Reserve strengthening, wildfires push some ILS funds to November drop

Negative returns have continued for a number of insurance-linked securities (ILS) and reinsurance or retrocessional linked investment funds in November, as some reserve strengthening has been required for prior month catastrophe events and a few ILS funds have been hit by the California wildfires.

The second-half of 2017 brought major hurricanes, in the shape of Harvey, Irma and Maria, earthquakes in Mexico and the California wildfires, all of which have caused negative impacts to the insurance-linked securities (ILS) and catastrophe bond markets.

November’s negative performance, which we’re told by sources has affected a number of ILS fund strategies, makes it four months in a row that at least some ILS funds have suffered a negative month due to losses, or an expectation of losses from the second-half catastrophe events.

A few ILS strategies felt the impact of hurricane Harvey in August, which drove the ILS Advisers index of ILS fund performance to -0.34% for the month.

September, which saw hurricanes Irma and Maria make devastating hits on the Caribbean and the United States, resulted in much broader ILS market losses, becoming the most negative month on record for the ILS fund market, recorded as -9.04% by ILS Advisers index.

Then October saw further hurricane losses flowing to ILS funds and the beginnings of mark downs for potential exposure to the California wildfires, resulting in 10 individual ILS funds falling to a negative return for the month.

We’ve been told that the negativity continued in November, with a number of ILS funds having to strengthen their reserves for the hurricane events in November, denting their monthly returns, while others have been establishing loss reserves for the impacts from the California wildfire loss events.

We understand that one ILS fund has made a substantial increase to its hurricane Harvey loss reserves in November, driving it to a high single digit loss for the month.

Loss events as large and complex as we’ve seen in 2017 can take some time to be fully understood, although adding large amounts to loss reserves from catastrophes occurring two or three months earlier is not all that common. ILS fund managers typically try to reserve as soon as possible and to the highest level expected to be needed to cover future loss development.

It’s possible in this case that notification of losses from a cedent has taken much longer than would normally be anticipated or hoped for.

The California wildfire losses, both the $10 billion of so of losses from fires in the northern wine regions and the additional insurance and reinsurance losses expected from wildfires in the southern part of the state, have been hitting ILS funds in multiple ways.

ILS fund managers have suffered from the marking down of catastrophe bonds that have potentially been impacted by the wildfires, more mark downs of aggregate cat bonds that are exposed to a number of the recent catastrophes, and also some private ILS contract impacts that have resulted in the necessity to set up loss reserves in November.

With the wildfires having continued into December there could be additional loss notifications or reserve strengthening to deal with in that month as well.

As a result of all of this loss activity we’re told that a handful of ILS funds have now suffered four months in a row with negative returns, which is quite unprecedented in the history of the ILS marketplace.

With 100% of tracked ILS funds having now reported their November returns to ILS Advisers, the Index shows a positive return of 0.38% for November 2017.

The fact the Index remains positive so far shows that the November negativity is likely not that widespread in the sector, likely being more contained to higher-risk ILS funds that invest in private ILS and collateralized reinsurance, while the lower volatility funds and cat bond focused strategies are likely to remain largely in positive territory.

Once again, this shows the difference in how different ILS fund strategies have been affected by recent catastrophe loss events

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