MiCRIX returns outpace cat bond market, accelerate in July and August

by Artemis on September 4, 2013

The Mercury investible Catastrophe Risk Index, or MiCRIX for short, one of the indices that we play host to here on Artemis has seen accelerating returns in the months of July and August. The index has delivered returns of 4.2% since June, gaining 1.2% in July and 3.0% in August alone, a stunning performance by any measure.

While the broader insurance-linked securities (ILS) fund market saw suppressed returns in July due to catastrophe bond spreads widening a little as the wind season approached, the MiCRIX saw returns accelerate in the underlying earnings of the index. In a similar fashion, ILS funds which participate largely in private transactions have also seen enhanced returns in July and are expected to perform strongly again in August.

The MiCRIX is a little different as it tracks the performance of a diversified portfolio of peak peril industry loss warranties (ILW’s), emulating the return an investor could make if following an ILW focused investment strategy. Pricing for the index is based on data collected from a panel of leading reinsurance brokers and the index accrues income according to the seasonality of the underlying contracts.The index provides another useful proxy for the return of the catastrophe risk and reinsurance market and the opportunity the asset class offers to investors.

The index return during the first-half of 2013 was 3.4%, below the 5.2% total return for the Swiss Re Cat Bond Index where mark to market gains on outstanding cat bonds boosted first-half performance, but equal to the return on the other index we host here on Artemis, the Eurekahedge ILS Advisers Index of 30 participating ILS funds.

Charlie Griffiths, CEO of Mercury Capital the Bermuda based fund manager which launched the MiCRIX, commented; “The index return in the first half of the year is in line with that achieved in 2009 and has only been bettered in 2012 where rates for Japanese Quake risk had spiked following the 2011 Quake.  With its focus on only the seven super peak exposures, the index had no exposure to any of the H1 events including European or Canadian Flooding and US Tornados.  Without the vagaries of mark-to-market security pricing, the index avoided the first half ILS gains that have since been partially given back in July.”

We are now entering the point of the year when seasonality lifts returns to their highest levels.  With the U.S. wind season near its peak, Japanese wind season in full swing and the European wind season soon to begin, Griffiths highlighted that September is the peak of the index exposure and hence premium accrual so in the absence of a September event we can expect further acceleration of index gains over the next month.

Commenting on the current exposure environment, Griffiths said; “Despite the above average estimates for 2013 Atlantic hurricane activity August has been unusually quiet.  It’s the first year since 2002 without a single Atlantic hurricane.  Conditions have become more favourable for hurricane formation over the recent days and are forecast to remain in place for several weeks.”

Mercury Capital launched the MiCRIX Tracker Fund at the start of the year to track the performance of the MiCRIX. The fund aims to replicate the portfolio and returns of the index by selectively investing across the ILW market.  Artemis understands that the returns on the fund to July were 4.7%, demonstrating close tracking of the index return over the period of 4.6%.

Griffiths explained; “The strength of the index portfolio lies in its constrained spread.  With its exposure spread evenly over the seven super peak exposures, capital in the index is broadly protected from any individual event.  However by having only seven perils, the index avoids picking up losses from the long list of other natural catastrophes that occur each year.”

The index has run completely clean in four of its seven complete years of tracking the market.  In the three loss affected years the index returns were 7.9%, 1.1% and -1.3% respectively.  The return on the index since inception at January 2006 is 9.4% per annum.

Year to date, including August’s returns, the MiCRIX has achieved a return of 7.74%, which is highly impressive and once again demonstrates the attractive investment opportunity that the market for catastrophe risk and reinsurance offers.

You can view the MiCRIX, analyse the index data and view index performance statistics on Artemis here: www.artemis.bm/mercury_micrix/

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