insurance sector.
The Stoxx EU Insurance 600 Index, the Dow Jones U.S. Select Insurance Index and the Bermuda Insurance Index are all down just over -3% since Michael threatened.
Reinsurance share prices seemed to cope the least with the hurricane Michael threat though, with the A.M. Best’s Global Reinsurance Index dropping more than -6% and the Global Reinsurance Index down almost -7%.
However, it’s not all reinsurance share prices and one in particular stands out, the Blue Capital Reinsurance Holdings share price, which is a listed equity but acts more like an ILS structure, only declined by -1.9%, so less than the main industry share indices.
What can we learn from this? Perhaps a few things, as there are a number of possible causes which could all, or none, have contributed to the way ILS fund values and share prices reacted to the storm.
That the landfall location and what that means for the eventual industry loss of hurricane Michael did not overly concern ILS funds and their investors, hence these structures values held up well in the face of even this extreme storm. The Panhandle is a lower exposure coastal zone than parts of North Carolina that were threatened by Florence.
That broader exposure to Michael is to be expected for traditional insurance and reinsurance firms, with more of the losses to be retained in the traditional market than ceded to alternative capital.
That hurricane Michael maybe moved too fast and intensified too quickly for ILS fund valuations to keep up and react to the situation in the same way they did to hurricane Florence’s threat.
That there was a lack of information to allow fund managers to value their assets, partly due to the intensifying nature of hurricane Michael and its rapid passage towards landfall.
Or, more simply, ILS fund values and their shares are a less liquid asset than re/insurer equities and hence do not move at the whim of the public and investors who will have been largely reacting to the media news as hurricane Michael intensified.
As we said, it will be interesting to see what some of these ILS funds values do today, after the impacts of hurricane Michael are better digested by the market and their investors.