Insurance-linked securities funds performance hit by Euro floods in June

by Artemis on July 30, 2013

The month of June saw insurance-linked securities (ILS) funds returns impacted by the major flooding event which struck Central European countries with some of the worst floods in recent memory. The event dragged the average return of ILS funds in June down to flat or 0.00%, as measured by the Eurekahedge ILS Advisers Index.

As reported at the end of May, some of the constituent funds had indicated to ILS Advisers that they may face some performance hit on private transactions from the European flooding. ILS Advisers explained at the time that any hit to performance was likely to be seen in the June figures, and that is what we are seeing in the index today.

So June becomes the worst months performance for the ILS Advisers Index since October 2012. The index tracks the return of 30 constituent ILS funds and June saw funds with exposure to private reinsurance transactions which included European flood exposure hit hardest, with a number reporting negative performance for the month.

Stefan Kräuchi, founder of ILS Advisers, commented; “European Floods covered by some private contracts lead to the first significantly negative monthly performance numbers for some of the funds in the index. Overall a rather weak month with only 20 funds showing positive numbers. ”

For the month of June the average ILS fund was flat at 0.00%, as measured by the ILS Advisers Index. This is the first time in 2013 that the index has not performed admirably, having return 3.38% for the first six months of the year.

For contrast, the catastrophe bond market, as measured by the Swiss Re indices, was down by 0.47% in June for the price return index and up by 0.17% for the total return index. Stefan Kräuchi explained; “Seasonal factors (hurricane season) and new cat bond issuances at a continuously high level were the other determining factors for June.”

Kräuchi explained the factors affecting the cat bond market, starting with pricing; “The weakness in the Swiss Re Cat Bond Price Index was on one hand the result of increased supply of new cat bonds and on the other hand due to price declines in cat bonds exposed to US hurricane risks, reflecting the typical seasonal pattern during the North Atlantic hurricane season, which officially started on June 1st.”

On cat bond issuance levels Kräuchi said; “With USD 700 million of new emissions, primary market activity in June  was unseasonably strong. As a result the new issue volume for 2013 reached USD 4.4bn and the total outstanding issues increased to USD 17.1bn by the end of June, which is a new all-time high. By the time of this writing in July the sector has grown further to over USD 18bn.”

These two factors are reflected in the performance figures for the cat bond indices and helped some of the more catastrophe bond focused ILS funds perform better than the average. Kräuchi continued; “As a result pure cat bond funds mostly performed sideways, however as a group did slightly better than the Eurekahedge ILS Advisers Index.”

The European flooding did not impact the return of any catastrophe bonds, as no current cat bonds feature European flood risks as a securitized peril. However it did affect a number of ILS funds which engage in private collateralized reinsurance contracts with exposure to flooding in Europe, and these funds largely experienced negative monthly performance, with 10 of the 30 constituent funds reporting a decline.

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

You can track the Eurekahedge ILS Advisers Index on Artemis here. It comprises an equally weighted index of 30 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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