Average insurance linked investment fund up 0.49% in February

Insurance-linked securities (ILS), reinsurance linked investment and pure catastrophe bond funds were up 0.49% for February 2014, a slightly below average return for the month, according to the latest data from the Eurekahedge ILS Advisers Index.

February’s return of 0.49% for the universe of ILS funds tracked by the Eurekahedge ILS Advisers Index was a little below the long-term average of 0.65%, with performance driven largely by yield.

The Swiss Re Cat Bond Price Return Index was flat for the month, showing the lack of price driven returns during the month, while the Cat Bond Total Return Index rose by 0.61%, showing that a pure catastrophe bond fund invested across the market may have been able to beat the average return in February.

Stefan Kräuchi, founder of ILS Advisers, commented; “With plus 0.49% February was an average month for the Eurekahedge ILS Advisers Index. Performance was mainly driven by current yield. Various risk events around the globe had no impact on the ILS funds represented in the index.”

Investor interest in ILS and the insurance linked investment asset class remained strong in February, with four new broadly marketed cat bond transactions all resulting in yields settling at the low-end of expectations. Investors show an increased interest in low risk ILS, commented Kräuchi, something Artemis noted in its report on Q1 catastrophe bond and ILS issuance.

Interestingly, Kräuchi said that some ILS managers have been seeing inflows of capital in recent weeks, leading to high levels of cash at some ILS funds. The upshot of this will be managers with capital that now needs to be put to work, suggesting that for potential sponsors conditions and pricing could become even more attractive.

Kräuchi explained; “Due to continued strong inflows in the asset class, cash levels at many funds at the end of February were relatively high.”

However this can present an interesting conundrum for managers if primary issuance and deal-flow does not enable them to put their capital to work quickly. That could result in further competitive bidding in the secondary market, raising some positions even further above par, or in managers seeking out more private ILS deal-flow and collateralized reinsurance opportunities.

The approaching April reinsurance renewals were also a factor Kräuchi said; “Also managers were setting aside cash for April 1^st renewals. Meanwhile April renewals have confirmed the trend of softening rates across most lines and geographies. It will be interesting to see how the different managers will fare in this challenging environment. As a result manager selection will become even more important.”

The cash set aside for April reinsurance renewals will have had an influencing effect on the declines seen in renewal pricing, with reinsurance broker Willis Re having reported large declines of 20% on some lines of April renewal business.

In February, all 34 of the ILS and cat bond funds tracked by the Index saw positive returns for the month. However, once again the gap between best and worst performers demonstrated the range of returns on offer from the insurance linked investment market, with the difference between the best and the worst performing fund being 1.22%.

This gap was higher than seen in previous month’s figures, perhaps reflecting the fact that a more diverse range of strategies continues to launch all the time, particularly on the higher returning side as cat bond yields have decreased. Despite the increasing popularity of private ILS and collateralized reinsurance in ILS funds it was the difference between pure cat bond funds and funds whose strategies include private ILS was small, with cat bond funds averaging 0.47% and the rest averaging only slightly higher at 0.52%.

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 including the new USD hedged version of the index. It comprises an equally weighted index of 34 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.

ILS Advisers launched its first ILS fund strategy recently, the ILS Diversified Ltd. fund-of-funds, which invests in a selected group of ILS funds from across the market, seeking to offer a market beating return with lower volatility. Read more about ILS Diversified Ltd. here.