Loss creep continued to affect the market for insurance-linked securities (ILS), catastrophe bonds and collateralized reinsurance funds in June 2019, denting the average performance to a below average 0.30% for the month.
Typhoon Jebi and hurricane Michael continued to result in some negative ILS fund performance, particularly from those investing in private ILS and collateralized reinsurance transactions.
The experience, particularly with typhoon Jebi, has shown up dramatic differences in loss reserving strategies, as some ILS funds manage positive months while others with similar overall portfolio mixes report negative performance.
The timing and magnitude of loss reserve strengthening differed across ILS funds again in June 2019.
This resulted in the 0.30% average return as reported for the Eurekahedge ILS Advisers Index for June 2019, below the long-term average of 0.43%.
However, it should be noted that there is still one ILS fund yet to report its June returns, having delayed them, which could change the June tally a little.
Overall, 25 of the 33 ILS funds tracked by ILS Advisers managed a positive return for the month of June. However, returns seem depressed across many of the private ILS and collateralized reinsurance funds, while pure catastrophe bond funds benefited from a better secondary market pricing environment.
Explaining the June 2019 ILS fund performance, ILS Advisers Founder Stefan Kräuchi told us, “Pure cat bond funds as a group were up by 0.61% while the subgroup of funds whose strategies include private ILS increased slightly by 0.06%. Private ILS funds on average continued to underperform pure cat bond funds YTD.”
However, the strongest single ILS fund performance came from one investing in private ILS and reinsurance, which managed a 1.28% return for June.
While the biggest loses for June was also a private ILS fund, that reported a negative -2.48% return for the month.
Once again, that demonstrates the differences in strategies in the ILS investment fund world, although a lot of the gaps seen in the last year or so have been down to differences in timing and magnitude of reserve strengthening, as well as pure performance gaps.
As a result, the difference between the best and worst performing ILS fund in June 2019 was 3.76 percentage points, a significant gulf for a single month.
“This again reflects the difference in reserving policies among different private ILS funds,” Kräuchi explained.
For the first-half of 2019 the overall Index performance now stands at -1.09%, which is the second lowest half-year performance since 2006, only ranked behind the -2.13% in 2011.
Once again, pure catastrophe bond funds have outperformed private ILS funds in 2019 so far.
“On a half year basis, pure cat bond funds were slightly down by 0.17%, while the private ILS funds decreased by 1.83%,” Kräuchi said.
He went on to explain that the private ILS funds saw their performance dragged down by old contracts in 2019, as the loss creep continued to bite and “continued loss creep from Michael and Jebi made some funds suffer.”
On a year-to-date basis, pure cat bond funds now outperform the group of private ILS funds by 3.45 percentage points, one of the highest gaps ever seen and reflecting the impact of loss creep to collateralized reinsurance positions over the last twelve months.
June was a better month in the end, but ILS funds did not manage to escape the spectre of loss creep. It will be interesting to see whether that continues into July.
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.