The average return across insurance-linked securities (ILS) and reinsurance linked investment funds was just 0.12% in May 2016, as the Fort McMurray, Canada wildfires and other catastrophe events caused losses and erosion of aggregate retentions for funds investing in private ILS and collateralized reinsurance deals.
May has seen one of the biggest catastrophe hits to the ILS fund market in a number of years, with the gap between best and worst performing fund tracked by ILS Advisers hitting a record of 6.12%, as one ILS fund that invests in private transactions declined by -3.07% for the month.
According to the Eurekahedge ILS Advisers Index ILS and reinsurance linked investment funds rose by 0.12% on average in May, taking the average year-to-date performance to 1.67% across the group of ILS funds.
Catastrophe bond investors saw another strong month in May, with prices appreciating resulting in pure cat bond funds outperforming the private ILS funds for the second consecutive month as the impact of catastrophe events hit only those invested in private collateralized reinsurance deals.
Stefan Kräuchi, founder of ILS Advisers, explained the May returns; “Cat bond return was good due to strong demand for cat bonds and the lack of supply, while private ILS funds were impacted by a couple of global events.
“The most influential event was the Alberta fire, the costliest natural disaster ever in Canada. We saw a number of private ILS funds reporting the losses incurred by the event or erosions to their aggregate covers. U.S. severe weathers also imposed limited impact on the funds.”
May’s 0.12% performance is just below half the average for the month, with the average historical May monthly return 0.25%. May is typically a month of lower performance anyway, with private ILS transactions accruing less seasonal premium during the month.
Kräuchi explained the divergence in performance between funds and pure cat bond funds versus those that invest in private ILS and collateralized reinsurance deals.
“With the lowest single fund return -3.07% and the highest one 3.05%, the monthly performance difference was 6.12%. The figure was the highest for the last 2 years, which shows great diversity on fund performance nowadays.
“Pure cat bond funds as a group were up by 0.53% while the subgroup of funds whose strategies include private ILS decreased by 0.19%. Private ILS fund group underperformed pure cat bond fund group for the second consecutive month,” according to Kräuchi.
This resulted in catastrophe bond funds outperforming private ILS funds by 0.91% for the month, on an annualised basis.
Catastrophe bond returns were impressive again, as lack of supply helped to boost demand which pushed prices higher in the secondary market.
The funds investing in private ILS and collateralized reinsurance, meanwhile, were hit by catastrophe events during May 2016. The Fort McMurray, Alberta, Canada wildfires were the most impactful event of the month, but some ILS funds were also hit by severe thunderstorms and convective weather in the United States and the threat of losses was also posed by European severe weather and floods.
“The most influential event was the Alberta fire, the costliest natural disaster ever in Canada. We saw a number of private ILS funds reporting the losses incurred by the event or erosions to their aggregate covers. U.S. severe weathers also imposed limited impact on the funds,” Kräuchi said.
Demonstrating the extent of the impact from the Canadian wildfires, May 2016 has been the first month in three years which saw the combined group of funds investing in private ILS and collateralized reinsurance contracts averaging a negative return.
26 of the 33 funds represented in the Eurekahedge ILS Advisers Index reported positive returns for the month, despite the wildfires impact. This demonstrates the diversity within ILS funds, that even a severe event only causes a handful of ILS funds to turn negative.
Pure catastrophe bond funds reported 0.53% performance as a group, while the subgroup of funds whose strategies include private ILS or collateralized reinsurance were down by 0.19%, the second month when cat bond funds have outperformed.
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 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.