Some cat bond / ILS funds could reach pre-Ian levels by end of March

Given the strong recovery in many catastrophe bonds and private ILS that were exposed to hurricane Ian, as well as the now elevated returns in the market on the back of higher reinsurance pricing and risk-free collateral returns, some insurance-linked securities (ILS) strategies could recover to levels seen before Ian by the end of March.

In fact, the way catastrophe bond fund returns have been so far in 2023, there is a strong chance that even this index of UCITS cat bond fund performance recovers back to, near or above, its pre-Ian levels by the end of this month.

While this broader index of ILS fund performance, that includes both cat bond and private ILS fund strategies, is also likely to get close to a recovery of the hurricane Ian decline once March figures are in.

It’s not all recovery from Ian, of course, rather a combination of rebounding values since the hurricane for positions that turned out to not be as exposed as thought, as well as cases where spread widening has been reversing, plus the now higher forward returns being delivered on the back of elevated pricing, as well as yield on US treasuries underpinning so many instruments.

As we reported back in February, catastrophe bond investment funds were already experiencing a record start to the year by early that month.

At that stage the UCITS cat bond fund index was only -1.98% down since hurricane Ian and more of that loss has already been recouped, with strong full-month of February performance reported by some strategies.

Barring any change to the market’s view of cat bond exposure to hurricane Ian, any fresh catastrophe events, or any further spread widening that occurs, the cat bond market will bounce back to levels seen pre-Ian over the next few weeks.

We’ve already heard of some cat bond funds delivering returns approaching 1.5% for February 2023 alone, with March anticipated to be another relatively strong month as returns from new issuance and the higher risk-free rates flow through.

Which would mean some investors could see the lost ground recovered within roughly a six month period, giving credence to some sources new estimates that (portfolio construction depending) the cat bond market now has the potential to absorb roughly two events at a similar level of impact to Ian, at the now higher pricing and with the benefit of much higher returns on collateral.

It’s important to note, that not all cat bond funds will get back to their pre-Ian levels by the end of this month, it depends on how significant their initial marking down was and also factors related to their portfolio composition. They will approach it though, it seems, with the entire cat bond fund market expected to deliver very strong returns through the first-quarter of 2023.

In private insurance-linked securities (ILS), so collateralized reinsurance and retrocession investments, performance since hurricane Ian very much depends on where in the reinsurance tower capital has been allocated and how much risk has been assumed.

But, for the low- to mid volatility private ILS focused fund strategies, a similar scenario is now unfolding, where some strategies could recoup the decline caused by hurricane Ian by the end of this month, or soon after.

Of course, there are also private ILS fund strategies that won’t, the recovery is very much portfolio dependent it seems.

But broadly, the ILS fund market’s performance since hurricane Ian has been very strong and with the forward return-potential now elevated, investors are seeing an industry with far greater potential to recover after major events, in the new and higher return environment of reinsurance and risk-free rates.

Recall that, according to the Eurekahedge ILS Advisers Index, cat bond funds as a group only fell -1.45% on average for 2022, beating the private ILS funds in the Index, which invest in a broader range of collateralized reinsurance and retrocession instruments, as they fell -2.77% for the year.

That was already a strong recovery, when you consider how far the market’s fell immediately after hurricane Ian.

The cat bond market was initially marked-down around 10%, but has since recovered steadily, while some private ILS funds set side-pockets amounting to double-digits of their strategies.

As hurricane Ian loss estimates started to trend lower, cat bond positions recovered very strongly, while private ILS fund side-pockets began to get reduced.

These trends have continued and now combined with the strong forward return potential of the cat bond and ILS fund market, driving fund net asset values (NAV’s) back towards the levels seen just before Ian.

The recovery is best analysed using our interactive chart of the Plenum CAT Bond UCITS Fund Indices and the Eurekahedge ILS Advisers Index.