ILS fund returns hit 0.86% in September on low catastrophe impact

The average return of the insurance-linked securities (ILS), reinsurance linked investment and pure catastrophe bond fund market reached its highest level of the year in September, at 0.86%, as impact from catastrophes on the asset class remained low.

September is typically the best performing month of the year for ILS funds and pure cat bond funds, as seasonality feeds into returns due to the peaking U.S. hurricane season. The latest data from the Eurekahedge ILS Advisers Index, which tracks ILS and cat bond fund performance, shows that 2014 has stayed true to form and the 0.86% returned in September is the highest single monthly return of 2014.

This beats the 0.82% achieved in August, which was actually particularly good for that month in a market of reduced yields, but September’s 0.86% lags a little way behind the historical average return for the month of 0.94%.

Year to date the ILS Advisers index has recorded an average return of 4.21%, which is some way behind the historical average of 5.21%, although perhaps not as far behind as some might have expected given the lower pricing and yields available on many insurance-linked assets and catastrophe bonds.

In fact, as an average return across 33 constituent ILS and cat bond funds that are tracked by ILS Advisers, a 4.21% return for the first nine months of the year is not that bad. Typically you would expect another 1.5% to be added if the rest of the year remains loss free, so the year-end total could be close to 5.5% to 6% we would expect.

September 2014 saw a number of catastrophe events around the world, with one even directly affecting a catastrophe bond, but the impact on the ILS market’s average return was muted.

Stefan Kräuchi, founder of ILS Advisers, explained; “In September, the most notable disaster was Hurricane Odile which hit Baja California Sur, Mexico. This was the most serious hurricane in that area since 1967, affecting more than 200,000 people. The hurricane had a central pressure of 930 mb and triggered cat bond MultiCat Mexico Class C, causing 50% loss. However the impact to the whole asset class remained small. In addition, Japan experienced two typhoons for which insured losses are yet to be confirmed. Finally, northern India and Pakistan suffered from strong monsoons. All events mentioned above had limited impact on ILS.”

There was a small impact to a number of pure cat bond funds from hurricane Odile, Kräuchi continued; “Hurricane Odile caused some impact to a few funds that mainly focus on cat bonds but impact to the whole asset class remained small.”

ILS funds participating in private ILS deals, collateralized reinsurance and other insurance-linked assets continue to far outperform pure catastrophe bond funds.

“Private ILS funds have outperformed pure cat bond funds for 6 consecutive months. The performance gap has widened to 0.69% on a monthly basis and 2.90% on an annualized basis, the biggest gap year-to-date,” Kräuchi said.

Pure catastrophe bond funds as a group were up by 0.48% in September (lower than August, perhaps demonstrating Odile’s impact), while the subgroup of funds whose strategies include private ILS and collateralized products increased by 1.17%. 30 out of the 33 constituent ILS funds saw a positive return in September.

The gap between the best and worst performing fund has widened again, to the greatest difference in the last year. The gap between top and bottom performing ILS fund reached 3.31% in September 2014.

So unsurprisingly there does seem to have been a negative impact to the pure cat bond funds due to hurricane Odile and the expected triggering of the MultiCat Mexico 2012 cat bond. It’s likely this has been fully priced into ILS funds as a loss meaning that there would be no further downside from this event in months to come.

October has so far been another quiet month in terms of catastrophe events affecting the global insurance and reinsurance market, so the average ILS return for this month should be strong as well. However, the seasonal effects on returns do begin to tail off in October which should result in slightly lower numbers, although perhaps pure cat bond funds will contribute more with Odile already factored in.

Eurekahedge ILS Advisers Index, showing average return of ILS and cat bond fund market

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 33 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.