ILS fund returns remain low in June, half-year ILS returns below average

Average insurance-linked securities (ILS), reinsurance linked investment and pure catastrophe bond fund returns continued to track well below average in June, returning an average 0.22% for the month resulting in a below average first-half of 2014.

The latest data from the Eurekahedge ILS Advisers Index shows that the average return of ILS and cat bond funds continued to be below average, with the 0.22% average return from June actually less than half the average June ILS fund return of 0.51% since the inception of the Index.

In fact it is not the lowest June return ever seen by the Index, that was in 2006 when the average ILS fund return was just 0.15%, so the 0.22% this June, while low, is perhaps not yet a cause for investor concern.

For the first-half of 2014 the average ILS fund return as measured by the Index was 2.08%, which is also below average.

Stefan Kräuchi, founder of ILS Advisers, explained; “The Eurekahedge ILS Advisers Index returned plus 0.22% for June, which is less than halve of the monthly average for the month of June. With a half year return of 2.08% the index is also slightly below the average return for the first six month (2.7%) reflecting weaker market conditions.”

A number of catastrophe events occurred around the globe in June but none had any impact on ILS funds represented in the Index, Kräuchi said. However, four of the 34 ILS funds tracked by ILS Advisers and Eurekahedge saw a loss in June, likely pure cat bond funds, or heavily weighted to catastrophe bonds.

Once again the funds which invest in private ILS and collateralized reinsurance outperformed the pure cat bond funds. In fact, 80% of the Index performance in June was driven by the funds investing in private ILS deals. Cat bond funds have now underperformed the private ILS funds in three consecutive months, said Kräuchi, and trail the return of the private ILS funds by 1.53% for the first half of the year on an annualised basis.

The difference between the best and worst performing ILS fund in June was 1.34%, which was higher than in previous months. This could be due to some of the ILS funds focusing on private deals and collateralized reinsurance starting to reap the seasonal returns at this time of year.

Pure catastrophe bond funds returned just 0.1% on average where as the ILS funds investing in private deals saw a return of 0.32%.

The reason for the continued gap and low returns for cat bond heavy ILS funds was the continued decline in secondary prices in June. ILS Advisers said that secondary cat bond prices were 0.8% down for U.S. Hurricane, 0.2% down for U.S. earthquake, 0.5% down for Japanese typhoon and earthquake, 0.4% down for European windstorm and flat for European earthquake bonds.

So catastrophe bonds continue to shed some of the mark-to-market gains made earlier this year, when investor appetite and high-levels of capital forced secondary marks above par. It’s uncertain at this time whether the secondary marks will drop back to more typical levels, in which case cat bond funds could see more slow months, or whether they will level off and perhaps rise further as we get deeper into the U.S. wind season.

We will update you in the months to come.

Eurekahedge ILS Advisers Index – Tracking the average performance of 34 ILS funds (click the image for more details)

You can track the Eurekahedge ILS Advisers Index on Artemis here including the new USD hedged version of the index. It comprises an equally weighted index of 34 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.