ILS fund returns again impacted by U.S. storms in May

by Artemis on June 29, 2017

Once again, slight impacts were reported for some ILS funds in May 2017 due to U.S. severe thunderstorm activity, as the average returns of the insurance-linked securities (ILS), pure catastrophe bond and reinsurance-linked investment fund sector came in at 0.19% for the month.

Supercell and tornado severe convective weatherThe May 2017 return was slightly below the long-term average for May, of 0.24%, taking the yield-to-date for 2017 so far to 1.24%, which is the third lowest for the 12 years since 2006, across the group of 34 ILS investment funds tracked by the Eurekahedge ILS Advisers Index.

Once again, the impact of convective weather and subsequent severe thunderstorms, large hail and tornadoes has dented the profitability of some ILS funds during the month. Hail appeared to be the major driver of loss during the month, with events in Colorado particularly hard hitting.

However, Stefan Kräuchi, founder of ILS Advisers, who tracks the market performance of ILS funds for the Index, said that any impact is considered “very slight and not material.”

“Severe weather in the US continued to exert pressure to ILS. Some funds faced losses or deductible erosions from the events. However, such impact is considered very slight and not material. The loss development is still on the way, and it will be more clear when we have better claim information from the funds,” Kräuchi explained.

We know that at least one ILS fund that invests in private collateralized reinsurance transactions has reported a negative return for the month of May due to the U.S. severe weather, and it appears that this fund is a constituent of the Index.

“33 funds represented in the Eurekahedge ILS Advisers Index made positive returns. The difference between the best and the worst performing fund was 1.20 percentage point,” Kräuchi explained to Artemis.

But despite this impact from the U.S. severe thunderstorms, which largely affects private ILS and collateralized reinsurance investments, the ILS funds investing in private deals continued to outperform those investing solely in cat bonds.

Kräuchi said; “Pure cat bond funds as a group were up by 0.17% while the subgroup of funds whose strategies include private ILS increased by 0.20%. Private ILS funds outperformed pure cat bond funds by 1.22 percentage points on annualized basis.”

Looking ahead now that the Atlantic hurricane season is officially underway, seasonality will influence ILS fund returns as well as any threats that are presented to the United States coastline.

“The U.S. hurricane season officially started at the end of May. The performance discrepancy will widen among ILS funds when we go through a hurricane season expected to be average. We will keep track of the hurricane activities as well as performance of ILS funds,” Kräuchi explained.

As seasonal returns flow in the performance boost should be seen across the ILS sector, although pure catastrophe bonds will likely see the smallest boost due to the overall expected loss of that market being lower than across the private ILS space.

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