Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

ILS funds delivering decadal high (and more) returns YTD in 2023


Numerous insurance-linked securities (ILS) fund strategies have delivered decadal high returns, at least, so far in 2023, as the higher reinsurance rate environment and elevated spreads for instruments like catastrophe bonds boost their performance.

chart-investment-return-performanceWhile ILS fund performance has struggled in many cases over the last five or so years, 2023 is turning into a significant recovery year, so far.

Of course, we need to qualify this by saying that we have an almost entire Atlantic hurricane season ahead of us and that it only takes one major insured catastrophe loss event around the globe to reverse fortunes for ILS funds.

But, by this stage of the year, many ILS funds are on-track for at least their best first-half in a decade, for some it will be their best half-year performance ever.

One benchmark we can look at is the Eurekahedge ILS Advisers Index, which while not yet fully reported for May, is currently on-track for its strongest first five months of the year since 2007.

It wouldn’t take much more in returns to be delivered, by the remaining ILS funds that need to report their May returns, for this Index to deliver a best ever return for the year to end of May.

Another benchmark we have available is the Plenum CAT Bond UCITS Fund Indices, which tracks the performance of a basket of cat bond funds structured in the UCITS format, offering a broad benchmark for cat bond investment fund performance.

Delivering an almost 7% return to June 9th, this UCITS cat bond fund Index is storming well ahead of any other year in its history and for many cat bonds funds this is their best first-half performance ever.

Another benchmark that we can look at, for the catastrophe bond fund market, is Swiss Re’s Global Cat Bond Total Return Index, which had delivered an 8.56% return to the end of May.

This Index runs ahead of true cat bond fund performance, given its nature, but it shows just how significant catastrophe bond market yields have been over 2023 so far. Swiss Re’s Index is also running at or near to record highs at the five month stage of the year.

We’ve seen some ILS fund returns for higher-risk strategies, featuring retrocession and the like, which have delivered significantly higher returns than the catastrophe bond market year-to-date as well.

We’re told that there are many ILS fund strategies that are on-track for returns well above 10% for the half-year, thanks to a relatively low level of catastrophe losses thus far in 2023.

Even lower volatility collateralized reinsurance and quota share type ILS fund strategies are on-track for their strongest first-half, in many cases, with returns of between 6% and 8% anticipated for the first six months of this year.

Overall, ILS funds are evidencing the improved reinsurance rate environment and the effects of much higher catastrophe bond spreads are flowing to the benefit of funds and their investors, so far this year.

Investors are keen to see this trend of higher returns continue.

ILS fund returns are now potentially high enough to quite easily absorb an average catastrophe loss year and still deliver positive performance, in many cases, which should be positive for encouraging new inflows from investors over the coming months.

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