The main driver of performance was the strong price rally experienced by bonds exposed to US hurricane risk, making September the best performing month for the fund year-to-date.
Whilst most Atlantic tropical storms and hurricanes form between June and November, activity tends to peak in September, typically making this month the riskiest for the cat bond universe. The subdued hurricane activity so far this season has meant that respective bonds’ mark-to market values increased substantially towards the end of the month. Primary market activity was quiet, as would be expected for the third quarter of the year. Only one bond was issued in September, covering earthquake risk in the State of California. The sponsor of the bond is CEA, a quasi-governmental entity occupying a prominent market share (c. 35%) of insured residential properties in California. The bond offered an attractive spread of 500 bps. The fund took a position in this security. Within the given investment constraints, the fund is already positioned to maximise its exposure to hurricane risks. Therefore, secondary trading during the month focused on non-peak perils (e.g. Japanese earthquake risk). If the current subdued Atlantic tropical storm and hurricane activity continues, we would anticipate a further price appreciation for bonds exposed to US hurricane risk in October.