Average ILS fund return up 0.46% in March, hit 17 positive months

The average returns of insurance-linked securities (ILS), reinsurance linked investment and pure catastrophe bond funds were up 0.46% for March 2014, taking the ILS fund sectors run of positive months to 17, according to the latest data from the Eurekahedge ILS Advisers Index.

March was actually an above average months return for the universe of ILS funds tracked by the Eurekahedge ILS Advisers Index, due to the heavily negative month of March 2011 skewing the results slightly. Take that month out and March 214 was a little below average, a reflection of the reduction of rates across the market perhaps.

March was actually the worst month of 2014 for the ILS fund market, although March can tend to see lower returns than January and February, possibly something to do with the primary issuance market for cat bonds often picking up at this time. January and February 2014 both saw returns of 0.5% according to the Index.

The Swiss Re Cat Bond Price Return Index was down -0.06% for March, again demonstrating the lack of pure price driven returns during the month, while the Cat Bond Total Return Index rose by 0.62%, again showing that pure catastrophe bond funds taking a broad spread of the market would have beaten the ILS fund average again.

The ILS fund space is beginning to feel the impact of declining catastrophe bond and catastrophe reinsurance rates on monthly performance. However the average return in March of 0.46% takes the first quarter return for the Index to 1.46%, which for investors is likely still considered a reasonable average for the sector to achieve, although it is down on Q1 2013 which saw a return of 2.05%.

Perhaps most impressive is the ILS fund sectors run of months without a negative return. Counting flat months as positive, of which there has been one last year, the ILS Advisers Index shows that average ILS fund returns have now seen 17 consecutive positive months.

Stefan Kräuchi, founder of ILS Advisers, commented; “The Eurekahedge ILS Advisers Index posted its 17th consecutive month of positive (counting flat months as positive) returns, and is up 7.01% over the last 12 months. Since its inception in December 2005, the index has delivered the best risk adjusted returns among all asset classes and boasts an impressive Sharpe ratio of 2.28 based on research released today by Eurekahedge.”

The cat bond market remained buoyant in March, noted ILS Advisers, with considerable capital inflow helping to keep the issuance environment dynamic.

Kräuchi said; “The first quarter has been very active with new record sales of cat bonds. Issuers, some of them new comers to the cat bond market, take advantage of investors’ appetite for uncorrelated and relatively attractive returns. At a time (April 10th) when Greece can raise USD 4.1bn in five year bonds at a yield of less than 5% and the issue was seven times oversubscribed I think ILS is still a very attractive alternative.”

In March 33 of the 34 insurance linked funds tracked by the Eurekahedge ILS Advisers Index reported positive returns. One fund reported unchanged because of premium adjustments for last year.

Once again the gap between strategies is evident, with the difference between the best and the worst performing ILS fund reaching 1.65% in March, which was higher than February’s figure. Pure catastrophe bond funds as a group performed slightly better in March, being up by 0.50%, while the subgroup of funds whose strategies include private ILS transactions were up by 0.46%.

So while returns are certainly looking down for a period where the ILS fund market has experienced no significant losses, the main reason is the soft market and reduced rates on catastrophe bonds. This trend looks set to continue, a slightly lower returns than in previous years, while cat bond rates and reinsurance prices remain low.

It will be interesting to see how the performance fares in the peak mid-summer months when many ILS fund typically earn more premium and experience higher returns due to seasonality.

Eurekahedge ILS Advisers Index – Tracking the average performance of 34 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.