The Aon Benfield ILS Indices, a set of indices calculated using month-end pricing data for outstanding catastrophe bonds and insurance-linked securities, saw mixed results in Q1 2015 as U.S. hurricane bonds dragged the index down.
The Aon Benfield U.S. Hurricane Bond index saw negative performance for the quarter of -0.55%, which dragged the Aon Benfield All Bond ILS index to a negative quarterly return of -0.26%.
These figures compare to a positive return of 1.08% for the hurricane bond index and 1.5% for the All Bond index in Q1 2014.
In comparison, the two other indices operated by Aon Benfield Securities, the BB-rated Bond index and the U.S. Earthquake Bond index, were both positive for the quarter. The BB-rated Bond index returned 0.42% while the U.S. Earthquake Bond index saw the highest quarterly return at 0.69%.
Paul Schultz, Chief Executive Officer (CEO) at Aon Benfield Securities, explained to Artemis; “Weakness in the US Hurricane index was driven by Florida-exposed bonds. Recent selling pressure in Everglades 2014, its relatively large notional size and the expectation of additional Florida exposed bonds coming to market in the first and second quarter drove losses. Selling pressure led to a decline of -0.55% in the US HU Index during the first quarter: prices declines contributed to a -2.28% loss, offset by a 1.72% positive contribution to return from coupon.”
In the quarter the Aon Benfield ILS Indices underperformed relative fixed income benchmarks, something that does not happen very often. This reflects the challenging environment that catastrophe bond focused investors find themselves in recently, with yields down and secondary pricing not always behaving as they might expect.
The secondary market for cat bonds and ILS continues to be affected by primary issuance levels, capital inflows and demand factors, which while all signs of a functioning market are also all signs of a market that remains insufficient to truly satisfy investor demand.
On an annual return basis all of the ILS indices underperformed the prior year, as keeping pace with returns as the overall yield of the market has declined is just not feasible.
However, despite the decreases the rolling ten-year average annual return remains very attractive, with the Aon Benfield All Bond ILS index recording an 8.33% average return, which remains superior to many fixed income benchmark average returns.
ABS notes that this average annual return; “Demonstrates the value a diversified book of pure insurance risks can bring long term investors’ portfolios.”
For the year ended the 31st March the All Bond index returned 3.14%, the BB-rated Bond index 1.81%, the U.S. Hurricane Bond index 6.27% and the U.S. Earthquake Bond index 3.12%.
These annual return figures indicate that a diversified portfolio, across the different peril classes, would hope to have achieved a return of around 3.6% or higher, depending on exposure to U.S. wind bonds. At that level the annual return still beats many of the fixed income benchmark returns, but only just.
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