Price dynamics helping to drive cat bond fund performance: Plenum

Pricing dynamics in the catastrophe bond market are helping to drive the performance of cat bond funds, despite the negative hit taken back in February due to the US winter storms and the losses that event has driven, insight from Plenum Investments suggests.

Plenum Investments AG, the Zurich based specialist insurance-linked securities (ILS) and catastrophe bond investment manager, explained that after February’s hit to secondary cat bond prices of those names exposed to winter storm Uri and the Texas freeze event, March saw a strong recovery.

Winter storm exposed cat bonds staged a partial price recovery in early March, as it became clear that the initial expectations for losses that might hit the cat bond market were too high.

However, winter storm losses still look like they are going to hit the market, not least through Allstate’s reinsurance recoveries under its Sanders Re cat bond series and Nationwide’s Caelus Re cat bonds, as we’ve previously reported.

But alongside the winter storm related price gains in the secondary cat bond market, Plenum also explains that high demand for catastrophe bond investments is also driving pricing higher.

This has come alongside a period of robust issuance, meaning there has been a lot of trading going on of late and this has helped support pricing as well, our sources suggested.

Periods of strong demand for investments in cat bonds and other related reinsurance-linked instruments can drive pricing higher in the secondary market, as bids rise to gain access to positions for investor and fund portfolios.

Plenum noted that these price dynamics are helping its cat bond funds performance, which will also be experienced by other investors and fund managers in the space.

As a result, April performance for cat bond funds may also prove attractive, especially for portfolios that aren’t overly exposed to US aggregate deals that could still see some pressure from the winter storm and related loss potential.