ILS funds return 0.56% in January 2018, helped by cat bond prices

Secondary market catastrophe bond price recovery helped the average return of insurance-linked securities (ILS) and reinsurance linked investment funds was 0.56% for January 2018, the highest January performance for a number of years, according to the ILS Advisers Index.

After the impacts of the severe hurricanes, wildfires and other catastrophe event in 2017, a number of aggregate catastrophe bonds had been deemed at some risk of loss by the market, but a few of these recovered in terms of secondary market pricing in January 2018, resulting in a bit of a price rebound and better returns for some cat bond fund strategies.

As a result, the Eurekahedge ILS Advisers Index has started 2018 with its best January since 2013, with ILS funds returning an average of 0.56% and catastrophe bond funds leading the way.

ILS Advisers explained, “On the secondary market, because the likelihood of payout reduced as the losses became clearer, some aggregate bonds that have been trading at discount are now showing price pick-ups. The reset feature also allows some cat bond exposures back to normal level.”

This recovery was reflected in the Swiss Re calculated cat bond insides, with the total return rising 1.35% while the price return rose by 0.83%.

27 of the 32 ILS funds tracked by the Eurekahedge ILS Advisers Index saw positive returns for the month of January 2018.

But as ever after loss events performance was far from equal.

Some ILS funds investing in private transactions and collateralized reinsurance had a harder time, with a few setting up or hardening side pockets for 2017 loss events during at the end of 2017.

As a result, the difference between the best and the worst performing ILS fund in January 2018 was 3.19%, which while lower than the previous month’s figure is relatively high.

The pure cat bond funds as a group reported an average return of 1% while the subgroup of funds whose strategies include private ILS and collateralized reinsurance increased by only an average of 0.21%.

ILS Advisers also said, “Some funds selected to only report the performance of main shares to third party database. Although new inves- tors will not be impact by previous events, the performance data reported could exclude potential fluctuation in side pockets.”

This is how many ILS funds deal with losses, segregating the impacted assets out of their main fund share classes.

As a result of the 2017 loss events and the fact some ILS funds continue to deal with the impacts, ILS Advisers noted that the private ILS fund subgroup underperformed pure cat bond funds by 10.10% on annualised basis.

So a relatively healthy start to the year for ILS fund returns, particularly for the catastrophe bonds. It will be interesting to see how that continues and how the private ILS fund returns recover, as the loss affected assets are dealt with over time.

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 on Artemis here, including the new USD hedged version of the index. It comprises an equally weighted index of 34 constituent insurance-linked investment 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.