Growing Water Scarcity in US is 'Hidden' Financial Risk for Investors Owning Utility Bonds
Investments in Event Linked Securities Solidum Partners AG ...€¦ · US Inv. Grade Corporate...
Transcript of Investments in Event Linked Securities Solidum Partners AG ...€¦ · US Inv. Grade Corporate...
1 21. April 2020
CAT BONDS
„CAT Bonds as Stabilizer“
Webinar 21. April 2020
Dr. Karsten Bromann, Solidum Partners
Stefan Müller, Solidum Partners
Harald Steinbichler, axessum
PLEASE NOTE THE RISK WARNING AT THE END OF THE PRESENTATION
2 21. April 2020
Investment Markets in 2020
Asset class Return Q1 2020
Government Bonds 2.81%
Cat Bond Universe -0.10%
US Inv. Grade Corporate
Bonds-2.81%
US High Yield Corporate
Bonds-8.49%
US Equities -20.10%
3 21. April 2020
Cat Bond Market 2020
COVID19: Textbook example of the low correlation of CAT Bonds to other markets
− The significant restrictions in economic activity caused by the Corona crisis led to massive slumps in many
investment segments. In this phase of great uncertainty and volatility, cat bonds were once again able to prove their
positive qualities as a stabilising element in an investment portfolio:
− they fulfil the promised diversification characteristics;
− they resist the distortions on the financial markets;
− as they have a truly independent source of default risk, their correlation in stress scenarios does not tend
towards 1, as is once again the case today with high yield and other alternative fixed income investments;
− Due to their characteristics as relative short maturities with a high-quality collateral, they are protected against
massive devaluations during a liquidity squeeze.
− Even though pandemic bonds are affected by defaults, the corona outbreak is primarily a liquidity event for the cat
bond market. Cat Bonds react to changes in supply and demand. However, a drastic devaluation, similar to that of
structured finance securitisations during the Lehman crisis or currently that of equities, is prevented due to their
characteristics as relative short maturity paper with a high-quality collateral. Currently, the stable performance of cat
bonds relative to the significant losses elsewhere results in an overallocation in some investor portfolios. Some
investors therefore need to make reallocations, and an oversupply in the secondary market leads to price
markdowns. This is further reinforced by liquidity-driven selling activities.
− Swiss Re Cat Bond Price Index in March (USD, non investable, without cost): - 2.36%
These discounts are NOT associated with increased risk and therefore represent an attractive entry
opportunity.
4 21. April 2020
COVID 19 Briefing
https://catbond.com/en/2020/02/27/the-2019-2020-coronavirus-outbreak-and-
implications-for-the-ils-market/
5 21. April 2020
Review: ILS market in the years 2017 to 2019
2017 was an exceptionally expensive year for the
reinsurance industryHurricanes Harvey, Irma and Maria, bush fires in California,
earthquakes in Mexico and many severe tornado events and
winter storms in the USA cost the insurance industry USD 140
billion and led to the default of many cat bonds and reinsurance
contracts.
As a result, ILS funds suffered more or less pronounced losses.
2018 and 2019 were average years in terms of total losses
− Accumulation of moderate events, but no catastrophic individual losses.
− Hurricanes Florence and Michael, Typhoons Trami and Jebi (2018) and Faxai and Hagibis (2019), bush fires in California,
bad weather in Italy and other events led to the loss some individual policies and cat bonds.
− Often aggregating contracts and sidecar structures were affected.
− Late claims development, especially from Hurricane Irma and Typhoon Jebi, delayed losses to subsequent years,
especially for many sidecar investments.
− As a result, the Eurekahedge ILS Advisers Index lost -3.5% in 2018 and gained a weak 1.4% in 2019. The Eurekahedge
Index can serve as a proxy of the overall offering of all ILS funds in the market.
− A general spread widening in the cat bond market exerted additional pressure on prices in 2019, but improved the
earnings potential 'going forward'.
6 21. April 2020
Solidum Funds in 2019 & Q1 / 2020
2019 Q12020
Solidum ELS SAC 3 (I-1) 8.22% 0.27%
Solidum ELS SAC 2 (I-1) 4.36% -0.76%
Solidum Cat Bond Fund 5.10% -1.61%
Solidum - Falcon Insurance Linked Strategy (I-USD) 5.47% 2.00% Solidum is manager since August 2019
Solidum - Falcon Insurance Opportunities (I-USD) 4.64% -0.69% Solidum is manager since August 2019
Eurekahedge ILS Advisers Index 1.43% 0.21%
Swiss Re Cat Bond Performance Index 4.43% -0.10% (without cost, non-investable)
USD class returns (technical currency classes of the funds); EUR and CHF returns are lower by the interest rate differential against the USD.
