Insurance-linked security (ILS) funds start 2013 with positive returns

by Artemis on March 1, 2013

The year for investors and fund managers has started in a positive manner, with the average return of insurance-linked security (ILS) and reinsurance-linked investment funds in January achieving 0.68% as measured by the Eurekahedge ILS Advisers Index. For a January this is around average and well up on the average ILS fund return a year earlier which saw just 0.16% returned in Jan 2012. A quiet month for cat bond issuance this year, January will please investors with a good follow on to the 1% average from December.

For comparisons purposes the catastrophe bond market as measured by Swiss Re’s indices was up by 0.24% for the price return index and 1.01% for the total return index. From this we can assume that ILS funds with more cat bond exposure who are tracked by ILS Advisers Index will likely have offered some of the better returns in January.

Stefan Kräuchi, founder of ILS Advisers, noted that January 2013 has been very different to January 2012, with lower primary cat bond issuance resulting in lower pricing pressure on secondary marks than seen a year earlier. Performance for ILS funds in January was largely driven by coupon yield, following typical seasonal patterns such as weakening of U.S. hurricane cat bonds, strengthening on European windstorm cat bonds and flat non-seasonal peril cat bonds such as earthquake risks.

Kräuchi said that the asset class continues to experience strong capital inflows, resulting in strong demand for secondary cat bond positions. However, as we’ve noted in recent articles, not every investors demand has been met in the secondary markets leading to competition over secondary marks and some finding investment opportunities elusive.

Every fund represented in the ILS Advisers Index reported a positive return in January, reflecting appetite for the asset class among investors and interestingly Kräuchi said that all funds returns were within a relatively narrow range. Sometimes divergence between the return of different funds can be wider, but January seems to have been a relatively healthy month for everyone.

2013 is expected to be another year of robust issuance in the ILS and cat bond sector, said Kräuchi, with the strong capital inflows expected to support the market and any supply expected to meet strong demand raising the chances of pricing being particularly attractive. Given the relatively benign nature of the market in February as well, Kräuchi expects the ILS Advisers Index will report positively for February as well.

We’ll update you next month on the index performance for February. You can track the Eurekahedge ILS Advisers Index on Artemis here. It comprises an equally weighted index of 29 constituent ILS funds which tracks their performance and is the first benchmark that allows a comparison between different insurance-linked securities fund managers in the ILS, reinsurance-linked and catastrophe bond investment space.

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