ILS investment fund returns hit 0.86% in August 2016

Insurance-linked securities (ILS), pure catastrophe bond and reinsurance linked investment funds reported their highest single monthly return of the year in August 2016, with the sector recording an impressive and above average 0.86% for the month.

Premium allocation due to being in the peak of the U.S. hurricane season and ongoing strong demand for catastrophe bond investments helped to boost ILS fund returns in August, according to specialist Asia-based insurance-linked investments advisor ILS Advisors.

According to the Eurekahedge ILS Advisers Index ILS funds rose by 0.86% on average in August, taking the average year-to-date performance to 2.25% across the group of 33 ILS funds.

Typically the peak of the U.S. hurricane season results in greater premium allocation being made to reinsurance contracts and August 2016 certainly experienced that, with private ILS funds that invest in collateralised reinsurance rising strongly during the month.

Stefan Kräuchi, founder of ILS Advisers, commented on ILS fund performance; “The August return of Eurekahedge ILS Advisers Index is 0.86%, higher than the average historical August monthly return of 0.79%. The yield to date is 3.16%, the third lowest figure since 2006. We saw some sign that the performance of the index is improving entering the U.S. hurricane season.”

August saw a number of catastrophe events around the globe, but causing little impact to exposed ILS funds.

“Events during the month included California wildfires, Louisiana floods and Italian earthquakes. Although all of them, especially Louisiana floods and Italian earthquakes were considered destructive events and caused significant amount of economic losses, the insured losses were very much limited by the low penetration rate,” Kräuchi explained.

But, as ILS funds expand their size and underwriting reach, even in a month where there are no major losses some funds reported that events such as the wildfires and floods in August had the potential to cause some erosion of aggregate reinsurance covers.

Additionally, one ILS fund tracked by the Index reported a loss from the Jubilee oil field loss in Ghana during August, as claims from this event continue to leak through to private ILS fund portfolios.

“With little losses recorded and more premium allocation during the season, private ILS showed solid returns of almost 1%. On annualized basis, they also outperformed pure cat bond funds after 3 months’ lagging behind,” continued Kräuchi. “We expect such momentum for private ILS funds will possibly continue in September as the month is relatively quiet so far.”

Catastrophe bond funds performed strongly again in August 2016, helping to boost the overall ILS market average return. Despite a slow primary issuance market, demand remains extremely high which resulted in a secondary market cat bond price rise of 0.73% and total return of 1.27%, according to the Swiss Re Global Cat Bond Index.

33 of the 34 ILS funds tracked by the Eurekahedge ILS Advisers Index reported positive returns in August 2016.

The performance gap between best and worst performing fund remained large though, at 2.64%, reflecting the increasingly broad range of risk and return profiles now available to ILS fund investors.

Pure cat bond funds as a group rose by 0.64%, while the subgroup of funds that also invest in private ILS or collateralised reinsurance were up by 0.99%. On an annualised bases, the group of private ILS funds outperformed the pure cat bond funds by 0.43%.

Private ILS funds as a group have lagged behind pure cat bonds funds in 2016 so far, after losses in recent months dragged their returns down while strong demand for catastrophe bond investments kept driving cat bond funds higher.

That has now reversed, after three months where cat bond funds were ahead on an annualised basis. ILS Advisers expect that this trend will continue, as September should also see higher premium allocation to private ILS and collateralised reinsurance contracts helping the annualised return gap to widen, as long as there are no major losses.

Kräuchi said that it looks like September will be another strong month for the private ILS funds, explaining; “We expect such momentum for private ILS funds will possibly continue in September as the month is relatively quiet so far.”

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 here on Artemis, including the new USD hedged version of the index. It comprises an equally weighted index of 34 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 fund investment space.