September sees best insurance-linked securities fund returns this year

September saw insurance-linked securities (ILS) funds return their strongest single month performance of the year so far, thanks to the very quiet Atlantic hurricane season and continued seasonal spread tightening, according to the Eurekahedge ILS Advisers Index.

The average insurance-linked security fund saw a stunning performance of 1.16% for the month of September 2013. That was the highest  single months performance since the previous September in 2012, which was just 2bps higher at 1.18%. This lifted the performance of the ILS Advisers Index to 5.9% for 2013.

The Eurekahedge ILS Advisers Index is an equally weighted index which tracks the performance of 30 constituent ILS funds, providing a broad measure of the performance of underlying hedge fund managers who exclusively allocate to insurance linked investments.

The catastrophe bond market saw performance of 0.94% in September for the Swiss Re price return index and 1.64% for the total return index, which as has been demonstrated in many months this year shows the attractiveness of a catastrophe bond investment strategy despite the reduction in cat bond rates.

September always has the potential to be a strong month for the ILS fund, catastrophe reinsurance and cat bond returns, just as long as there is no threat of major hurricanes approaching the U.S. coastline. For the second year in a row the Atlantic tropics have been unseasonably quiet in September, helping the average ILS fund achieve extremely attractive returns for their investors.

Stefan Kräuchi, founder of ILS Advisers, explained; “The extraordinarily quiet North Atlantic hurricane season with only two category 1 hurricanes until the end of September lead to a continuation of the uptrend in secondary market cat bond prices primarily for US hurricane cat bonds, on relatively small trading volumes.”

Recent secondary pricing, however, does suggest that the ILS and cat bond market believes that much of the threat of the hurricane season is now over.

Kräuchi cautions; “It seems that the market has already begun to price in the end of the hurricane season even though it officially only ends at the end of November. We sincerely hope history does not repeat itself as we had a similar situation last year with the secondary market discounting the end of the hurricane season early only to be surprised by HU Sandy right at the end of October.”

Since the inception of the Eurekahedge ILS Advisers Index September has seen average performance of 0.94%, demonstrating the strong returns that the month can deliver.

All 30 of the constituent funds in the Index delivered positive performance in September, however the difference between strategies was again clear. There was a difference of 3.76% between the best and worst performing funds, much lower than last month as one fund had seen a negative in August due to the German hail losses.

ILS funds with a balanced strategy across different types of catastrophe risk instruments and contracts performed slightly better as a group in September. Pure cat bond funds returned 1.1% while funds which also include private ILS were up by an average of 1.19%.

Performance from the Eurekahedge ILS Advisers Index in 2013 is already approaching the level returned over the course of the full year of 2012. Last year saw Index performance of 5.93% for the year, while 2013 is at 5.9% already.

Kräuchi commented; “Unless any large event happens until the end of the year, 2013 could turn out to be an excellent year.”

The Eurekahedge ILS Advisers Index continues to provide a good proxy for the performance of the ILS fund market, demonstrating the attractive returns that are possible from catastrophe risk and reinsurance as an asset class.

Eurekahedge ILS Advisers Index - Tracking the average performance of 30 ILS funds (click the image for more details)

You can track the Eurekahedge ILS Advisers Index on Artemis here. It comprises an equally weighted index of 30 constituent ILS 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.