Catastrophe bond funds could be heading for gruesome drawdowns as the US braces for another potentially devastating tropical storm.
Incoming Hurricane Florence was downgraded from a Category 4 to a Category 2 storm on Thursday, but officials are still urging more than 1 million people in its pathway to evacuate their coastal abodes. It is expected to touch down in the Carolinas on Friday morning.
Catastrophe bonds, known colloquially as cat bonds, are used by insurance and reinsurance groups to transfer risk to investors. Funds that invest in the asset class provide regular payments to investors but can lose money if storm damages are too high.
Data provider Artemis estimates that 6% or $2.1bn of the $37bn insurance linked securities market specifically protects against US storms and hurricanes.
Cruising for a bruising
The Catco Reinsurance Opportunities fund, a London and Bermuda listed company, has already seen its share price slump 8% since last Friday’s close. The fund,from reinsurance investment manager Markel Catco, has a market cap of £225.2m.
Its $543m (£414m) C share class offshoot, which was launched last November, has also taken a hit, falling 2% over the same period.
Florence’s impending touchdown has brought pain for mega insurance-linked securities fund Stone Ridge Reinsurance Risk Premium Interval. The $5.8bn (£4.4bn) fund saw 5% knocked off its share price on Monday though it had recovered half of this by Thursday, according to data from Bloomberg.
The Swiss Re Cat Bond Index, widely used as the benchmark for catastrophe bond performance, has not taken a hit so far as it is only updated once a week on Friday.
Popularity spike
Despite the spike in deadly natural disasters in recent years, cat bonds have never been more popular.
There have been $11.6bn of catastrophe bonds issued so far in 2018, just $1bn shy of the record $12.6bn raised in 2017, according to Bloomberg.
The Swiss Re Cat Bond Index itself has also bounced back from the deluge of adverse weather events. The index fell 16% in the midst of last year’s hurricane season but has since recouped its losses over a period of nine months. On Thursday it was 1.4% higher than where it was at the end of August 2017.
Mixed fortunes
The Catco Reinsurance Opportunities fund is down 43.7% on a net asset value basis over one year, according to Trustnet. Hurricanes Harvey, Irma, Jose and Maria wiped out 50% of the listed company’s capital last year, it reported in its annual results. The four storms collectively cost $200bn in damages to the mainland US, figures from the National Hurricane Centre revealed.
Fortunes for other major cat bond funds have been mixed since last year’s hurricane season.
Schroders’ $1.3bn Gaia Cat Bond fund returned just 1.87% on a one-year view, with its worst month being last September when the fund was down 5.84%.
The Gam Star Cat Bond fund meanwhile returned 7.22% over one-year, putting it well above peers in the IA Global Bonds sector which delivered a minus 1.4% return.
