ILS funds have best month of 2014, returning 0.82% in August

The average return of the insurance-linked securities (ILS), reinsurance linked investment and pure catastrophe bond fund market jumped to 0.82% in August, the highest monthly return for ILS funds in 2014 but still only average compared to previous years.

The latest data from the Eurekahedge ILS Advisers Index shows that the average return of ILS and cat bond funds reached 0.82% in August, which is more than double the 0.40% achieved in July.

Returns bounced back strongly, according to ILS Advisers, as seasonal premiums flow into ILS and cat bond funds, with funds investing in private ILS transactions seeing the most attractive returns yet again. Catastrophe bond focused funds have been buoyed somewhat by a rebound in secondary prices.

Despite being the best single month of the year for the ILS fund market, the 0.82% returned is still only average compared to other years on record. Year to date the ILS Advisers Index has returned 3.32% which is the second lowest since the index began recording the average return of the ILS fund market.

Stefan Kräuchi, founder of ILS Advisers, explained; “The August return of 0.82% is the highest monthly return this year and average compared to the month of August in past years. However, the eight months YTD figure of 3.32% is the second lowest in history, reflecting the soft market conditions and low interest rate environment.”

During the month of August there were a number of natural catastrophe events around the globe, such as the Napa California earthquake, as well as earthquakes in China and Peru and tropical storms in Hawaii, but Kräuchi said that these: “Had little to no impact on the ILS funds represented in the index.”

Catastrophe bond issuance during August remained low, as would be expected during the U.S. hurricane season, with just the one cat bond completing, the $250m Golden State Re II. Industry loss warranty (ILW) activity saw a dip as the oversupply of capital in the reinsurance market resulted in a stronger willingness of the market to sell indemnity products at attractive prices, reducing demand for ILW’s.

Private ILS funds performed best again in August, partly due to seasonality delivering increased premiums but also due to the fact that these transactions can still access deals which enjoy more attractive premiums than cat bonds, according to ILS Adviser.

The gap between the two strategies continues to widen, in the current soft market conditions, demonstrating the importance of manager selection and access to a broad range of ILS transactions.

Kräuchi explained; “Private ILS funds contributed 60% of the Index return. Till August the funds with private ILS have outperformed pure cat bond funds by more than 2ppt (percentage points) on an annualized basis and the gap has been widening since the beginning of the year.”

In August the performance gap between cat bond funds and those investing in private ILS or collateralized reinsurance deals widened.

“The delta of the best performing fund (a private ILS fund) versus the worst performing fund (a pure cat bond fund) has widened to 2.16ppt, this is the highest level this year and is quite remarkable when putting this number into relation to the YTD performance. This demonstrates how the selection of managers and their strategies can lead to quite different outcomes,” continued Kräuchi.

Pure cat bond funds did bounce back strongly though, thanks to the increase in secondary pricing on many outstanding cat bond deals. Pure cat bond funds as a group returned 0.67% in August, while the subgroup of funds whose strategies include private ILS and collateralized reinsurance increased by 0.98%.

However the real delta is between the best and worst performing ILS funds, with a 2.16% gap from the top performer to the bottom. This really highlights the differing strategies available in the ILS fund market and clearly shows that certain strategies are still more than delivering on investors return expectations.

Next month we will see whether there was any impact to the pure catastrophe bond funds from the impact of hurricane Odile and the expected triggering of the MultiCat Mexico 2012 cat bond, as well as whether the storm affected the private ILS funds who may have been providing capacity to Mexican insurers.

Eurekahedge ILS Advisers Insurance Linked Securities Fund Index

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.