ILS funds return 0.24% in February, as catastrophes erode deductibles

by Artemis on April 2, 2015

The average return of insurance-linked securities (ILS), reinsurance linked investment and pure catastrophe bond funds reached 0.24% in February, a month that saw catastrophe events around the globe erode ILS fund aggregate deductibles.

The 0.24% monthly performance for February, as reported by the Eurekahedge ILS Advisers Index, is below average for the month, however not the lowest February performance ever seen as three months in previous years saw worse performance.

Stefan Kräuchi, founder of ILS Advisers told Artemis; “The EH ILS Advisers Index was up by 0.24% for February, which makes it the 4th weakest February for the index, but as we know the beginning of the year does not mean much. February 2009 was up by only 0.22% but the year turned out to be the second best year for the index with almost 9% performance but of course we are now in a different part of the reinsurance cycle.”

February saw a number of catastrophe events strike the globe, including two cyclones that struck northern Australia and the almost constant severe winter weather in the United States. Losses from the U.S. winter weather are expected to exceed $1 billion.

“Despite this all funds, with one small exception, were up for the month. However some funds reported an erosion of their aggregate deductibles,” Kräuchi explained, saying that actual losses suffered by funds were small.

As the ILS market expands and ILS funds increasingly allocate capital to collateralized reinsurance contracts the chances of small or attritional losses grow. The impact of this development of the ILS market could result in more volatility for certain funds and underscores the importance of diversification.

The end of the European windstorm season was drawing to a close in February, although nobody told storm Niklas, meaning that the premium flow from this peril dropped as a result, which Kräuchi said negatively impacted some ILS funds during the month.

33 out of the 34 ILS funds tracked by the Index were positive for the month of February, however the difference between ILS funds performance narrowed this month.

“In general fund performances are within a narrow range with a difference of only 0.92 percentage points between the best and the worst performing fund which is largely due to seasonality as only a small share of the premium income is allocated to February,” Kräuchi explained.

The gap between ILS funds focused on collateralized reinsurance or private ILS and those investing in pure catastrophe bonds was narrower than in previous months as well, perhaps demonstrating how the attrition of cat events can have a tendency to hit the collateralized players rather than cat bonds.

Kräuchi continued; “Private ILS funds continued to do better, up 0.34% for the month, than pure cat bond funds with a performance of 0.07% on average, as price in the secondary cat bond market was quite weak for many perils.”

On an annualised basis though, the private ILS and collateralized reinsurance focused ILS funds outperformed by 3.30 percentage points.

February 2015’s ILS fund performance is just under half that seen a year ago and provides a good example of how catastrophe events at this time of year can impact performance as well. It will be interesting to see how the high volume of primary issuance in March and the inevitable inflows that accompany it will have affected the month when it is reported in due course.

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

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 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.

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