Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

ILS funds September returns the highest in three years


Once again the average return made by insurance-linked securities (ILS) funds, as measured by the Eurekahedge ILS Advisers Index, hit record levels for the year in September. In fact, last month was the best single monthly return that the index had achieved in three years, since September 2009, according to insight from ILS Advisers, an investment consultancy based in Hong Kong focusing on ILS as an asset class.

A combination of seasonal factors influencing U.S. hurricane exposed positions and continued strong investor demand keeps pushing returns higher and in September the average return of the funds in the ILS Advisers index was 1.18%, bringing the index return for the year-to-date to 5.13% (based on 86% of funds which had reported September returns by the 19th October). Using unofficial figures from all 29 constituent funds the number for the month is also 1.18%. This is the best single monthly return that the index has seen since it returned 1.58% in September 2009.

Another measure of the return in the ILS and cat bond market is the Swiss Re indices. In September the Swiss Re price return index was up by 1.25% while the total return index was up by 1.95%. These indices give a view of the performance of all outstanding catastrophe bonds, while the ILS Advisers index gives a view of ILS fund managers returns across all their insurance and reinsurance linked assets so is perhaps more representative of the average ILS investment opportunity.

Stefan Kräuchi of ILS Advisers told us; “September, which is traditionally one of the best months for ILS Funds has fully lived up to expectations. ILS funds delivered their best performance since September 2009. While all 29 index constituents delivered positive numbers, the funds with the highest allocation to US wind risk were the top performers for the month.”

Performance in the ILS and cat bond market continues to be driven by the recovery in prices and returns witnessed since June, said ILS Advisers, In particular U.S. hurricane exposed cat bonds increased strongly during September as we passed the peak of the hurricane season with no major impacts and no storms on the horizon.

ILS Advisers discussed the primary cat bond market activity which took place in September, noting the record low pricing that was achieved with the Eurus III Ltd. deal which ILS Advisers said “Marked a historical low for this level of expected loss”. While this shows pressure on pricing of cat bonds they are quick to highlight that this doesn’t necessarily indicate similar pricing pressure on private transactions. Hence, they say that ILS investors may find that being flexible in terms of where they allocate capital and looking outside of cat bonds might offer a more attractive investment opportunity at this time.

This is a very interesting point and something that cat bond issuers need to bear in mind, while pricing remains at record lows there is a risk that capital might withdraw in the hopes that pricing will rebound or other reinsurance-linked opportunities present themselves. It will be interesting to note the pricing of the three deals currently in the market when they close towards the end of the month.

The outlook for October looks almost as strong, according to ILS Advisers. They expect that prices will continue to increase in the majority of cat bonds as long as no hurricanes threaten the U.S. This will support the returns of the majority of ILS fund managers and as a result ILS Advisers expect the index to have another strong month in October, although perhaps not as strong as September, which historically is the best month of the year for the Eurekahedge ILS Advisers Index.

We’ll update you next month on the index performance for October. You can track the Eurekahedge ILS Advisers Index on Artemis here. It comprises an equally weighted index of 29 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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