ILS funds in positive 0.42% July 2019 return, but loss creep drag persists

Insurance-linked securities (ILS), catastrophe bonds and collateralized reinsurance funds experienced a more stable July 2019, averaging a 0.42% return for the months, although this was below the long-term average for the month.

That took cumulative performance year-to-date for the ILS and cat bond fund sector, as tracked by the Eurekahedge ILS Advisers Index, to -0.71%, which is the second lowest performance since 2006, ranking behind 2011.

One ILS fund has still to report its results for July, as its reporting remained delayed this month.

The main cause of a below average return for July 2019 was continued drag from loss creep for private ILS funds investing in collateralised reinsurance and retrocession, which continue to deal with issues related to prior year catastrophes and trapped collateral drag.

27 of the ILS and cat bond funds tracked by ILS Advisers reported positive returns for July though, which is an improvement on previous months.

“Pure cat bond funds as a group were up by 0.49% while the subgroup of funds whose strategies include private ILS only increased by 0.34%, still feeling the drag from the loss creep in their side pockets. Private ILS funds on average continued to underperform pure cat bond funds YTD,” ILS Advisers Founder Stefan Kräuchi explained to us.

Once again, differences between best and worst performing ILS funds were significant in July.

Kräuchi said, “The best performing fund was a private ILS fund that increased by 1.6%. The biggest loser in the Index was also a private ILS fund that lost 3.46% for the month. The difference between the best and the worst performing fund was 5.06 percentage points.”

There was further reserve strengthening related to typhoon Jebi losses in the month, as private ILS and collateralised reinsurance loss expectations rose further given the still rising industry loss estimates.

However, Kräuchi told us, “On the whole, ILS funds still enjoy the increased allocation of premium to July compared to June in their main shares.”

But added, “Regarding side pockets, some funds reported more conservative numbers as Jebi was reserved on a insured loss level of USD 16bn and that caused some negative impact.”

Catastrophe and weather losses during July are expected to have had little impact on the ILS and catastrophe bond market, ILS Advisers further explained.

ILS fund performance benefited from positive premium flows during July, which should continue into August.

Year-to-date the private ILS funds also investing in collateralised reinsurance continued to underperform pure cat bond funds by 3.30% on an annualised basis.

August is likely to be another mixed month, with premium improvement from current portfolio deals, but continued drag from loss creep and some further reserve adjustments possible.

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 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.