Ongoing price pressure in the secondary catastrophe bond market dragged the average return of the insurance-linked securities (ILS) market down to 0.17% in June, a month that saw 15 of the 34 ILS, reinsurance linked and cat bond funds tracked see negative returns.
The cat bond pricing pressure resulted in the majority of ILS fund’s focused on cat bond investments reporting negative results in June. Of the 15 ILS fund’s that were negative in June, 13 were pure cat bond funds, while 2 also invested in private ILS and reinsurance deals, reflecting the cat bond market’s difficulties in recent months.
As a result of continued poor performance from cat bond investments, the group of ILS funds that also invests in private ILS deals and collateralized reinsurance stretched the gap between the two strategies again.
The 0.17% average return for the month of June, across the 34 ILS funds tracked by the Eurekahedge ILS Advisers Index, is the third lowest June on record. Year to date, the Index has returned 1.27%, which is the second lowest performance for the first-half ever seen.
Cat bond price pressure has driven much of the poor performance throughout this year, as evidenced by the gap between the cat bond only and private ILS focused fund strategies.
Stefan Kräuchi, founder of ILS Advisers, provided some colour on ILS fund performance in June, saying; “Among the 34 funds represented in the Eurekahedge ILS Advisers Index, 19 were positive and 15 delivered negative returns, the highest number for negative funds in the past 12 months.”
Of those 15 negative ILS funds, 13 were strategies focused on pure cat bond investing.
“The performance gap between private ILS funds versus pure cat bond funds has widened to 3.52% on an annualized basis, the highest figure in the past 15 months,” Kräuchi continued.
Pricing pressure remained most evident on the lower-yielding cat bond notes in June, as ILS managers continued to seek out higher-yielding opportunities and demand for the lower-yielding cat bonds remains very low.
At the same time, ILS Advisers has noticed the slight hardening of some pricing and the first signs of a floor on pricing in some catastrophe exposed lines of reinsurance business.
Kräuchi explained; “In terms of private transactions, RoL on ILW increased substantially from last year, roughly 20% of price pickup in the U.S. region. This could be another signal of hardening market conditions, mainly resulting from the increase on the demand side and ease of overcapacity due to the exit of some major players.”
In June, the difference between the best and worst performing of the 34 ILS funds was 1.3%, higher than the figure reported in May.
Reflecting the difficult price situation for cat bond investors, the group of pure cat bond funds were down by -0.11% in June, while the group which invests in private ILS and collateralized reinsurance were up by 0.37%.
For comparison, the Swiss Re cat bond price index was down by -0.7% in June, while the total return index also declined by -0.18%. The fact that the cross-market cat bond indices were down so much, where as the cat bond funds tracked by ILS Advisers were down less at -0.11%, perhaps demonstrates the value in asset selection from managers.
So still the expected recovery in catastrophe bond secondary prices did not materialise meaningfully in June, with many positions priced below par at the end of the month. We had expected to see stronger Index performance in June, but cat bond prices continued to drag the overall market return down.
Still, individual ILS fund strategies continue to see attractive performance, particularly when compared to other asset classes, making manager selection increasingly important going forwards for investors.
Seasonality should begin to flow through into ILS fund returns through the July, August, September period, which should boost the returns. It will be interesting to see how catastrophe bond prices respond to this.
At this stage, the lack of a seasonal boost could even make you believe that cat bond secondary pricing will provide the first evidence of a flatter reinsurance cycle overall, as seasonal effects appear muted with the likely culprits being capital and demand factors.
Of course, this is likely a temporary effect of the way the market has responded to supply and demand of both capital and cat bonds, but a muting of seasonality could be expected in future due to greater abundance of efficient capital. Something to consider.
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 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.