Average insurance-linked (ILS) fund returns 0.31% in November

The average return of insurance-linked funds in November 2015 reached 0.31%, taking the return for the year to 30th November across a group of 32 ILS, reinsurance linked and catastrophe bond funds, to 4.15%.

At 0.31% the average return of the ILS funds included in the Eurekahedge ILS Advisers Index, which tracks the performance of a group of ILS funds and reports their average performance, so giving a god proxy for ILS market return, was slightly below the long-term average for the month of 0.35%.

Returns in November continued to reduce as catastrophe bonds exposed to U.S. named storm and hurricane came fully off-risk. As seasonality from the Atlantic hurricane season reduces even private ILS funds saw premium allocations reducing, although still managing to significantly outperform pure catastrophe bond funds.

The year-to-date return for the Index, of 4.15% up to the end of November 2015, is the third-lowest for the first 11 months on record. This is despite no months having seen a negative return in 2015 and reflects the reduced pricing performance on catastrophe bonds, reinsurance contracts and across the market in general due to the softening cycle.

Stefan Kräuchi, founder of ILS Advisers, commented on the performance across the different classes of ILS funds included in the Index, saying; “In November, cat bond return made slight positive returns, which drove pure cat bond funds to grow 0.17%. The private ILS funds grew by 0.35%. After the US hurricane season, the performance gap from the two subgroups narrowed from 3.86% previous month to 3.72% this month.”

So the benefits of a diversified investment across the ILS sector remain apparent, with private ILS or collateralised reinsurance deals driving much of the performance for the Index again. However it is also apparent that there is a wide range in returns available within those private ILS funds, which ultimately gives investors much more choice in terms of risk and return profile of funds.

“Still private ILS secured significant outperformance. This month more funds are positive compared to the last month. 31 funds represented in the Eurekahedge ILS Advisers Index made positive returns,” Kräuchi continued.

Catastrophe and severe weather events across the globe had some impact on a few of the ILS funds that invest in collateralised reinsurance and private transactions. This is evidence of the continued expansion of the ILS market, with private deals and an increase in aggregate exposure meaning that some ILS funds are increasingly exposed to frequency events, rather than just severity.

A major bushfire in southern Australia caused small losses to some funds that have exposure through private ILS contracts, ILS Advisers explained. The one ILS fund that reported negative performance for November was due to a loss on aggregate reinsurance covers in Australia, according to ILS Advisers.

Some ILS funds also reported attritional losses due to the flooding and European windstorm events in the UK, but impacts to their portfolios are expected to be minor.

Kräuchi explained how the risk profile of the sector has changed; “The widespread nature of private contracts means losses can be incurred even in absence of major events. This is in line with our observation that some private ILS funds suffered losses from regional and frequent events.”

The difference between the best and the worst performing ILS fund tracked by ILS Advisors in November 2015 was 0.94% points, which was lower than the gap in October perhaps reflecting reduced seasonal premium input.

December could see further small losses for some of the private ILS funds in the group, as continued UK flooding, as well as tornadoes, severe weather and flooding in the U.S., could all hit those ILS funds with aggregate exposures, or that are participating in collateralised reinsurance contracts.

Eurekahedge ILS Advisers Index, showing average return of ILS and cat bond fund market - Click the image for more data on ILS fund performance

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 32 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.