The average return made by insurance-linked securities (ILS) funds, as measured by the Eurekahedge ILS Advisers Index, in November was a very acceptable 0.21% again demonstrating the ability of the market to recover quickly after a catastrophe event of the magnitude of hurricane Sandy. In October the average return across the 29 funds the index tracks was -0.29%, so in November the market almost recouped all of its negative movement from the month before.
November saw the market achieve a positive average return of 0.21%, bouncing back from the negative -0.29% seen the month before. Of particular interest, said Stefan Kräuchi of ILS Advisers, is the fact that many ILS funds which reported positive returns in October, reported negative returns in November, and vice versa. This is due to different accounting techniques and the differing way some funds book mark-to-market losses on the positions they hold. Now that we’re through November all of the downside from Sandy should have been accounted for, unless of course any cat bond positions or other reinsurance contracts such as ILWs that funds hold face a loss in the coming weeks. All the mark-to-market downside should now be factored into this index.
The cat bond market as measured by the Swiss Re cat bond indices tell a different story as they don’t show any accounting differences, just showing the secondary cat bond market pricing. For November, the price index was up by 0.80% and the total return index was up by 1.57%. This strong recovery in cat bond prices will likely lead to a strong month for the ILS funds tracked by the ILS Advisers index in December.
In November, the index slid further at the start of the month but then recovered strongly in the second half of the month helped by the first official loss estimate for Sandy from PCS. The fact that the initial estimate was well below the risk modeling firms industry loss estimates changed the markets sentiment and recovery from the mark-to-market losses on certain positions began to accelerate.
Just 4 of the 29 ILS funds that the ILS Advisers Index tracks reported negative performance in November, as we said earlier in this article those four had all shown positive numbers for October. All the funds which were negative in October managed to recover part or even all of their losses from the previous month and reported positive numbers in November.
To be able to properly assess the impact of Sandy on the index and the ILS market you need to combine the numbers from October and November and likely also take into account any further losses caused by the finalisation of the Sandy industry loss figure in the coming months. Purely looking at October and November from the ILS Advisers index it looks like the impact is less than 0.1%, a very small amount considering the size of the event.
If you look at the Swiss Re indices then the price return index, which has still not fully recovered the -2.38% it lost in October, remains down -1.58% since Sandy. However the total return index, which tracks a basket of outstanding cat bonds total returns, is down just -0.02% since Sandy and has nearly recovered its full decline from October in November. Price returns will continue to rise in the coming weeks it is expected.
Interestingly, Stefan Kräuchi of ILS Advisers said that the index would have recovered all of its October loss had one fund not booked a Costa Concordia write-down in November. This write-down alone caused a 30bp drop in the index. Stefan also commented on Sandy; “While the assessments of the Sandy losses are not final yet, it is fair to say, that Sandy has not led to a meaningful absolute loss of index performance, but has caused opportunity costs of approximately two average monthly performances for the Eurekahedge ILS Advisers Index.”
We’ll update you next month on the index performance for December. You can track the Eurekahedge ILS Advisers Index on Artemis here. It comprises an equally weighted index of 29 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.