Average ILS fund return beats cat bond market total-return in May

Investors in and managers of insurance-linked securities and reinsurance-linked investment funds saw another positive month in May, although the lowest months return of the year-to-date. The average return of ILS funds in May, as measured by the Eurekahedge ILS Advisers Index, was 0.42%.

It’s notable that the average return of ILS funds actually beat the total-return of the catastrophe bond market in May, as measured by the Swiss Re indices. The Swiss Re Catastrophe Bond Price Return index was down by 0.32% in May while the total-return index was up by 0.41%.

Stefan Kräuchi, founder of ILS Advisers, told us; “This is especially noteworthy if you recall that the index performance is after cost, while the Swiss Re Index has no cost. The diversification of the index across all instruments obviously helped in front of a backdrop of weakening cat bond prices towards month end as the spreads on some hurricane related bonds widened for seasonal reasons.”

So the weakening prices of outstanding catastrophe bonds, which we’ve documented regularly here on Artemis, really became evident in the returns of ILS funds in May. Secondary market activity was high across the board in May, according to ILS Advisers, with price gains from earlier in the month offset towards the end.

ILS Advisers explained that the strong activity right before the 1st June is due to investors and investment managers seeking to get capital to work on U.S. wind risk, as that is the final date for traditional reinsurance covers for that peril. Of course, this year we have seen some opportunities for investors to put capital to work on U.S. hurricane risk through catastrophe bonds which have come to market after the U.S. wind season started, a slightly unusual occurrence but demonstrative of demand and supply dynamics changing in a maturing market.

ILS Advisers suggest that the weakness in the cat bond price return index is due the typical seasonal pattern as we enter the hurricane season and spreads on exposed cat bonds have widened.

Primary cat bond market activity was strong in May, with close to $1 billion of new issuance, details of which can be found in our Deal Directory. By the end of May new cat bond issuance had reached $3.7 billion, which surpassed the level seen by end of May 2012. New issuance generally upsized by around 30% and risk premiums fell, a trend which has now continued into June on even the latest cat bonds.

All 29 constituent funds of the ILS Advisers Index saw a positive return for May, led by those with lower allocations to cat bonds and higher allocations to private transactions, which performed the best.

Finally, ILS Advisers note that some funds have made indications that they could face some performance hit on private transactions from the European flooding, but it is too early to tell and any hit may be seen in the June performance figures.

We will update you next month on ILS funds performance in June.

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.