Cat bond prices & MultiCat drag ILS fund returns down in October

Seasonal factors and a likely loss for the catastrophe bond market from MultiCat dragged down the average ILS fund return in October, across a group of 32 ILS, reinsurance linked and catastrophe bond funds, to just 0.26%.

For the Eurekahedge ILS Advisers Index, which tracks the performance of a group of ILS funds and reports their average performance, so giving a god proxy for ILS market return, the 0.26% October figure is the 3rd lowest October performance in ten years.

Year-to-date for 2015, to the end of October, the ILS Advisers Index has now returned 3.82%, which is also the 3rd lowest figure by that stage of the year on record.

Following on from two much stronger months in August and September, the October result looks a little disappointing. Seasonality and price recovery in catastrophe bonds saw the two previous months experiencing average, or above, returns.

But October appears to have seen seasonality tail off rapidly, resulting in price declines of U.S. wind exposed outstanding cat bond marks, while at the same time the impact of hurricane Patricia in Mexico and the expectation of an impending default and loss for the MultiCat Mexico 2012 cat bond also dragged down average ILS fund returns.

Stefan Kräuchi, founder of ILS Advisers, explained the seasonal factors impacting October’s ILS fund returns; “9 out of the 32 funds represented in the Eurekahedge ILS Advisers Index were negative, mainly due to the price compression of cat bonds and lower premium allocation of private transactions as we officially exit the US Hurricane Season.”

The difference in performance between ILS funds in October was stark, in fact the biggest gap of the year between top and bottom performer, Kräuchi explained; “With the lowest single fund return -1.72% and the highest one 2.15%, the monthly performance difference was increased to 3.87%, the highest in the year.”

The MultiCat Mexico 2012 Class C cat bond notes saw their price fall by 95% at one point, recovering to 80% down, and this decline hit a number of funds returns in October. Additionally, some fund managers began to switch out of catastrophe bonds, over to private ILS and collateralized reinsurance deals, likely as the end of the seasonally higher returns began and they try to lock in gains made in August and September.

Pure cat bond funds as a group were down by 0.02% for October, while the subgroup of funds whose strategies include investing in private ILS and collateralized reinsurance again outperformed, increasing by 0.46%.

This stretched the performance gap between pure cat bond fund and private ILS fund to 3.86% on an annualised basis, the highest gap so far this year.

Looking ahead for the rest of the year this pattern, of lower cat bond returns and ultimately private ILS too, as seasonal effects wear off, is expected to continue.

“The US hurricane season just ended, on the one hand, we expect the monthly return to be lower since less premium will be allocated and the seasonality effect fades. On the other hand, we expect ILS fund managers to increase cash holding as to prepare for the January renewal 2016, which further reduces the return of the remaining months in the year,” Kräuchi said.

In terms of loss events, ILS Advisers said they expect little to no impact to ILS fund managers, even those investing in collateralized reinsurance, from events in October such as flooding across the U.S., Patricia (aside from MultiCat) and the terrorist attacks in Paris, France.

Eurekahedge ILS Advisers Index, showing average return of ILS and cat bond fund market - Click the image for more data on ILS fund performance

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 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.