ILS funds return 0.57% in July, but U.S. storms erode some deductibles

The average return of insurance-linked securities (ILS) and reinsurance linked investment funds reached 0.57% in July 2017, as seasonal effects began to boost the return of the ILS investment market, despite some further erosion of private ILS contract deductibles from U.S. severe thunderstorms.

Throughout much of 2017 so far, severe thunderstorms and convective weather in the United States has been eroding deductibles and the aggregate retention on certain private ILS or collateralized reinsurance contracts, something that continued in July, according to ILS fund-of-funds manager and advisory ILS Advisers.

The 0.57% average ILS fund return for July, according to the Eurekahedge ILS Advisers Index, was still slightly below the long-term average but represents the beginning of seasonal premium allocation due to the U.S. hurricane season peak approaching, hence returns should be boosted in the coming months (before taking into any consideration hurricane Harvey impacts of course).

Stefan Kräuchi, founder of ILS Advisers, explained the July ILS fund performance; “The July return of Eurekahedge ILS Advisers Index is 0.57%, slightly lower than the average historical June monthly return of 0.60%. The yield to date is 2.22%, the 3rd lowest among the 12 years since 2006, below the 12 year average of 3.07%.”

All of the 34 ILS funds tracked by ILS Advisers in its Index reported positive returns in July 2017, while the gap between best and worst performing increased as well.

“All funds represented in the Eurekahedge ILS Advisers Index made positive returns. The difference between the best and the worst performing fund was 0.91 percentage point,” Kräuchi said.

While there were a number of larger catastrophe events in China, Japan and India, none of these was a threat to ILS fund performance during the month, ILS Advisers said, but the U.S. severe weather situation continues to eat into aggregates and ILS contract deductibles.

Kräuchi commented; “The severe weather in the U.S. continued to play an important role in growing insured losses which eroded deductibles of some private ILS contracts. However, meaningful losses remained unseen. On the whole, the impact of the events in July is minimal.”

During the month of July pure catastrophe bond investment funds rose by 0.52%, while the funds that also invest in private ILS and collateralized reinsurance rose by 0.64%.

On an annualised basis, private ILS funds continue to outperform cat bond funds, with the gap now 1.28%.

It will be interesting in a month’s time to see how hurricane Harvey impacts the ILS Advisers Index and whether there are any private ILS losses already accounted for in August’s returns.

The cat bond funds are likely to experience a slight dip in their figures, as mark-to-market losses could take longer than to the end of the month to recover.

Private ILS funds are likely to report further deductible erosion because of hurricane Harvey and these contracts could begin to look a lot riskier after that storms impacts are factored in.

Eurekahedge ILS Advisers Index, showing average return of ILS and cat bond fund market - Click the image for more data on ILS fund performance

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 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.