The average return of insurance-linked securities (ILS), reinsurance linked investment and pure catastrophe bond funds slipped to 0.13% in November, as lower performance of cat bonds, largely caused by the selling of short dated paper, impacted returns.
The latest data from the Eurekahedge ILS Advisers Index, which tracks ILS and cat bond fund performance across 34 constituent funds, shows that on average ILS funds reported a return of 0.13% for November. This is half the long-term average of 0.36%. The Index now shows a return of 4.97% for 2014 to the end of November, which with just one month left to run means that 2014 will result in a below average full-year return from the Index.
It’s the worst monthly performance for the ILS Advisers Index since May. The last few months have seen strong performance, despite lower yields and reinsurance pricing, with October seeing an average return of 0.61%, September a return of 0.86% and August saw 0.82%.
From a catastrophe point of view, November saw some reserving at a number of ILS funds which have an exposure to the hailstorm event in Queensland, Australia. Australian perils are a growing piece of the ILS market and while insured losses for the event are not expected to be especially significant, a number of ILS fund managers have set aside reserves during November to protect themselves against any impact.
While the Australian hail event reserving may have had some marginal impact on ILS fund’s private deal valuations, the main reason for the lower return in November is poor performance of the catastrophe bond market, with the Swiss Re Cat Bond Total Return Index only up by 0.03% for November and the Price Return Index down by 0.5%. The cat bond market’s performance has not been simply driven by the threat of losses. Once again it has been secondary market activity which has largely depressed some prices.
Stefan Kräuchi, founder of ILS Advisers explained; “Secondary market was slightly down as some short dated bonds were sold by investors looking for longer maturities and making space for new issues.”
Other cat bond news that could have hit performance to a degree would be the continued uncertainty around the MultiCat Mexico 2012 catastrophe bond and whether it had been triggered by hurricane Odile. Some funds likely discounted their positions by 50% as a result. It was only recently that it became clear that the MultiCat Mexico 2012 cat bond had not been triggered.
The case of the Gator Re cat bond, which has been becoming increasingly exposed as the aggregate retention layer beneath the cat bond’s trigger has been eroded, could also have contributed to lower cat bond market performance to a degree. This bond has been discounted 10% to as much as 20% according to secondary trading prices.
There may also have been some final seasonality from the hurricane season leaving certain cat bond prices in November, causing some U.S. wind exposed bonds to lose a little additional price value. However the main impact was certainly the approaching maturity of many bonds resulting in investors offloading short-dated paper as a way to free up capital to put to work in new cat bonds and private ILS renewal deals.
The Australian hail event demonstrates that ILS continues to expand its remit and reach into new perils and regions. Just a couple of years ago there would have been little to no threat of a severe hail event in Queensland impacting ILS fund managers, today the peril is clearly gaining relevance in the ILS market.
Kräuchi commented; “A powerful storm swept Queensland, Australia. Hails and rains damaged a lot of facilities and caused power outage. The insured losses were estimated to be around AUD 300m. Some funds have made provisions for the event but we believe the impact is limited since it is not a hotspot for ILS.”
Of the 34 constituent funds included in the ILS Advisers Index only 24 reported positive returns for November, the worst overall performance since June by the constituents. The difference between top and bottom performing fund was 1.61% in November, higher than the previous month’s figure, again demonstrating the potential difference in returns depending on strategy and manager.
As you’d expect with such a poor month in the catastrophe bond market, pure cat bond funds as a group were down by 0.07% while the subgroup of funds whose strategies include private ILS transactions were up by 0.29%. In fact, ILS Advisers said that 7 of the funds which reported negative numbers in November were pure catastrophe bond funds.
This is now the 8th consecutive month that the group of ILS funds that invest in private ILS have outperformed the pure catastrophe bond funds, showing the benefits of a diversified strategy across both cat bonds and private reinsurance transactions. On an annualised basis ILS Advisers reports the performance gap between the two groups of funds as 2.92%.
With just one month left to report 2014 will definitely be a below average year for the ILS Advisers Index of ILS funds. The market will struggle to achieve much more than 5% on average across the constituents, but the gap between those funds performance could be wide, demonstrating the broad range of strategies that are now available in the ILS 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.