ILS funds see slightly above average 0.61% return for October

Insurance-linked securities (ILS), reinsurance linked investment and pure catastrophe bond funds returned an average of 0.61% for the month of October, which is slightly above the long-term average, strong performance in the currently low-rate environment.

Above average performance in the ILS space is largely testament to three things. ILS fund managers continued ability to source quality and well-priced business, particularly in the collateralized reinsurance and private ILS deals space, the continued low-level of catastrophe losses, as well as catastrophe bond prices which remain largely above par with many gaining again in October.

The latest data from the Eurekahedge ILS Advisers Index, which tracks ILS and cat bond fund performance across 34 constituent funds, shows that October has been another strong month, with an average reported return of 0.61%. This has now helped the index to a return of 4.83% for the first ten months of 2014, which while below average is actually only 1% down on the average return to the end of October of 5.83%. To refresh your memories, September saw a return of 0.86% and August saw 0.82%.

For comparisons purposes, the Swiss Re Cat Bond Total Return Index rose by 0.69% for October, while the Price Return Index rose by 0.12%. This shows that despite the low pricing, cat bond returns remain reasonably strong and a well-selected portfolio of catastrophe bonds can still provide an attractive return, even with pricing at record lows.

October once again saw no catastrophe events occurring that could impact the ILS market. Stefan Kräuchi, founder of ILS Advisers explained; “Yunnan province in China experienced an Mw 6.0 earthquake, causing damage to thousands of houses and affecting hundreds of thousands of people. India suffered from cyclone called Hudhud, which affected 2 million people, destroyed thousands of houses, and resulted in 68 deaths. The insured losses were reported to be USD 100-400m. A typhoon hit Japan and caused power outage to over 150,000 homes. Hurricane Gonzalo struck Bermuda in the middle of the month, causing significant property damage with trees and power poles pulled down. Luckily no fatalities were reported. The insured losses are expected to be USD 200-400m. All the events however had little impact on ILS funds.”

With a large amount of cat bonds maturing through the next few months, ILS Advisers expects strong issuance. However, Kräuchi notes that while investors and cedents are keen to renew as much of this maturing capacity as possible, there is a high likelihood that protection buyers, with ample capital and capacity available already, will be inclined to transfer more senior or lower yielding risks to the capital markets.

Kräuchi also notes another feature of the currently soft market, ILS fund managers search for alpha. “On the fund side, soft market conditions entice managers into special strategies to pursue alpha, such as run off business or participation in the Lloyd’s marketplace, aiming to seize opportunities in special business lines,” he said.

All of the 34 constituent funds included in the index saw a positive return in October. However, the difference between best and worst performing was again quite a gap, at 1.46%. Pure catastrophe bond fund strategies were up by 0.56% in the Index, while funds investing in private ILS as well saw a return of 0.67% for October.

“Private ILS funds have outperformed pure cat bond funds for the seventh consecutive month. The performance gap was 0.11% on a monthly basis and 2.76% on an annual basis,” Kräuchi explained.

It will be interesting to see how this Index tracking ILS fund performance fares through the last two months of the year. Typically we should expect to see the index put on another 0.7% to 1% for the two months. As a result it looks like the index will finish the year about 1% to 1.5% down on the long-term average for a full-year.

Given recent declines in both catastrophe bond and reinsurance pricing this is not bad, however as more vintage cat bond risk matures the total return of that market will decline, especially as new cat bond deals tend to be more remote, higher layers with corresponding lower yields.

That does mean that the gap between pure catastrophe bond fund strategies and those investing in private ILS or collateralized reinsurance as well will likely widen in 2015. However, a pure cat bond fund strategy, even if only returning 4% or 5% is still better than other fixed income strategies and, of course, provides all the benefits of low-correlation (and other qualities) that institutional investors are increasingly learning to appreciate.

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 33 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.