Having shown a divergence in manager strategies as NAVs moved in different directions at times and by different amounts as hurricane Milton approached, the US mutual investment funds that allocate to catastrophe bonds and other insurance-linked securities (ILS) diverged again at pricing on Friday, but have since stabilised having incorporated post-landfall net asset value adjustments.
Stone Ridge Asset Management had marked its two dedicated catastrophe bond and ILS funds down harder and further than other mutual fund managers, as hurricane Milton approached, so it was unsurprising to see a strong recovery for these funds on Friday.
Remember that, as these mutual cat bond and ILS funds priced their net asset values (NAVs) on Friday, they had the benefit of insights from catastrophe bond pricing sheets and also the cat bond market index to assist.
So further adjustments were always to be expected and it again reflected the difference in strategies seen, as managers seek to apply their view of risk and potential hurricane losses to their portfolios.
It’s also worth remembering that the investment managers operating these mutual ILS and cat bond funds are marking their portfolios daily, without the benefit of that end of week pricing insight from broker sheets that the ILS market has always relied on.
With greater clarity available post-landfall and with the catastrophe bond pricing sheets in hand, the mutual cat bond and ILS fund managers have been able to make some final corrections, which have brought the funds more into line, although still with clear differences in view of loss quantum seemingly visible between some of them.
Last week, for three days in a row, some of the asset managers with ILS strategies in the mutual fund format cut their NAVs, as they grappled to understand the potential impacts and losses that could be faced.
It’s not been helped by the wide range of industry loss estimates that emerged before hurricane Milton’s landfall, nor by the fact there is still a reasonably wide range after the impacts.
Based on estimates seen so far, there remains a range of roughly $26 billion to $50 billion, with a mid-point around $31 billion, but most of our sources suggesting that once you incorporate the NFIP’s losses (as not all the estimates seen so far have) the mid is likely to move into the upper 30’s.
The uncertainty in the estimates and relatively wide range makes it even harder marking cat bonds and ILS positions, meaning we can expect moves in prices as loss reports and fresh estimates, from industry wide to cedent specific, emerge over time.
As we said, Stone Ridge Asset Management made the most significant cuts to the NAVs of its two dedicated cat bond and ILS funds as Milton approached land, so since landfall the cuts have been reduced with recoveries in net asset values seen.
Initially, the more catastrophe bond focused Stone Ridge High Yield Reinsurance Risk Premium Fund strategy was marked down as much as -6.92% by October 9th, but since then has made a steady recovery.
The Stone Ridge High Yield Reinsurance Risk Premium Fund cat bond strategy saw its NAV marked up 2.32% on the 10th, then 2.72% on the 11th, since when it has resumed its typical trajectory for the time of year.
This strategy stood -1.94% lower than before Milton by pricing on October 15th.
The Stone Ridge Reinsurance Risk Premium Interval Fund which allocates 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, had been down -7.67% as of October 9th.
It too made strong recoveries though, as the pre-landfall picture improved and then as post-landfall data and cat bond pricing became available on the 11th.
The Stone Ridge Reinsurance Risk Premium Interval Fund rose by 3.72% on October 10th and then by a further 1.2% on the 11th, then 0.26% on the 14th and 0.12% on the 15th, to now leave it just -2.66% down since before hurricane Milton.
It’s worth highlighting here, that the declines now seen for these two ILS funds operated by Stone Ridge Asset Management would be absorbed by a single month of loss free performance at this time of year, typically. If you look back at August, both these funds saw their NAVs rise by more than the eventual Milton hit.
It’s a similar, albeit slightly different pattern, picture with the other mutual cat bond and ILS funds.
Investment manager Amundi US had marked its Pioneer dedicated ILS funds down less than Stone Ridge at first, then made a correction on October 10th as greater clarity on hurricane Milton’s potential landfall impacts was available at that time.
But then, on the 11th, Amundi US marked both of its mutual ILS funds back down again, presumably with the insights gained from pricing sheets and post-landfall analysis.
The Pioneer CAT Bond Fund had been -2.94% down on hurricane Milton by pricing on October 9th, but then Amundi US priced the NAV back up 2.58% on the 10th and then down by -0.61% on the 11th, before resuming a typical pattern from October 14th.
Now, as of pricing on October 15th, the Pioneer CAT Bond Fund, which is Amundi US’ dedicated catastrophe bond strategy, is only -0.86% down since it began moving as hurricane Milton intensified and headed for Florida.
Amundi US’ other mutual ILS strategy, the Pioneer ILS Interval Fund, that allocates to strategies across quota shares, sidecars and collateralized reinsurance as well, had been -2.36% down at one stage.
On October 10th, the Pioneer ILS Interval Fund NAV was marked back up 2.21%, but then it fell again on the 11th by -1.95%, before resuming a typical pattern on the 14th.
As of pricing yesterday on October 15th, the Pioneer ILS Interval Fund was -2.15% since before hurricane Milton.
So a different pattern of NAV moves to the Stone Ridge ILS fund strategies, resulting in mark downs that are slightly less severe, again reflecting different manager views of risk and approaches to marking their portfolios.
All four of these funds are marked within the ranges that would typically be expected, based on the information available at this time on the catastrophe bond market and industry losses, it appears.
Finally, the Ambassador US mutual catastrophe bond fund strategy, operated by advisor Embassy Asset Management, which saw a -2.41% decline as hurricane Milton approached Florida beginning on October 7th, but then rose three days in a row to leave it just -0.1% by October 10th.
The Ambassador cat bond fund then fell slightly on October 11th, was flat on the 14th and rose yesterday, leaving this fund just -0.1% down since before Milton NAv moves began.
Which suggests the portfolio manager of the Ambassador Fund is relatively confident its positions will prove largely free from loss, with any impacts covered by the removal of NAV accumulation from the few days the strategy was down and this final -0.1% left as of yesterday.
After yesterday’s marking of these mutual cat bond and ILS funds, the average decline is just -1.54% across the five.
Removing the Ambassador Fund, given the small cut to NAV there, the average across the other four is -1.90% move on Milton.
Just comparing the two most catastrophe bond strategies of Stone Ridge and Amundi US, the average for them is -1.4%, incredibly close to the cat bond market move of -1.34%.
Across the two interval style ILS funds from the same two managers, that invest through the reinsurance and quota share spectrum, the hurricane Milton move as of yesterday’s pricing averaged -2.40%.
Read all of our hurricane Milton coverage.
