Mercury Capital opens first index tracking catastrophe investment fund to external investors

Bermuda based insurance-linked securities and industry loss warranty investment manager Mercury Capital has announced that it is opening up an innovative new ILS investment fund to external investors for the first time. The Mercury iCRIX Tracker Fund is the first index-tracking catastrophe risk investment fund, tracking an index developed by Mercury Capital called the Mercury investible Catastrophe Risk Index (MiCRIX), which we’re pleased to announce is now published on Artemis.

Mercury Capital has developed the index and fund to try to bring investors something a little different in the ILS investment fund market. The fund still offers 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. Mercury Capital said that the new fund represents a low volatility strategy with expected returns in the high single digits.

The MiCRIX Tracker Fund was launched in December 2012 with seed funding from Ark Syndicate Management, a Lloyd’s of London Managing Agency.

The MiCRIX provides an excellent proxy for the returns of the catastrophe reinsurance market, and the index tracks the performance of a diversified portfolio of Industry Loss Warranties (ILWs) creating broad, diversified exposure to the sector.  Industry Loss Warranties are commoditised reinsurance agreements, where the settlement of any losses under the contracts is based on the insured industry loss from a specific catastrophe event.

Mercury Capital has put together a balanced portfolio of peak peril catastrophe exposures, which the index represents. The portfolio of risk has been diversified by peril, region and attachment points and features a range of insured industry market loss levels approximating a market weighting approach. Being well diversified the portfolio has been designed to be able to absorb the total loss of a single tower of exposure, which effectively insulates the index from a negative annual return from a single loss event.  According to Mercury Capital, the index has experienced only three down months in the 87 since inception.

Charlie Griffiths, CEO of Mercury Capital, commented on the launch; “It’s an exciting time for the business.  We’ve worked hard to develop a unique fund offering that retains all the features that attract investors into the space.  The MiCRIX Tracker Fund, as the only insurance-linked tracker fund, provides investors with exposure to outstanding alternative beta with a very low correlation to other investment markets.  It achieves this with transparency, whilst avoiding exposure to the idiosyncratic risk associated with individual asset selection.”

Ian Beaton CEO of Ark Syndicate Management Ltd added; “There are an increasing number of ways of investing in the property cat space. Often, however, alpha is offered but beta less a large margin is delivered. Too often skill based claims around outperformance mask un-priced idiosyncratic risk within an organisation.   MiCRIX Tracker gives us a pure form of catastrophe exposure, in a liquid, short term format, with limited downside even in extreme scenarios due to its diversified approach. It is simply the only pure index there is in this alternative asset class.”

The Mercury iCRIX Tracker Fund offers an interesting dimension to the ILS fund market and investors seeking to harness the returns of reinsurance and catastrophe risk. By tracking the index it is perhaps a good fit for investors looking for broader diversification than some other offerings can provide.

Charlie Griffiths added; “MiCRIX is the result of many conversations with active investors in the space and their advisers.  We noted consistent concern about the lack of available indices or suitable benchmarks for insurance linked opportunities funds. Despite 2011 and 2012 having the second and third highest aggregate insured catastrophe losses of all time, the index preserved investor capital over the period.  With such a focussed group of core peak perils the chance of multiple losses occurring is kept adequately constrained.”

Prime Management Limited, a Bermuda headquartered independent provider of fund administration with a focus on insurance-linked securities, is the index calculation agent for the MiCRIX. Index calculation is based on pricing data collected from a panel of reinsurance brokers.

The Bermuda branch of legal firm Conyers Dill & Pearman assisted with structuring of the Mercury iCRIX Tracker Fund.  Conyers regularly advises on a variety of insurance and fund matters, including insurance linked securities, catastrophe bonds and investment funds.

Since its inception in 2006, the MiCRIX has returned 9.2% per annum, a very attractive rate of return. You can view the MiCRIX, analyse the index data and view index performance statistics on Artemis here: www.artemis.bm/mercury_micrix/