Diversification pays off for some catastrophe bond funds

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Some cat bond funds have been able to mitigate the effects of widespread widening in spreads through their diversification in recent weeks, with diversification risks and regions seeing less widening in cat bonds outstanding , thus offering better yields in May and June.

We have documented the widening of spreads seen in the catastrophe bond market over the past few months, as catastrophe bond spreads began to widen in earnest in early April, with a mismatch between supply and demand, as well as as investor risk aversion, seen as the main drivers of this trend.

While some believe that the effects of widening spreads could be felt throughout the year, as we have also reported recently, there is now evidence that the widening has slowed or even accelerated. stopped.

The execution and pricing of a number of cat bonds exposed to recent peak risk in the US suggest that things are more balanced in the cat bond market at this time.

Of course, with reinsurance rates for catastrophe-exposed programs significantly higher than a year ago, it seems unlikely that spreads will fall back very quickly to where they were six months or even a year ago.

While spreads have widened for newly issued catastrophe bonds, indicating price hardening in this market, the effects are of course also being felt in the secondary market and wider spreads have eroded the yields of many investment funds. catastrophe bonds in recent months.

However, the ripple effect has certainly been felt most strongly during peaks in US disaster risk, particularly the US wind.

We are now told that some cat bond fund strategies have managed to offset some of the spread pressure on their positions through their allocations to diversified risks and regions, where spread pressure has been less evident.

Cat bond funds with larger allocations to diversified regions like Asia, for example, have performed better as these diversified cat bond investments have remained positive in recent weeks.

We even heard of some funds attributing positive monthly performance solely to the diversified cat bond positions they held, as almost every other fund in the portfolio felt the effects of the spread environment.

The way spread pressure has impacted catastrophic bonds exposed to peak US risk has been almost like seasonality driven effects, albeit this time spurred by the broader macro environment and all the reasons we have documented well in previous articles.

Having diversified sources of return can always be useful and this period has shown the value of having some diversification risk in a catastrophe bond portfolio.

Of course, not all diversifiers are equal and some ILS fund exposures to regions like Australia have come back to managers in recent years.

Nonetheless, while many seek more concentrated exposure to US wind-focused cat cat bond funds, many investors appreciate a broader spread, by region and by peril, which can benefit them when conditions are right. , as we have seen in recent weeks.

Artemis’ measure of the average spread between expected loss and coupon when issuing new catastrophe bonds has now reached its widest since 2012.

Meanwhile, Artemis’ measurement of multiples in the market for newly issued cat bonds is also at its highest level since 2012.

Q2 2022 Catastrophe Bond Market ReportFor details on the second quarter 2022 catastrophe bond issuances and related ILS, including a breakdown of deal flow by factors such as perils, triggers, expected loss and pricing, as well as a analysis of emission trends observed by month and year.

Download your free copy of Artemis’ Cat Bond & ILS Market Report Q2 2022 here.

For copies of all of our catastrophe bond market reports, visit our archives page and download them all.

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