Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

A below average February for ILS funds, with 0.32% return


The average return across a group of 34 insurance-linked securities (ILS), pure catastrophe bond and reinsurance-linked investment funds came in at a below average 0.32% for February 2017, with some prior month loss reserve adjustments perhaps impacting performance.

February’s 0.32% average ILS fund return takes the year-to-date performance to 0.68% by the end of February, which is slightly below 2016’s 0.74%, but ahead of 2015’s 0.63% by that stage of the year.

The reason the market was ahead in 2016 by the end of February was actually due to adjustments to side-pockets, including the realisation that the MultiCat Class C catastrophe bond notes were just a 50% loss, allowing some loss reserves to flow back to benefit ILS fund returns last year.

So, with that in mind and the realisation that some private ILS funds continue to slightly increase reserves for loss events suffered in recent months, it looks like 2017’s year-to-date return is aligned with last year’s, reflecting greater stability in ILS investment returns.

However, despite the fact that ILS returns do seem to have stabilised to a degree over the last year, reflecting more stable reinsurance pricing, still the levels of return are a way down on those achievable a few years ago.

Stefan Kräuchi, founder of ILS Advisers, explained; “The February return of Eurekahedge ILS Advisers Index is 0.32%, much lower than the average historical February monthly return of 0.57%. The yield to date is 0.68%, the 4th lowest among the 12 years since 2006.”

February 2017 did not see any significant new catastrophe loss events impacting the ILS sector, despite a number of catastrophes and severe weather events occurring.

“No natural disasters in February had a significant impact to ILS funds so far,” Kräuchi said. “However, some private ILS funds have been resolving the loss reserves of the previous events which may cause slight impact.”

With the number of attritional and major catastrophe events up in 2016 ILS funds that invest in collateralized reinsurance remain busy updating loss estimates and reserves for prior events, a process that can take some months to fully evaluate and resolve.

“For private ILS funds, we didn’t see material impact from events during the month and the returns were determined by premium allocation according to seasonality,” Kräuchi continued.

With the ILS market more exposed to a wider range of catastrophe and weather events as it expands more deeply into insurance and reinsurance markets, the frequency of loss events hitting some funds is increasing, making the job of managing claims and reserves a rising priority as a result.

Explaining how performance differed between ILS funds in February 2017, Kräuchi said; “All funds represented in the Eurekahedge ILS Advisers Index made positive returns. The difference between the best and the worst performing fund was 0.99 percentage point.

“Pure cat bond funds as a group were up by 0.24% while the subgroup of funds whose strategies include private ILS increased by 0.38%. Private ILS funds outperformed pure cat bond funds by 1.57 percentage points on annualized basis.”

While February 2017’s ILS fund returns are below the historical average, it’s worth asking whether the average of more recent years is a more accurate target for the market.

In which case, given the returns by this stage in the year are relatively stable over the last three years, with only loss reserving and releases being the major factor differentiating them, perhaps we should just consider the range of returns seen over the most recent few years as normal from now on.

Eurekahedge ILS Advisers Index, showing average return of ILS and cat bond fund market

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.

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All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance video content and video interviews can be accessed online.

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