ILS funds return 0.2% in March, cat bond funds perform worst

by Artemis on May 6, 2015

The average return across a group of 34 insurance-linked securities (ILS), reinsurance linked investment and pure catastrophe bond funds fell to 0.2% in March, the second lowest return for the month on record, as pure cat bond funds suffered from weak performance.

The 0.2% March monthly performance, for the group of ILS funds tracked by the Eurekahedge ILS Advisers Index, is the second lowest March performance on record. Only March 2011 saw worse performance, when the Tohoku quake impact saw the index drop to -3.9% for the month.

For the first-quarter of 2015 the ILS Advisers Index also tracks below average, having returned 0.84% in Q1 compared to an average for the quarter of 1.38%. This is not unsurprising, but poor performance of catastrophe bond secondary marks continues to weigh on returns.

So far this year, founder of ILS Advisers Stefan Kräuchi noted, catastrophic losses hitting the insurance and reinsurance industry remain very low, so events cannot be blamed for lower fund performance.

Given various events globally this month, ILS funds have suffered minimal impact. Insured losses for the 1st quarter was USD 3.25bn (USD 2.2bn for the U.S.), 76% below the average of the past 10 years of USD 13.1bn, in the absence of a major event,” Kräuchi explained.

Weak price performance of catastrophe bonds hit the Index, leading to lower returns for pure cat bond funds than for the funds which invest in private ILS and collateralized reinsurance as well. The Swiss Re Cat Bond Price Index was down by 0.56% in March and the Total Return Index down by 0.01%.

Only 27 of the 34 ILS funds tracked by the Index reported positive returns in March, with all 7 funds that were negative being pure cat bonds funds that were hit by the weak performance.

“The difference between the best and the worst performing fund was 0.83 percentage points, which was lower than previous month’s figure,” Kräuchi commented.

The negative price development on outstanding catastrophe bonds ensured that as a group cat bonds funds were worse off in March.

“Pure cat bond funds as a group were up by 0.02% while the sub-group of funds whose strategies include private ILS increased by 0.31%,” said Kräuchi.

On an annualised basis the difference in performance between the two strategies, of pure cat bonds versus funds investing in private ILS and collateralized reinsurance, is clear. The annualised gap currently sits at a widening 3.37% and private ILS focused funds have now outperformed pure cat bond funds for 12 consecutive months.

Finally, ILS Advisers have observed an ongoing and perhaps accelerating shift by ILS fund managers into more niche strategies, or by moving into or expanding further into specialty lines of reinsurance business. This is likely due to the low rates in property catastrophe reinsurance.

It will be interesting to see how cat bonds perform price wise through the coming months. With a significant amount of new cat bond issuance to complete in May, the secondary market prices may see further pressure. As primary issuance typically slows through the summer months it will be interesting to see if/how cat bond price movements bounce back.

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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