ILS funds achieve 0.51% January 2019 return despite continued loss creep

Insurance-linked securities (ILS) and reinsurance linked investment funds managed to achieve a slightly below average monthly return of 0.51% in January 2019, despite the continued impact of loss creep from previous events.

The impact of the last two year’s of catastrophe losses continues to affect the ILS fund market, even resulting in a delay in the reporting of the figures from the Eurekahedge ILS Advisers Index this month as well as the removal of one Markel CATCo fund that has yet to report a January return.

But, despite this, the 0.51% return achieved in January 2019 is a decent start to the year and the highest monthly return of this Index since last July, so will be welcomed by ILS investors.

After a negative 2018, ILS and catastrophe bond fund managers will be hoping for some more stable months of returns through the start of this year and so far fresh losses remain lighter, while some price recovery in cat bonds has continued to drive prices there.

But the spectre of loss creep from prior catastrophe events continues to haunt both the private ILS and cat bond fund market’s, with further impacts felt in January 2019.

These adjustments to previous losses and related side pockets from 2017 and 2018 events continue to take a toll on some ILS funds, particularly on the private ILS side of the market.

While in January there were also updates to some cat bond loss expectations, resulting in a few marked down positions in that market as well.

But overall, the 0.51% January return was only a little below the long-term average of 0.61% for the month, so not a bad start to the year considering.

However, as usual strategies matter and some ILS funds fared much worse than others, resulting in a wide gap between performance levels.

Pure catastrophe bond fund returns were driven by price increases in that market, helped by the pressure created by considerable maturities during the month.

As a result, the cat bond funds contained in the Index rose by 0.76%, while the funds investing in private ILS transactions and collateralized reinsurance only rose by 0.33%.

“Private ILS funds on average continued to underperform pure cat bond funds YTD. The biggest gainer was a cat bond fund that increased by 1.49%. The biggest loser in the Index was a private ILS fund that lost 0.83% for the month. The difference between the best and the worst performing fund was 2.23 percentage points,” said ILS Advisors Founder Stefan Kräuchi, explaining the performance gap to Artemis.

While explaining the differing performance levels seen Kräuchi said, “Adjustments for previous losses  still were an important factor for January performance. Some cat bonds were marked down due to further losses reports from cedents. However, due to massive maturity of bonds, purchasing power drove up the prices by 1.02%.”

Overall 29 of the 32 ILS funds included in the Index for January reported a positive return, but the gap in performance between the cat bond funds and private ILS funds continued during the month.

As a result, the private ILS fund segment now underperforms the pure cat bond fund segment of the Index by a huge 5.39% on an annualised basis.

This gulf shows how impactful the losses of the last 12 months and the ongoing loss creep have been to private ILS and collateralized reinsurance contracts.

But with a few months ahead where lower levels of overall global catastrophe loss will be hoped for, the ILS fund industry could gain a decent start to the year 2019, as long as the spectre of loss creep doesn’t continue to raise its ugly head.

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 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.