ILS fund performance split in February, as loss adjustments bite

Insurance-linked securities (ILS), catastrophe bonds and collateralized reinsurance funds saw divergent performance during the month of February, as a number saw their performance hit as they were required to make adjustments to prior month loss estimates during the period.

In fact, some ILS funds saw performance as negative as -2% during the month of February 2018, while others saw positive performance of around +2%, reflecting the diversity among ILS and collateralized reinsurance investments strategies, as well as reflecting the differing levels of risk some ILS managers take on.

February would typically be a positive month for the ILS fund market overall, based on the last twelve years during which the market has never fallen to a loss, but this year it may not be particularly positive and there remains a chance it could slip into negative territory.

The ramifications and fallout from the major hurricanes and wildfire losses of the second-half of 2017 continue to haunt ILS fund returns, with numerous managers having to make loss adjustments to portfolio valuations during the month of February 2018.

These loss adjustments have hit positions for pure catastrophe bonds funds and also private ILS or collateralised reinsurance investment funds as well, as hurricanes Maria and Irma as well as the California wildfires were all seen to be events causing loss adjustments to be made during the month.

Catastrophe bond losses continue to become clearer, including for sponsors Heritage and Nationwide who both updated the market during February, which has led to some markdowns on positions being made and hurt the February returns of a number of cat bond funds.

A similar picture may emerge in March, as USAA’s Residential Re cat bond loss picture now has additional clarity since the insurers latest loss updates were revealed.

But the cat bond funds are typically not seeing the size of loss adjustment that some collateralised reinsurance and retrocession positions have required.

We’re told that at least one ILS fund was down more than -2% on the loss adjustments made to collateralised positions in its portfolio.

On the other hand, there are ILS funds invested in private positions that benefited from positive adjustments, as the loss picture clarifies, with some funds reporting returns of positive 1% to almost 2% for the month of February.

This split in ILS fund performance is likely to continue until losses from the 2017 catastrophes become fully realised and recognised within ILS fund valuations, which could still take some months to come.

Currently the Eurekahedge ILS Advisers Index, which tracks the performance of ILS funds, is showing a return of +0.04% for the month of February, based on reporting from 75% of funds tracked so far. We’ll update you when the final figures for February are announced.

So this figure will move by the time the final reporting comes out for February 2018 and there could be time for it to recover some ground, or even turn out negative for the month.

ILS fund managers we have spoken with said there had been a push to recognise losses as fully as possible in portfolios during February, based on the information available at the time, as investment managers sought to realise the negative effects of 2017 events sooner, so as to minimise ongoing impacts from last years catastrophes on ILS fund returns over the coming months.

However, it is to be expected that some ILS funds will continue to have to make adjustments to loss reserves set aside for the 2017 catastrophes events over the coming months, as the extent of the impacts from their aggregation may not be fully understood for some months to come.

It’s worth also keeping an eye on how the Mercury investible Catastrophe Risk Index (MiCRIX), an investible catastrophe risk index that tracks the performance of a diversified portfolio of peak peril industry loss warranties (ILW’s), performs over the coming months as a comparison benchmark. In February the MiCRIX returned 0.44%.