Insurance-linked securities (ILS) funds reported only a 0.05% return for December 2021, taking the annual ILS fund return to just 0.85% for full-year 2021, according to the Eurekahedge ILS Advisers Index.
2021 was another challenging year for the insurance-linked securities (ILS) market and the annual results from ILS Advisers widely referenced Index of ILS fund performance tells a clear story.
Full-year 2021 saw the average ILS fund deliver only a positive 0.85% return, the fourth lowest annual return on-record and far behind 2020’s 3.48%.
But the average performance across the ILS fund market does not tell the full story, as you need to look at different categories of ILS funds to really see where performance was still delivered to investors.
The catastrophe bond fund market demonstrated its ability to deliver attractive returns, despite another year of heavy catastrophe losses for the insurance and reinsurance market, in 2021.
Overall, the average return for catastrophe bond funds was 2.34% for the full-year 2021, far better than a negative -0.12% return for the funds that also invest in private ILS contracts, such as collateralised reinsurance.
The more risk-remote nature and higher-reinsurance layer coverage of the cat bond helped to protect this segment of the ILS market against many of the losses that hurt collateralised reinsurance in 2021.
In addition, the way aggregate coverage is structured in catastrophe bonds also helped,
Another year with frequent small to mid-sized catastrophe events really hurt some private ILS strategies again, denting the full-year performance.
But, as ever, it is the range of returns that shows the breadth of strategies within the overall insurance-linked securities (ILS) investment marketplace.
The worst returning ILS fund tracked by ILS Advisers fell to -12.1% for the year, but the most positive delivered a 13.8% return to its investors.
ILS funds are not all equal and the diverse range of strategies available means investors can pick and choose managers and strategies to follow.
It’s important to note that an ILS fund which was negative in 2021, could be positive still in another significant catastrophe loss year, as it is the specifics of events, how they fall, where, and importantly how they aggregate against the specific exposures an ILS fund has underwritten that determines how badly affected a strategy could be.
As ever, risk selection and portfolio management are key, but what is a very strong portfolio in one year, may prove to be weaker in another, depending on the specifics of catastrophe loss activity.
Overall, 19 of the ILS funds tracked by the Eurekahedge ILS Advisers Index ended the year in positive territory, while 10 reported negative full-year performance.
December was a low performance month to cap off the year, with pure catastrophe bond funds only delivering 0.04%, thanks to pricing pressure in the market as a result of strong new issuance, meaning private ILS funds beat them as they returned 0.05% on average.
However, there are some losses to consider, as some ILS funds were affected by aggregate deductible erosion through December, largely on the back of the US tornado outbreak and the typhoon in the Philippines.
While that typhoon Rai (Odette) has caused a loss for holders of a World Bank catastrophe bond, that will be accounted for in January 2022’s returns for the cat bond fund segment.
ILS fund managers will be hoping for improved performance in 2022, thanks to harder reinsurance pricing, as well as ongoing actions to improve portfolios and tighten terms and conditions of coverage.
Reduced aggregate exposure, as well as imposition of stricter terms around aggregate reinsurance and retrocession, could be one factor that makes a difference, especially for private ILS funds, if we have another year featuring numerous catastrophe losses.
The ILS fund Index remains far below its peak in 2017, showing that as a sector ILS still has a way to go in order to earn back all of its losses.
You can track the Eurekahedge ILS Advisers Index here on Artemis, including the USD hedged version of the index. It comprises an equally weighted index of 28 constituent insurance-linked investment 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.
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