The average return of insurance-linked securities (ILS) funds was just 0.92% for full-year 2019, as catastrophe losses and prior-year loss creep dented returns.
The hit to ILS fund returns was not evenly shared in 2019 though, as pure catastrophe bond funds as a group fared better than those also investing in private ILS and reinsurance contracts.
But even within these groupings there was a wide dispersion of returns for the year, particularly on the private ILS and collateralised reinsurance focused side of the market where some funds did remarkably well, while others fell to negative returns for the year.
Overall, the ILS and cat bond fund sector, as tracked by the Eurekahedge ILS Advisers Index, recorded an average rise of 0.30% in December 2019.
Private ILS funds, that invest across the spectrum of ILS assets including reinsurance deals, outperformed for the month, with an average return of 0.33%.
Meanwhile the pure catastrophe bond focused funds only managed a 0.26% return for the month.
26 of the 33 funds featured in the Eurekahedge ILS Advisers Index were positive for the month of December 2019, but there was another wide gap in performance with a 7.2% difference between the best and the worst performing fund.
Loss creep from hurricane Irma and other prior year events is the main cause of the gap, with collateralised reinsurance positions experiencing further creep at the end of 2019.
The full-year return figures tell the real story of the performance gap in ILS funds, with a wide divergence reflecting the significant differences in strategies, across both sides of the ILS fund market.
Commenting on the full-year 2019 ILS fund returns, ILS Advisers Founder Stefan Kräuchi told us, “Performance does not properly represent the better yield that ILS has delivered in 2019 following the premium increase at renewals.
“The year was marked by 4 main events: Hurricane Dorian which devastated the Bahamas, yet avoided the worst-case scenario by turning north just ahead of Florida. Typhoons Faxai and Hagibis hit the Tokyo area and resulted in substantial insured losses in Japan. Finally, the Australia bushfires left an enormous ecological footprint, but did not impact ILS as much due to the low density of properties in the affected areas. All those events had a moderate impact on some ILS managers depending on their portfolio allocations.”
But while ILS funds were hit by fresh catastrophe and severe weather losses in 2019, it was the continued impacts from loss creep due to prior year events that really dented some funds performance for the year.
“What really dragged down returns was more the loss creep from typhoon Jebi earlier in the year, as well as upward loss reserve adjustments in the last months of the year related to the 2017 events (Harvey, Irma & Maria),” Kräuchi explained.
The result was that pure cat bond funds as a group far outperformed private ILS funds as a group, given the loss creep was largely assumed by funds investing in collateralised reinsurance and retrocession.
“Cat bond funds as a group were up 3.32% while private ILS funds lost -0.81%. This differential is conducting more investor interest towards cat bond markets,” Kräuchi said.
That compares to a full-year gain for the Swiss Re Global Cat Bond Index of 4.43%.
He added, “Healthy new issuance brought the cat bond market above the $40bn mark, keeping pace with increased investor appetite. New cat bonds were issued at higher risk-adjusted spreads over the second half of 2019. We have however witnessed substantial upsizing in deal size and ultimate pricing at the lower-end of spread guidance lately. The supply/demand relationship will have to be monitored carefully over the next quarters.”
But it is as you dive deeper into the ILS fund return data that you see the divergence and dispersion of returns, within each of the groupings.
There was a significant gulf between best and worst performing ILS funds in 2019, perhaps a reflection of the complex nature of losses and the loss creep suffered.
The best ILS fund return in 2019, of those tracked by this Index, was 6.7% and this was a pure cat bond fund.
The worst performing ILS fund of 2019, again of those tracked, was -19.8%, a private ILS fund.
So that is a 26.5% gap between best and worst performing ILS fund in 2019, demonstrating just how varied this asset class is in terms of risk and reward potential.
Within the pure cat bond funds, the best performer was this +6.7% fund, but the worst was only negative by -1.7%, so a 8.4% performance gap.
While in the private ILS fund side of the Index, the best performer achieved +5.8%, while the worst was the negative -19.8% fund, resulting in a performance gap of 25.6%.
Within that private ILS group, it’s important to consider the different strategies in terms of U.S. versus international exposure, which was a key determinant in 2019 performance.
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 33 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.