Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

ILS funds average 0.84% return in August, beat many benchmarks


Seasonality helped the insurance-linked securities (ILS) market bounce back to deliver a much more impressive months performance in August, with the average ILS fund return across a group of 34 ILS, reinsurance linked and catastrophe bond funds recorded as 0.84%.

The much more impressive August performance, more than double the average return seen in every other month in 2015 so far, helped to take the year-to-date average to 2.5%, which while still below average is still outstripping some of the traditional asset class benchmarks.

August saw high levels of financial market volatility, with benchmarks such as the S&P500 falling by over -6% during the month and many higher yielding corporate bond indices down -1% to -2%. In fact looking at a comparable BB rated bond index, to the end of August the index was down -0.81%, which clearly shows why institutional investors still appreciate ILS returns.

The 0.84% average return for the month of August, across the 34 ILS funds tracked by the Eurekahedge ILS Advisers Index, is an above average return for an August in the history of the Index, the average being 0.77%.

Strong seasonal performance for catastrophe bonds and seasonal premium allocation from private ILS and collateralised reinsurance contracts boosted August’s return performance for ILS funds. The Swiss Re cat bond indices reflected the strong seasonal contribution, with a total return of 1.27% and a price return of 0.78%.

Stefan Kräuchi, founder of ILS Advisers, commented on August’s stronger ILS fund performance; “For the first time this year all the 34 funds represented in the Eurekahedge ILS Advisers Index made positive returns, mainly due to the price pickup of cat bonds and higher premium allocation of private transactions in the season.”

As usual there is a gap between different ILS fund strategies and performance in August, with some lagging while others had a very impressive month.

“With the lowest single fund return 0.17% and the highest one 2.92%, the monthly performance difference was increased to 2.75%, the highest in the year,” Kräuchi explained.

“Pure cat bond funds as a group were up by 0.62% while the subgroup of funds whose strategies include private ILS increased by 1.05%. The performance gap between private ILS funds and pure cat bond funds increased to 3.60 percentage points on annualized basis, also the highest figure in the year,” he continued.

ILS fund performance tends to diverge more during the midst of the U.S. hurricane season, when a large amount of premium is allocated to U.S. wind exposed cat bonds and reinsurance contracts.

Kräuchi commented; “In the hurricane season, we expect more diversity among performances of ILS fund managers that apply different strategies and have different backgrounds and skill sets. The capacity to build competitive franchise is the key for ILS managers to outperform their peers.”

With no major losses during the month of September and season price rises and premium allocation having continued through the month, the ILS fund index could see another impressive months performance when ILS Advisers next reports.

The fact that ILS continues to beat many comparable benchmarks remains impressive, when pricing has been so depressed of late. During a month when financial market volatility hit investors globally, but ILS funds average a 0.84% return, ILS demonstrates the lack of correlation it has with broader economic factors, which can only help to increase the attractiveness of the asset class.

Eurekahedge ILS Advisers Index, showing average return of ILS and cat bond fund market

Eurekahedge ILS Advisers Index, showing average return of ILS and cat bond fund market

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.

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