Historical returns are not indicative of future returns or current or future trends
95
100
105
110
Okt Dez Feb Apr Jun Aug Okt Dez Feb Apr
Solidum ELS - SAC Fund 3
Solidum ELS - SAC Fund 2
Solidum Cat Bond Fund
Solidum-Falcon ILS (I-USD)
Solidum-Falcon IOF (I-USD)
Swiss Re Cat Bond Performance Index
Eurekahedge ILS Advisers Index
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2019 2018
Solidum ELS SAC 3 (I-1) 8.22% 10.88%
Solidum ELS SAC 2 (I-1) 4.36% 4.83%
Solidum Cat Bond Fund 5.10% 4.13%
Solidum - Falcon Insurance Linked Strategy (I-USD) 5.47% 2.53% Solidum is manager since August 2019
Solidum - Falcon Insurance Opportunities (I-USD) 4.64% 2.94% Solidum is manager since August 2019
Eurekahedge ILS Advisers Index 1.43% -3.49%
Swiss Re Cat Bond Performance Index 4.43% 2.81% (without cost, non-investable)
Solidum Funds 2018 – 2019
USD class returns (technical currency classes of the funds); EUR and CHF returns are lower by the interest rate differential against the USD.
Historical returns are not indicative of future returns or current or future trends
949698
100102104106108110112114116118120122
Okt Dez Feb Apr Jun Aug Okt Dez Feb Apr Jun Aug Okt Dez Feb Apr Jun
Ertragsentwicklung 2018 -2019
Solidum ELS - SAC Fund 3 Solidum ELS - SAC Fund 2 Solidum Cat Bond Fund
Solidum-Falcon ILS (I-USD) Solidum-Falcon IOF (I-USD) Swiss Re Cat Bond Performance Index
Eurekahedge ILS Advisers Index
Performance 2018 - 2019
8 21. April 2020
Success Criteria - Solidum Philosophy
Successful security selection
- Experience and Know-How of the team
- Portfolio size allows to say NO to suboptimal CAT Bond offers
Regarding reinsurance and retrocession investments
- No aggregated retrocession contracts: Solidum offers only traditional retrocession contracts
with «per occurrence» trigger and reinstatement
- None sidecar investments
- No ‘yield-Chasing’ with retrocession and insurance contracts
- Carefully selection of counterparties
Solidum's setup allows more “quality analysis time” per million invested
9 21. April 2020
Cat Bond Market 2020
Outlook 2020:
− The long awaited premium increase becomes visible in the cat bond market
− The late-loss problem from the years 2017 & 2018 has been resolved for the vast majority of cat bonds;
however, there are few for which we believe there is still a risk of total loss
Development of earnings potential (cat bond market) 2018 to 2020:
Liquidity-driven spread widening in the cat bond market due to the corona crisis is currently
increasing the earnings potential without additional risk
1) Based on mid-spreads over money market according to AON prices (29.12.2017, 31.12.2018, 31.12.2019); weighted with nominal capital of the bonds; exclusion of all "pathological" cases and
bonds expiring during the year (seasonal effects)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
01.01.2018 01.01.2019 01.01.2020
Spread over Money Market
Expected Loss
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
01.01.2018 01.01.2019 01.01.2020
Spread over Money Market
Expected Loss
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
01.01.2018 01.01.2019 01.01.2020
Spread over Money Market
Expected Loss
US Wind and Multi-Peril Diversifizierende Bonds Gesamtmarkt
Spread over Money Market of CAT Bond Market1)
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Solidum ILS Funds – Positive influence on an investment portfolio
Market neutral Fixed Income /High Yield Investment
- No duration risk
- Marginal counterparty risk
- Low correlation with other asset classes
Attractive risk adjusted spread over money market
- Peak risks in reinsurance represent a systematic risk for this industry
and therefore require significant risk premiums. ILS investors can
collect these excess premiums, with ILS also serving as an ideal
diversifier in the portfolio
Source: Swiss Re - Insurance-Linked Securities market update, Volume XXXI, September 2019
PPCmetrics AG - Impact of the coronavirus pandemic on asset managers, April 2020
PPCmetrics: «Highly Affected
Markets»
11 21. April 2020
Sales Partner of Falcon Fund Management
Managing Partner
axessum GmbH
Anton Krieger Gasse 130 Top 1
1230 Vienna
Austria
Tel. +43 1 888 60 69
Mobile +43 664 851 64 42
www.axessum.com
Harald Steinbichler, Member of the Board Falcon Fund Management (Luxembourg)
12 21. April 2020
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Risk Note