12.3% MiCRIX 2014 return shows potential of ILW investments

The Mercury investible Catastrophe Risk Index, or MiCRIX for short, an ILS market index that we play host to here on Artemis, has achieved an above average full-year return for 2014 of 12.3%.

The MiCRIX, which was created by Bermuda based insurance-linked securities and industry loss warranty (ILW) investment manager Mercury Capital, provides another useful benchmark for the returns possible from a diversified portfolio of catastrophe risks.

Particularly interesting is the fact that the MiCRIX tracks the performance of a diversified portfolio of peak peril industry loss warranties (ILW’s), creating broad, diversified exposure to the sector and emulating the return an investor could make if following an ILW only investment strategy.

This provides a useful benchmark for comparison against other ILS and reinsurance linked investment strategies, such as catastrophe bond only, or diversified with private ILS deals. The level of risk involved in an ILW strategy can often be a little higher than generally seen in the cat bond market, but the investors are fully compensated with much higher yield potential than a strategy focused on cat bonds.

For comparison, the Swiss Re cat bond indices saw a total return of 5.92% for the full-year 2014, reflecting what could have been achieved by a market-wide diversified portfolio of cat bonds. The ILS Advisers Index, that tracks 34 ILS funds, returned 5.38% for the year, but the gap between best and worst performing fund of 13.85% shows that not all ILS investment fund strategies are made equal.

The MiCRIX is a good example of the returns that can be made from an investment strategy solely focused on the returns achievable from a diversified portfolio of ILW’s. This is a very different strategy to collateralized reinsurance or private ILS deals, where the majority of contracts will be structured using an indemnity trigger.

ILW’s are commoditised reinsurance agreements which feature a trigger based on industry-wide insured losses, typically reported by an independent third-party agency, so respond to, or payout for, events which impact the re/insurance industry rather than just a specific cedent.

The 12.3% achieved in 2014 is almost 2% above the long-term average for the index, which is particularly impressive given the declines seen across reinsurance pricing. However the performance is 3.5% lower than the 15.84% seen in 2013, so it may be expected to decline a little further as the latest price reductions are fully reflected in new ILW’s underwritten.

Charlie Griffiths, CEO of Mercury Capital, commented on the index performance; “12.3% is another solid return for the index in a year that once again avoided any major insured catastrophes. 2014 is the ninth calculation year for the index and the sixth year without loss activity. With 3 loss events over the period and an annualised return since inception of 10.3% the index demonstrates the opportunity that exists in insurance linked investment strategies. The value of the diversification in the index portfolio is demonstrated well by the worst performing year, 2011, where the annual return was -1.3%. It would take multiple loss events, not just one large one, to materially impact the strategy.”

You can view the performance of the MiCRIX on the dedicated page on Artemis.

Mercury investible Catastrophe Risk Index (MiCRIX) performance (click for interactive version)

Mercury Capital also operates its own ILW focused investment strategy, the Mercury iCRIX Tracker Fund which opened to external investors in May 2013. The fund is the first index-tracking catastrophe risk investment fund, tracking the MiCRIX and offering investors the typical ILS style low correlation, high yield returns of a portfolio of natural catastrophe event risk, but without the idiosyncratic exposure of individual risk selection.