ILS funds delivering strong returns during seasonal peak

Insurance-linked securities (ILS) funds are generally delivering strong returns to their investors so far during the seasonal peak of premium allocation, when the risk-linked return contribution tends to be at its highest.

We’ve become aware from sources that a reasonable number of private ILS funds and funds focused on collateralised reinsurance and retrocession investments have been delivering returns to their investors in excess of 2% during August and September.

In fact, there are cases where ILS funds focused on private transactions and collateralised reinsurance have delivered returns of over 4% in September alone, as the seasonality in terms of premium allocation flows through to deliver much stronger investor returns.

Of course, the higher the returns, the higher the levels of risk being assumed as well, but again sources tell us that comparatively returns in 2019 from ILS funds are looking higher than the prior year, which is again encouraging.

We also understand from fund management sources that returns for some ILS funds are actually looking slightly better than in recent years, as the effects of higher pricing secured at renewals through this year begin to be allocated through these peak season months.

ILS funds, in allocating a significant amount of their capital to exposures covering U.S. hurricane risk, tend to allocate a significant chunk of their premiums earned throughout the peak months of the Atlantic storm season.

With higher rates achieved quite broadly across reinsurance renewals this year, including at the key Florida renewals in June, that means ILS fund portfolios now feature fresh contracts which are going to be delivering their peak premiums over this part of the year.

The result is evident in the returns of the market, with private ILS and collateralised reinsurance funds seemingly performing better in some cases than they have for a few years (if losses were taken out of the equation in the last two, we’re told).

The industry loss warranty (ILW) market also provides some evidence of this, with returns for the year currently looking on track to better 2015 and 2016 at least, perhaps even come close to 2014, according to data from the Mercury investible Catastrophe Risk Index (MiCRIX).

Even catastrophe bond returns have been buoyant, with the total return of the outstanding cat bond market around 1.2% for August and 1.4% for September, based on certain broker secondary pricing sheets.

However, some cat bond funds were dented in August due to mark-to-market declines on certain cat bonds exposed to hurricane Dorian, which dented their returns for the month.

It seems that the ILS funds that have reported September returns already have done so without too much immediate impact from catastrophe events that occurred during the month, such as typhoon Faxai. It’s possible that this event may be booked in different months, by different managers, as it tends to take time for loss reports to come out of Japanese carriers and early estimates depend on the modelled information that was available to ILS funds.

But the strong returns from some ILS fund strategies through August and September is an encouraging sign, particularly as in some cases they seem to compare well to recent years and perhaps suggest a slight uptick in return potential of the portfolios as a whole.

It will be interesting to see what the Eurekahedge ILS Advisers Index reports for these months and how much of a seasonality boost there has been across the market. Although, it is likely the final figures on August will be depressed by the cat bond mark-to-market impact from Dorian when they arrive in the coming days.