Some US mutual cat bond & ILS funds reacted to Beryl, but recovered fast

As hurricane Beryl travelled across the Caribbean towards Jamaica, Mexico and Texas, there were minor movements in the share prices of some US mutual catastrophe bond and insurance-linked securities (ILS) funds.

But, given the limited cat bond and ILS market exposure to this storm, these declines were not significant and have been rapidly recovered, when it transpired losses could be light to non-existent for the vast majority of ILS strategies.

There were really three ILS market threats from hurricane Beryl during its travels across the Caribbean and into the Gulf of Mexico.

Firstly, the most clear threat of the three, which was to the World Bank facilitated, IBRD issued, Jamaica’s $150 million IBRD CAR Jamaica 2024 catastrophe bond.

This cat bond came close to be being triggered, with central pressure and track both close to what might have been required to activate a loss of principal to the notes.

As we’d explained, these notes were being offered at reduced prices as Beryl neared Jamaica, but no trades were completed as far as we were aware.

In the end, Jamaica’s cat bond was deemed safe, although there was a slight reduction in price noted for some secondary cat bond pricing sheets.

After that, there was a minor threat to the IBRD Mexico catastrophe bond, as had Beryl intensified again before hitting the Yucatan this could have come into play. However, the forecasts always suggested weakening prior to that landfall, so there wasn’t any price movements or potential trading action to watch out for.

The third threat was all related to the Texas landfall of hurricane Beryl, but as we reported the storm was hindered in the Gulf by dry air and shear, which meant it did not rapidly intensify as some had been predicting.

These were the three threats to catastrophe bonds and ILS and you can see how some of them affected mutual catastrophe bond and ILS funds in their price moves over that period.

First, the Stone Ridge High Yield Reinsurance Risk Premium Fund, which is that alternative asset manager’s most catastrophe bond focused mutual ILS fund strategy.

This fund was down -0.34% on July 2nd as hurricane Beryl neared Jamaica, but recovered fully and had quickly continued its upwards trajectory, moving higher since then. There was no noticeable effect from the Texas landfall threat, which is not surprising given that for catastrophe bonds to be threatened Beryl would have needed to intensify significantly while over the Gulf.

Next, the Stone Ridge Reinsurance Risk Premium Interval Fund, that invests across the spectrum of ILS and reinsurance-linked assets with a particular focus on sidecars and private quota shares, as well as other collateralized reinsurance arrangements and to a lesser degree catastrophe bonds.

This strategy from Stone Ridge also saw a decline as Beryl neared Jamaica, but to a lesser degree at just -0.13% down. The fund price recovered by July 8th, but it then fell by -0.11% which it seems was likely a reaction to the Texas landfall of hurricane Beryl. Since then it has recovered fully and risen strongly again.

Next, we can look at the Pioneer CAT Bond Fund, Amundi US’ dedicated cat bond mutual fund strategy. This fund dropped -0.28% on July 3rd, so likely related to the Jamaica cat bond near miss, but has since recovered this fully and was also unaffected by the Texas landfall threat posed by Beryl.

Interestingly, Amundi US’ more reinsurance and quota share focused Pioneer ILS Interval Fund did not seem to react to hurricane Beryl at all, either during its Caribbean passage or for its Texas landfall threat. This fund is a little more risk-remote than the Stone Ridge interval ILS equivalent though, which its price development over this period may be showing.

Two other mutual ILS strategies, the Ambassador Cat Bond Fund and the City National Rochdale Select Strategies fund (which is largely ILS and index-trigger cat bond focused), did not respond significantly to hurricane Beryl.

The Ambassador cat bond fund did see its price rise flatten for a day or two as Beryl passed Jamaica, but it soon resumed its upwards trajectory. The CNR ILW focused fund did not budge from its upwards trajectory.

All funds are now higher than prior to Beryl’s nearest approach to Jamaica and it’s clear they have fully-recovered and then continued to climb on the influence of insurance risk premiums and cat bond spreads.

The fluctuations seen are evidence of the diligent approach asset managers have in the catastrophe bond and ILS space, reacting to mark-to-market price changes, as well as to the output of their own modelling, to ensure they are marking fund values as accurately as they possibly can, even when catastrophe losses may be threatening.

In most cases, the movements seen were reflected in the traditional reinsurance market, with many property catastrophe exposed reinsurers seeing declines over the same period as Beryl neared Jamaica through to its emergence over the Gulf and travel towards Texas. In every case we’ve looked at, these declines have also been more than recovered by now.

Finally, across the UCITS catastrophe bond funds, there are similar signs of small shifts as hurricane Beryl approached, but again all evident moves were recovered fully and now surpassed it appears.

With the UCITS cat bond funds though, it seems in many cases the recovery in value after the end of the period of spread widening has helped them not to register any weekly declines anyway, as that was a more significant positive input to their weekly pricing than Beryl was negative.

As evidenced by the latest weekly pricing of the Plenum CAT Bond UCITS Fund Indices, which continued to rise in the week through July 5th and we don’t expect the Texas landfall will dent the week after, when that is reported.

These funds, both mutual and UCITS, have acted precisely as they should, recognising the slight threats posed at different points in hurricane Beryl’s lifetime and then recovering fully to continue their upward march as soon as the uncertainty was removed.