ILS fund inflows more than compensate for losses: Eurekahedge

Strong investor inflows in 2017 and 2018 helped the insurance-linked securities (ILS) fund market more than compensate for its losses, driving continued growth in the size of the sector, according to Eurekahedge.

However a slowdown in inflows was noted over the last year, as investor inflow allocations amounted to $9.4 billion in 2018, trailing the roughly $16 billion of inflows recorded in 2017.

But in both years these figures outstripped the performance-based losses suffered by ILS funds, which amounted to $2.1 billion in 2018 and around $7 billion in 2017, according to hedge fund data and analysis provider Eurekahedge.

Annual asset flows and AUM of the ILS fund industry – Source: Eurekahedge

Eurekahedge tracks an equally weighted index of 33 constituent ILS funds with the help of Hong Kong based specialist ILS investment manager and advisor, ILS Advisors. The resulting Index is available to view and analyse here on Artemis.

It should be noted that the figures above on losses are only performance-based losses recorded through the ILS fund returns reported and the respective funds assets under management, hence the gap between the roughly $9 billion or so of losses over 2017 and 2018.

This figure falls far short of the estimate that around $20 billion of ILS and collateralized reinsurance capacity was trapped by catastrophe losses of the last two years, but that figure is based on the entire market (Eurekahedge’s is a subset) and trapped collateral does not always translate into a loss.

But the gap between the two figures is interesting. It perhaps suggests that a good-sized chunk of the estimated $20 billion of trapped collateral will flow back without any losses to the ILS funds and reinsurance vehicles that deployed it in the first place, boosting their assets over the course of this year as loss expectations are finalised.

How much of this trapped collateral will flow back is uncertain and it’s unlikely to be anywhere near the $11 billion difference between the amount of performance-based ILS fund losses and the estimate of collateral trapped.

But it could be relatively meaningful, perhaps in the billions of dollars across the entire market and for some ILS funds and collateralized reinsurance vehicles be a welcome return of capital that can then be put to work in underwriting deployments.

It’s also worth noting that the inflows recorded over the years 2017 and 2018 still outstrip the total estimated trapped collateral, reflecting the ILS markets ability to replace affected capacity and continue to take opportunities to expand.

Another interesting data point to look at from Eurekahedge is the fact that many ILS funds actually reported positive returns for both 2017 and 2018.

In fact the median return of ILS hedge funds tracked by the Index in 2017 and 2018 was positive at 0.19% and 0.95%.

Some ILS funds did pretty well in fact, with the 90th percentile returns of tracked ILS funds being 2.59% in 2017 and 3.69% in 2018. However the 10th percentile returns reflect the severe losses suffered, at -18.40% in 2017 and -10.29% in 2018.

It’s another data point that shows how strategies and levels of risk assumed affect ILS fund performance and deliver a wide range of outcomes in loss heavy years.

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Terms & risk access as important as rates in determining ILS returns.