Swiss Re Insurance-Linked Fund Management

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ILS Capital Management’s 1609 Fund returns 19.7% net to investors in 2014


When much of the coverage of ILS discusses lower returns of ILS and catastrophe bond investments, Bermuda-based asset manager ILS Capital Management Ltd. provides an example of just how attractive insurance-linked investments can be with a 19.7% post-fees return in 2014.

The insurance-linked securities (ILS) investment manager’s flagship fund, the 1609 Fund Ltd., reported a full-year return of 19.7% for 2014, while on an invested capital only basis the return of the invested asset portfolio was actually 25.4%.

This outperformed the sector by a significant margin, with the Swiss Re cat bond index having reported a 6.4% 2014 return and benchmarks such as the ILS Advisers Index, which tracks an average return across 34 ILS funds, reporting 5.4%.

ILS Capital Management, established by veteran reinsurance exec Don Kramer in late 2011 but began actively investing in 2012, invests across a wide range of insurance and reinsurance linked assets, including both specialty and property reinsurance risks. With investments in lines of business such as marine and energy, aviation and crop the 1609 Fund provides a fine example of how a more broadly focused ILS investment strategy can reap rewards.

ILS Capital Management seeks to generate alpha for its investors through diversification in risk selection, while focusing its capital allocation to what it views as the more attractive sectors of the reinsurance market.

This first full year of operations for the 1609 Fund shows the potential of this strategy, although it should be noted that 2014 was practically loss-free for ILS Capital Management’s strategy. The 1609 Fund Ltd. enters 2015 with $110m of assets, while ILS Capital Management also has another $115m of assets under advisement.

The fourth-quarter for the 1609 Fund was also very impressive, with a 1% December returns closing the year with a 4.4% Q4. ILS Capital Management has also been actively taking advantage of lower-priced reinsurance capacity to hedge its own exposures, buying an industry loss warranty (ILW) in November to offset risks associated with a European windstorm contract.

The firm reports that the hedge was almost offsetting, making it extremely attractive to it and removing the majority of its exposures while not bringing any basis risk with it.

For 2015 ILS Capital Management has constructed a portfolio for the 1609 Fund which is more diversified than 2014’s portfolio, however given the drop in rates as well as the fact that certain diversifying contracts did not materialise the firm is looking to hedge the tail-risk to safeguard investor returns for the year. The target will be similar to the 2014 loss-free return, meaning that another clean year could see the fund outperform the sector once again.

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