ILS funds return average 0.40% in July, private ILS led the way

The average return of the insurance-linked securities (ILS), reinsurance linked investment and pure catastrophe bond fund market was slightly improved in July, at 0.40%, but the gap between pure cat bond and funds investing in private ILS is widening.

The latest data from the Eurekahedge ILS Advisers Index shows that the average return of ILS and cat bond funds had risen in July, to 0.40% which is the highest monthly average return since March. However the 0.40%, which is the same as the index recorded in July 2013, is the lowest July return recorded since the inception of the index.

The lower returns are a function of reduced cat bond yields and lower catastrophe reinsurance pricing, which has made achieving targeted returns more difficult for some ILS investment managers. As a result, more ILS funds are now investing in private ILS and collateralized reinsurance transactions, which allow them to access higher returns than the catastrophe bond has been offering of late.

In fact, over the year so far the funds investing in private ILS are far outperforming the pure cat bond funds as a group. This is to be expected, but ILS Advisers notes that the gap between the year-to-date return of the cat bond funds and the private ILS funds is now unprecedented.

Stefan Kräuchi, founder of ILS Advisers, explained; “Year to date we observe an unprecedented outperformance of private ILS versus pure cat bond funds of 1 percentage point (ppt) or 1.80ppt on an annualized basis. Given current market conditions in the cat bond market and in the absence of a major event, we expect this to continue for at least the rest of the year.”

While the average ILS fund return, as measured by the Eurekahedge ILS Advisers Index, hit 0.40% for July 2014, the cat bond market saw a total return, as measured by the Swiss Re index, of 0.49% but the price return index declined by 0.10%.

ILS Advisers notes that the market faced a number of catastrophic events and potential losses in July, including typhoons in China and Japan, aviation disasters such as the Malaysia Airlines flight which was shot down and the damage and destruction to planes in Tripoli, Libya.

Kräuchi commented; “Some funds reported to have small positions in aviation, but the impact would unlikely be material. However losses have to be confirmed with further investigation. Up to now, no impact was incurred by ILS funds. We will keep monitoring the situation.”

Most of the ILS funds are fully deployed at the moment, said Kräuchi, also noting an increase in exposure to U.S. wind and named storm in their portfolios at the moment, as is typical after the mid-year reinsurance renewals.

Some trading has been occurring, both speculative and also ILS funds writing ILW coverage as a way to hedge their own tail risks.

“We saw some funds taking positions early in the month as cat bond prices softened in order to benefit from stronger prices towards the end of the month. At the same time some funds took advantage of cheap hedging opportunities to hedge tail risk,” Kräuchi said.

32 out of the 33 constituent funds in the Index were positive in July, demonstrating the consistency and stability that investments in ILS funds can offer. The difference between best and worst performing fund tracked by the Index was 1.4%, which is higher than the previous months figure.

Pure catastrophe bond funds returned 0.26%, while the funds investing in private ILS and collateralized reinsurance led the way again with an average return of 0.53%.

The Index provides a way to analyse the performance of the sector, on an average basis. The year to date return of the index has risen to 2.48% after July. It will be interesting to see how the funds react, if at all, to the recent Napa, California earthquake. Kräuchi said that current loss estimates suggest no impact to ILS fund performance, but August’s figures will likely make this clearer.

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.