ILS funds return 7.56% on average in 2013, best year since 2010

by Artemis on February 4, 2014

Insurance-linked securities (ILS) funds saw an average return of 7.56% for the full-year of 2013, according to the latest data from the Eurekahedge ILS Advisers Index, the best annual return since 2010.

The average insurance-linked security fund saw a return of 0.36% for the month of December 2013, according to ILS Advisers, taking the full-year total to 7.56%, the fourth highest annual return in the eight year’s history of the Eurekahedge ILS Advisers Index.

Stefan Kräuchi, founder of ILS Advisers, told Artemis; “2013 was the best year for the index since 2010. December results were quite similar across funds. Performance differential between best and worst was again smaller than in previous months.”

December ILS fund performance was just below the total return of the catastrophe bond market, which was up by 0.43% according to the Swiss Re Global Cat Bond Total Return index. Secondary cat bond price returns tailed off in December, with the Swiss Re Global Cat Bond Price Return index dropping by 0.28% for the month.

During 2013 the Eurekahedge ILS Advisers Index of ILS fund returns benefitted from the increasing interest in ILS and reinsurance as an asset class and ongoing inflows of new capital into the space. Very strong performance was seen at the start of 2013, from January to April, and again later in the year, from August to October.

The strong performance at the start of the year was largely due to the strong inflows of new investor capital into ILS, collateralized reinsurance and catastrophe bonds which saw strong issuance from March.

This was followed by typical seasonal weakness in May, in advance of the U.S. hurricane season, while June performance was impacted by European flooding and then spread widening depressed the indices performance in July.

Once the market accepted the likelihood of a benign hurricane season things changed, however, and this helped to push the index higher in August and September, with some very unseasonable price movements in the cat bond market helping to buoy prices further. September resulted in the best single monthly return of the ILS market in 2013 and the best single month since September 2009, according to the Index.

The rally in cat bond prices lost some momentum in October and November which resulted in the return of the ILS Advisers Index being driven by current yield instead of price appreciation.

During the course of 2013, the coverage of the ILS Advisers Index increased from 29 funds to 32, it had hit 33 but one fund has now returned its capital to investors, Artemis understands.

In December, 31 out of the 31 constituent ILS funds saw positive returns. The gap between the best and worst performing funds was 1.27%, lower than in recent months.

Pure cat bond funds as a group averaged a return of 0.31%, while the group of funds which include private ILS and collateralized reinsurance in their strategies saw an average return slightly higher at 0.4%, reflecting the higher yields available from these private deals.

ILS fund managers have reported price declines at the January renewals to Kräuchi of ILS Advisers, which could mean that this index sees a slightly lower return in the year ahead.

Stefan Kräuchi explained; “As has been reported by Artemis but also reflected in the comments from different managers, January renewals were the most challenging in years with rates down in recent years as rates in the traditional reinsurance market fell in almost all regions and business segments between 10% to 15%. The reason for the softening market conditions were comparatively low insured losses in 2013, strong balance sheets of reinsurance companies and the competition from the capital market as a result of the continued inflows in the asset class.”

The Eurekahedge ILS Advisers Index shows the value that a diverse investment strategy across the ILS fund manager market could achieve, such as a fund-of-funds strategy. The annual return of 7.56% in a year of declining rates and cat bond yields is impressive, and with the continued shift towards private ILS deals at many managers a diverse strategy across cat bond and more mixed ILS funds will prove very attractive to large institutional investors such as pension funds in the future.

Eurekahedge ILS Advisers Index - Tracking the average performance of 30 ILS funds

Eurekahedge ILS Advisers Index - Tracking the average performance of 30 ILS funds (click the image for more details)

You can track the Eurekahedge ILS Advisers Index on Artemis here. It comprises an equally weighted index of 32 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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