Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

ILS funds report highest monthly return of 2015 so far in July


The average return of the insurance-linked securities (ILS) fund market saw its highest single month performance of 2015 so far in July, as the average ILS fund return across a group of 34 ILS, reinsurance linked and catastrophe bond funds reached 0.4%.

So far this year the performance of the ILS market has been softened by lower rates-on-line for reinsurance risks, lower pricing for catastrophe bonds and also price pressure on outstanding cat bonds, which has dragged down ILS fund performance year-to-date.

The 0.4% average return for the month of July, across the 34 ILS funds tracked by the Eurekahedge ILS Advisers Index, is the lowest July return in the history of the Index, equal with 2013.

Year-to-date the ILS Advisers Index has recorded a return of 1.64%, which is the second lowest seen in the last 10 years, a fact that ILS Advisers put down to the “excessive capacity and low rate on line.”

July’s return was helped by stronger performance in the catastrophe bond market, as seasonality returned and prices rose for the first month in a while. Seasonality on private ILS, or collateralized reinsurance transactions, also contributed to July’s return.

Stefan Kräuchi, founder of ILS Advisers, commented; “Among the 34 funds represented in the Eurekahedge ILS Advisers Index, 31 were positive and 3 delivered negative returns. The improved performance of July, compared with June, was mainly the consequence of the price pickup of cat bonds and the seasonality accounting of private ILS portfolio that allocates more premium during the wind season.”

However, there was a mixed performance across ILS funds once again, with the difference between top and bottom performer reaching 1.1% in July. Annualised, the performance gap between the group of pure cat bond funds and those ILS funds that invest in private ILS and reinsurance transactions hit 3.32%.

Pure catastrophe bond funds as a group returned 0.28% in July, while the group of funds investing in private ILS and collateralized reinsurance returned 0.48%. This again demonstrates the value that a diversified ILS strategy provides in the current market for those investors seeking a higher return than cat bonds alone can provide currently.

The next few months should see stronger performance again from the ILS fund market, as long as there are no major impacts from catastrophe events.

“In the peak season months to follow, we expect managers with good deal sourcing and portfolio management skills likely to keep the outperformance,” Kräuchi explained.

Seasonality helped the ILS fund market in July and if the market remains free of large losses it should be able to recoup some lost ground over the next few months of peak wind risk.

We will report again next month.

Eurekahedge ILS Advisers Index, showing average return of ILS and cat bond fund market

Eurekahedge ILS Advisers Index, showing average return of ILS and cat bond 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.

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