Swiss Re Insurance-Linked Fund Management

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Average Sandy impact on ILS funds was just -0.29% in October


After a catastrophe event with the scale, impact and uncertainty of super-storm and hurricane Sandy you might expect that the insurance-linked securities and catastrophe bond investment universe would have seen a large decline in returns during October. In fact, the average return made by insurance-linked securities (ILS) funds, as measured by the Eurekahedge ILS Advisers Index, only declined by -0.29% over the course of October showing the resilience of a diversified view of the market.

As we wrote earlier this month ILS funds were destined to show a variety of performance figures for the month of October. Some will have booked large mark-to-market losses in that month while others may account for those in November instead or even spread the decline over both months returns. Every ILS fund has different ways of accounting for the mark-to-market decline in cat bond prices and private transactions and contracts. The average returns in November will be telling as it will take at least a month for the full impact of Sandy to be reflected in the ILS Advisers Index performance as the storm made landfall just before the end of October.

Stefan Kräuchi of ILS Advisers explained just how varied returns have been for the constituent funds last month, saying; “The October results for the Eurekahedge ILS Advisers Index show an unusually wide difference of over five percentage points between the best and worst performing funds in the index. This reflects the difference in exposure of the index constituents to the areas affected by Sandy but also the great uncertainty around the ultimate insured losses. At the same time the index itself was down less than one-third of a percent. This proofs once more the advantage of a diversified approach to the asset class.”

So, according to insight from ILS Advisers the average ILS fund (all 29 constituent funds of their index have now reported returns for October) slid by just -0.29% in October which leaves the index up by 4.83% for the year-to-date. Compare this to a different view of the market, from the Swiss Re cat bond indices which saw the price return index down by -2.38% and the total return index down by -1.59% in October.

The difference between the performance of the ILS Advisers Index and the cat bond indices is clear evidence of the benefits of a diversified view of the ILS and cat bond investment market. The mark-to-market impact of the decline in exposed cat bond prices has a much more obvious impact on the performance of a basket of catastrophe bonds, where as it is muted when viewed across the ILS fund investment universe.

The accounting differences between funds is one reason the impact is muted of course, there is also north-east U.S. exposure to consider and also contributing to the difference is the diversified nature of this index approach to the ILS fund universe which includes a broader range of reinsurance-linked investments. Those factors also explain the varied returns of ILS funds in October with a difference of over 5% between the best performing and worst performing funds.

Earlier this week we discussed ILS Advisers plans to launch what will essentially be the first ILS fund-of-funds investment vehicle which will track the performance of the Index closely. This marked difference between the performance of the cat bond universe versus the ILS fund universe is a great example of the benefits of a cross-market investment approach and the defensive qualities of an investment across the breadth of the ILS Advisers Index constituent funds. Diversification really is key here!

We’ll update you next month on the index performance for November. You can track the Eurekahedge ILS Advisers Index on Artemis here. It comprises an equally weighted index of 29 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.

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