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Cat bond funds beat private ILS in 2022. ILS fund performance gap was 55.2%


According to the final year-end data for the Eurekahedge ILS Advisers Index, an equally weighted index that tracks the performance of 26 constituent insurance-linked investment funds, on average, pure catastrophe bond funds performed the best in 2022, while the gap between the top and bottom performing ILS funds was particularly significant.

winner-winning-medalOverall, the Eurekahedge ILS Advisers Index was down -2.16% for the full-year 2022, with two factors the main culprits for the decline.

Hurricane Ian and catastrophe bond spread widening were the two most impactful events of 2022, when it came to reducing ILS fund performance, it seems.

But even with the effects of the second most costly hurricane loss event in insurance and reinsurance market history, the catastrophe bond market faired better throughout the year.

Remember that the cat bond market had fallen by roughly 9% after hurricane Ian, in terms of the mark-to-market impact, after which a relatively significant amount of value was recovered, as some cat bonds were found not to face any losses from the event.

But still, the cat bond market ended 2022 down more than 2%, by some index measures (such as Plenum’s UCITS cat bond fund Index).

However, the pure catastrophe bond funds within the Eurekahedge ILS Advisers Index only fell -1.45% on average, beating the private ILS funds in the Index, which invest in a broader range of collateralized reinsurance and retrocession instruments, as they fell -2.77% for the year.

Of course, in a year with a particularly significant catastrophe industry loss event you would expect cat bond funds to likely come out on top.

What’s interesting is that hurricane Ian was a really significant loss event in the ground-zero Florida peak peril zone, but still the ILS market was only -2.16% down on average, with even the less liquid side of the market only fell -2.77%.

But, when you look beneath the Index, it’s clear the range of performance was especially wide, again as would be anticipated in a major catastrophe loss event year.

The ILS fund performance gap, between the best and worst performing in the Index was a significant 55.2%, with the worst performing ILS fund return reported to have been -44.0%, while the best performing fund returned an impressive +11.2% for 2022.

Both those bottom and top performing ILS funds of 2022 are most likely focused on private collateralised reinsurance and retrocession investments, so presumably taking on significantly more risk than a cat bond fund would.

So 2022 provides another glimpse of the robustness of the catastrophe bond investment strategy, even in a difficult year with a major catastrophe loss in the peak peril region.

While for private ILS, last year has shown the wide-range of strategies and risk-return profiles of funds in the market, plus the fact some have actually delivered an impressive annual return, despite hurricane Ian, showing risk selection and portfolio construction really matter.

Also read: Hurricane Ian estimates trend lower, some ILS fund side pockets reduced.

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