Cat bond funds see best month in 2 years, ILS funds avg 1.03% in Sept

Pure catastrophe bond investment funds saw their highest single monthly return in two years in September, as the rebound in cat bond prices helped to raise the average ILS fund return across a group of 34 ILS, reinsurance linked and catastrophe bond funds to 1.03%.

After consecutive months of low returns earlier this year, as prices were affected by reinsurance market dynamics and supply/demand factors which depressed secondary marks, cat bonds continued their strong rebound in September.

The September return 1.03% average ILS fund return, across the 34 ILS funds tracked by the Eurekahedge ILS Advisers Index, is the highest month of the year so far and in fact the highest return for the Index in two years as well. The historical average for September is 0.95%.

Year-to-date the Index has returned 3.55%, which remains the second lowest on record for nine months into the year.

All 34 of the constituent ILS and cat bond funds were positive in September, according to ILS Advisers.

Stefan Kräuchi, founder of ILS Advisers, provided some colour on how the monthly performance broker down; “In September the second month for the cat bonds to rebound and gain 1.48% in total return. Such a gain also helped pure cat bond funds make the best monthly return over the past 24 months. Private ILS funds continued to outperformance and delivered 1.15% gain on average, making the YTD performance gap 3.63% on annualized basis. Dispersion in performance is still quite remarkable with a range from 0.34% to 2.32% for the month.”

During September some ILS funds reported immaterial losses to their funds from a range of events, such as the Chile earthquake or wildfires in the U.S. No significant impact has been expected by any fund, but the fact they report small impacts is further demonstration of the increasing diversification in ILS funds thanks to collateralized reinsurance and private ILS.

The outstanding catastrophe bond market total return rose by 1.48% during September while the price return rose by 0.93%, a very strong month for the market as seasonality helped prices recoup losses from earlier this year.

That strong cat bond performance is unlikely to be repeated in October, although seasonal effects will still drive pricing higher. However the impact of the loss (while still uncertain exactly how much) of the MultiCat Mexico 2012 cat bond will bring down cat bond fund returns a little.

ILS Advisers said that it has already had some ILS funds report holdings of the MultiCat notes to it.

The difference between the best and the worst performing fund in September hit was 1.98%, lower than previous month’s figure. Pure catastrophe bond funds rose by 0.86% while the group of ILS funds that also invest in private ILS and collateralized reinsurance increased by 1.15%.

Given September was again a month which saw global financial market uncertainty and volatility, the ILS fund index has again beaten many financial market benchmarks. While returns remain lower than has historically been witnessed, ILS funds continue to provide attractive returns in comparison to many other asset classes.

Eurekahedge ILS Advisers Index, showing average return of ILS and cat bond fund market

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 34 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.