ILS funds average 0.16% in May, as cat bond price pressure continues

Pricing pressure on outstanding catastrophe bonds continued to drag on the average return of the insurance-linked securities (ILS) market in May, with the average ILS fund return across a group of 34 ILS, reinsurance linked and catastrophe bond funds only managing 0.16% in May.

As you’d expect, due to the cat bond pricing pressure, the group of funds focused on cat bond investments struggled again in May. On the other hand, the group of funds which also invest in private ILS or collateralized reinsurance saw stronger performance.

The 0.16% average return for the month of May, for the ILS funds tracked by the Eurekahedge ILS Advisers Index, is the third lowest May return on record. The return year-to-date has now reached 1.09%, remaining well below average for the time of year.

Despite various catastrophe events around the world in May, ILS Advisers reports that the group of ILS funds it tracks didn’t suffer any material losses.

Stefan Kräuchi, founder of ILS Advisers, commented; “Given various events globally this month, ILS funds have suffered minimal impact. 26 of the 34 funds represented in the Eurekahedge ILS Advisers Index were positive. 8 funds in the index were negative. All the negative funds are pure cat bond funds.”

The ILS Advisers Index continues to demonstrate the stronger performance of the ILS funds focused on private ILS and collateralized reinsurance, while the cat bond market price pressure is clearly evident in eight funds inability to perform positively.

“Private ILS funds outperformed pure cat bond funds by 0.27 percentage point monthly and 3.04 percentage points on annualized basis. The outperformance persisted for the past 14 months,” Kräuchi explained.

The pricing pressure on cat bonds was largely seen on lower-yielding notes in May, according to ILS Advisers, as these notes suffer from lower demand as cat bond fund managers need to target higher-yielding layers in order to maintain returns.

ILS Advisers has noted some interesting trends from the recent reinsurance renewals, including some rate hardening on private ILS transactions.

“In terms of private ILS, while ROLs declined on recent renewals, it was on moderating pace, even hardening in some sectors,” Kräuchi commented.

This stabilising of reinsurance rates, which has been noted by the major reinsurance brokers, has been helped by a lowering of capital under management at some larger ILS managers, Kräuchi said.

“The AUM deduction of some large ILS players signaled the mitigation of over capacity. Similarly weakening support from the capital market and increasing demand lead to development in retro market,” he continued.

The gap between top and bottom performing ILS fund in May narrowed to 0.9%, lower than previous month’s figure. Pure catastrophe bond funds averaged a flat return in May, although many were down, while the subgroup of funds whose strategies include private ILS increased by 0.27%.

The expected recovery of catastrophe bond secondary prices had yet to materialise by the end of May, with many positions priced below par still. That should begin to become evident over the course of the U.S. wind season, although to what extent they recover remains to be seen given the demand factors that are also pressuring cat bonds.

It would normally be expected for this Index to demonstrate much stronger performance for June. Investment managers will be hoping to see cat bond funds make a greater contribution in that month.

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.