ILS funds return above average 0.23% in March, monitor Debbie loss

by Artemis on April 28, 2017

Insurance-linked securities (ILS), pure catastrophe bond and reinsurance-linked investment funds reported an above average return of 0.23% for March 2017, thanks to global catastrophe events having little immediate impact on ILS funds, although a number of ILS managers are monitoring the developing cyclone Debbie market loss.

The March average return of 0.23% is well above the historical average for the month of 0.16%. It takes 2017 year-to-date returns for the first-quarter to 0.91%, across the group of 34 ILS investment funds tracked by the Eurekahedge ILS Advisers Index, which is around the average ILS market return for this time of year.

Stefan Kräuchi, founder of ILS Advisers, discussed March 2017’s ILS fund performance, explaining; “31 funds represented in the Eurekahedge ILS Advisers Index made positive returns. The difference between the best and the worst performing fund was 1.06 percentage point, which was higher than the previous months figure.”

Pure catastrophe bond funds reported positive performance of 0.17% as a group, despite declining secondary prices which were a reflection of the fact that “Some funds were selling off some positions to make room for IPOs,” Kräuchi said.

With primary catastrophe bond issuance strong in March the natural effect is some selling down of secondary portfolios, which can weigh on pricing.

The group of ILS funds that also invest in private ILS and collateralized reinsurance deals reported stronger performance in March, recording an average return across this group of 0.26%.

“Private ILS funds outperformed pure cat bond funds by 1.43 percentage points on an annualized basis,” continued Kräuchi.

A number of severe weather catastrophe events occurred in March, but ILS Advisers said that direct impact to ILS was limited.

However the impact of cyclone Debbie, which struck Australia and is estimated by Swiss Re to have caused an insurance industry loss of as much as US$1.3 billion, is being closely monitored by a number of ILS funds which have potential exposure to the loss event.

“Natural disasters in March had little direct impact to ILS funds so far, although some ILS funds said they are still monitoring potential loss from the tropical cyclone Debbie in Australia,” Kräuchi told Artemis.

As ever though the build-up of losses could begin to threaten some aggregate layers, particularly in private ILS contracts which provide aggregate multi-peril coverage, or retrocessional covers which aggregate global industry losses. These would begin to show later in the year, as aggregate retentions are eroded.

So March has been a relatively strong month of returns for the ILS market, despite pressure on secondary cat bond pricing and the focus on new issuance and necessary capital inflows to support this.

The other index of ILS market returns we host, the Mercury investible Catastrophe Risk Index (MiCRIX), returned 0.33% in March 2017 and 1.26% for the first quarter, showing that a diversified portfolio of industry loss warranties (ILW’s) can provide a very attractive return.

March ILS fund performance could bode well for the coming months, especially as maturities in the cat bond market will result in significant capital to put back to work. How that record level of liquidity due to maturities will affect ILS fund returns will be interesting to watch.

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 - 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 34 constituent insurance-linked investment 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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