Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

ILS fund Index sees strong end to 2022 on continued recovery from Ian

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Insurance-linked securities (ILS) and catastrophe bond funds only fell by -2.16% on average for the full-year 2022, despite the significant losses the industry suffered from major hurricane Ian, an Index of ILS fund performance shows.

ILS fund and cat bond fund performance returns IndexThe Eurekahedge ILS Advisers Index experienced a particularly strong ending to 2022, with November’s return revised upwards to 1.23%, the strongest November performance in Index history, once all reporting ILS fund manager data was in, which was followed by an even more impressive December.

December 2022, saw the average return of the ILS and cat bond funds tracked by the Eurekahedge ILS Advisers Index reach 1.40%.

That is the strongest performance for any December since the inception of the Index.

So, two record months of ILS fund performance, on average and according to this Index, with recovery from hurricane Ian a key driver of these impressive monthly returns that have allowed many investors to recoup a portion of losses that had been anticipated from Ian.

ILS Advisers explained, “Florida-exposed positions continued to recover in December as updated loss-reports (from hurricane Ian) were not as severe as previously expected.”

We reported earlier this week that, our sources say a number of ILS fund managers have been able to reduce the size of their side pockets related to hurricane Ian, as loss estimates from cedents have continued to trend more favourably in recent weeks.

That, as well as continued price recovery in the catastrophe bond market, where mark-to market implied losses from hurricane Ian have at least halved since the event occurred, also buoyed the performance of this ILS fund performance Index in December.

Catastrophe bond prices in the outstanding market rose by approximately 1% in December, ILS Advisers noted, while the total-return of the outstanding cat bond market was particularly strong at 1.89%, according to Swiss Re’s Index.

As a result of all this, pure cat bond funds as a group delivered a +1.59% return in December 2022, while the subgroup of funds whose strategies include private ILS and collateralised reinsurance or retrocession, gained +1.27%.

In total, 20 of the 26 ILS funds tracked by this Index were positive in December, with a really significant performance range.

The worst performing ILS fund was -0.52% down for the month. But the best performing ILS fund for December reported a +11.01% gain, clearly a big Ian-related recovery there.

For the full calendar year 2022, pure catastrophe bond funds as a group lost -1.45% on average, while private ILS funds as a group were down -2.77%.

Resulting in the Index falling to a -2.16% negative return for full-year 2022.

Only 8 of the ILS funds tracked delivered a positive performance for 2022, while 18 experienced negative returns, ILS Advisers reports.

But, the gap between best and worst performing ILS fund in 2022 was extremely wide, as the bottom performer was -44.0% down, but the top performer delivered a positive +11.2% return for the year.

The recovery after hurricane Ian has been quite stunning to watch and really significant, with cat bond funds often gaining back over half their initial markdowns, while some private ILS funds are now seeing almost as large recovery gains.

In the end, 2022 ILS fund performance looks less than half as bad as 2017, when this Index was down -5.60% for the full-year and also better than 2018, when the Index declined -3.92%.

It’s still the third worst performing year since the inception of this ILS fund Index in 2006.

It’s important to remember we are still only a quarter or so out from hurricane Ian and hurricane loss events have developed for years before, so it will be interesting to see whether there is any backtracking to be seen, or whether the positive developments stick this time around.

One final point of note, had it not been for the significant spread widening in catastrophe bonds earlier this year, much of which is still wiped off the market value of many positions, the full-year Index performance could have been even better.

ILS fund and cat bond fund performance returns Index

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 26 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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