December second strongest month of 2012 for insurance-linked security fund returns

Demonstrating the insurance-linked security and reinsurance-linked investment markets resilience to bounce back from events of the magnitude of hurricane Sandy, the average ILS fund returned, as measured by the Eurekahedge ILS Advisers Index, a very impressive 1% in December. This made December the second best monthly return performance of the ILS Advisers ILS fund tracking index, just behind September which saw a 1.19% return.

December saw ILS fund managers experience a strong bounce back from the mark-to-market losses that hurricane Sandy caused, as well as some seasonal gains, helping them to return an average of 1%. The ILS Advisers index measures the returns of 29 ILS funds meaning that some will have experienced much higher than 1% performance if they had exposure to Sandy impacted positions.

For the whole of 2012 the index saw performance very close to 6% (5.92% to be exact) which is remarkable given the impact of hurricane Sandy on the market. The long-term annualised average return for the index is 6.99% so 2012 was not too far behind in terms of annual performance. Investors will have been pleased with the way ILS funds performed in what could have been a more difficult year.

Commenting on the years performance Stefan Kräuchi, founder of ILS Advisers, said; “December was the second strongest month of the year. The Index is up almost 6 percent for the year, which is still a decent result, about 1 percent below the longterm average. This is quite remarkable and shows once more the resilience of the asset class even in a difficult year with one major event (Sandy), Isaac and Costa Concordia.”

For comparisons purposes, the Swiss Re Cat Bond Price Return Index rose by 0.75% in December while the Total Return Index demonstrated the strong recovery in catastrophe bonds after Sandy by returning 1.53% for the month. We suspect that ILS funds with more exposure to cat bonds will have been among the leaders last month.

It wasn’t just recovery from Sandy which drove strong ILS fund returns in December, Stefan Kräuchi said that strong demand in the secondary cat bond market created by market conditions caused by a strong end of year inflow of capital not being met by primary issuance levels. Issuance was below the markets expectations in the fourth quarter of 2012 meaning that some capital was put to work in the secondary market instead. This helped the Index to its very healthy return for the month.

28 out of the 29 constituent ILS funds in the ILS Advisers Index reported positive returns in December. Funds reporting lower returns were impacted by loss development from the Costa Concordia as salvage delays increase the expected toll. Hurricane Sandy also impacted some funds as the final loss total is awaited.

Kräuchi said that despite a difficult start to 2012 with the Costa Concordia marine disaster, the adverse pressure on cat bond prices from mark-to-market movements, Hurricane Isaac in August and Hurricane Sandy in October, as a whole 2012 turned out to be quite a decent year with fund index performance only slightly below the longterm average.

We’ll update you next month on the index performance for December. 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.