ILS fund returns rise on reserve adjustments for some 2017 months

by Artemis on January 15, 2018

A number of insurance-linked securities (ILS) and reinsurance-linked investment funds have restated their returns for some loss hit months due to making adjustments to reserves, which has had the effect of lifting the monthly and annual returns of the ILS fund market as reported by the Eurekahedge ILS Advisers Index.

In September the ILS Advisers Index fell by -9.04%, the largest single monthly drop in its history. However the decline for September 2017 has now been adjusted to -8.61%, as ILS funds restate returns due to changes made in their reserving for the hurricanes.

October 2017 saw the ILS Advisers Index rise by 0.35%, a recovery of sorts after the impact of September. But this figure has been restated down to 0.32% on updates from ILS funds.

November 2017 has seen the biggest change, in percentage terms, as the originally reported positive return of 0.38% for the month has now been doubled to 0.76%, the ILS Advisors Index shows, again reflecting reserve adjustments made by ILS fund managers.

With December 2017 returns currently stated at 0.52%, although only based on reporting from around a quarter of the ILS funds tracked by the Index, the year-to-date return has now risen to -5.36%.

While a negative year that is not anywhere near as negative as the -7% or so reported at the end of October.

Benefiting the returns of the ILS fund market has been its reserving practices. We’re told that a number of ILS funds had reserved heavily for losses in the last few months of the year, but as there remains significant uncertainty over the eventual size of losses some of these reserves have been reduced just prior to the end of the year.

Also, some ILS funds have shifted reserves from those set aside to pay for losses into side-pockets to allow for losses to develop, as the initial figures reserved for may have been too high.

Additionally, there have been some ILW positions which had been facing loss but have been saved by updates to industry loss estimates, we understand.

This all reflects the fact that the ILS fund market, while facing the largest losses in its history, recognises that the losses are not quite as bad as they were first estimated to be.

For the investors in these ILS funds this practice of reserving for the maximum possible losses, then releasing some reserves as it becomes possible to do so when greater clarity emerges, is beneficial as it helps to protect them against loss deterioration.

There is of course still a chance that some reserves may need strengthening in the months ahead, however the ILS fund managers now have a lot of information available to them on the 2017 losses and it will be hoped that the current reserves have been set relatively accurately now.

Full monthly return details are available from the Eurekahedge ILS Advisers Index.

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