Insurance-linked securities (ILS) investment funds started 2016 with a below average 0.23% average return for January, as pressure on catastrophe bond prices affected some funds, while price declines across reinsurance markets continue to weigh on performance.
The Eurekahedge ILS Advisers Index reported its second lowest performance on record for January 2016, across the group of 31 constituent insurance-linked investment funds that the Index tracks. Only January 2012 saw lower January performance at 0.18%.
During January 2016 some ILS funds were again hit by the pressure on catastrophe bond pricing, with a number falling negative for the month.
Stefan Kräuchi, founder of ILS Advisers, commented on the performance seen during the month; “27 funds represented in the Eurekahedge ILS Advisers Index made positive returns. Among the 4 negative funds, 3 are pure cat bond funds, which are mainly negative due to falling price of cat bonds.”
Strategies among ILS funds continue to diverge, somewhat, with catastrophe bond funds suffering price pressure regularly and ILS funds investing in private ILS and collateralised reinsurance generally seeing better returns.
“With the lowest single fund return -0.24% and the highest one 1.37%, the monthly performance difference was 1.61%. Pure cat bond funds as a group were up by 0.09% while the subgroup of funds whose strategies include private ILS increased by 0.34%. The performance gap between private ILS funds and pure cat bond funds was 3.15 percentage points on the yearly basis,” Kräuchi continued.
Of course it should be noted that the private ILS and collateralised reinsurance strategies among ILS funds are likely the more volatile and higher risk (and return) of the market, with greater tendency for exposure to more regular loss events.
January 2016 again showed that attritional losses are possible from events around the world, with frequency events around the globe causing some minor impacts to private ILS funds.
The largest single event of the month was the winter storm in the U.S. during January, according to ILS Advisers, but it didn’t cause any meaningful losses to exposed ILS funds.
Meanwhile the insurance industry loss estimate from the Chinese Tianjin port explosions has risen further, increasing the uncertainty for any exposed ILS funds which have established side pockets for the event.
Kräuchi noted; “For funds who set up side pockets for the event, the release of collaterals can take months given the slow process of claim collection.”
At the January reinsurance renewals ILS Advisers noted similar trends to those already reported, of steeper price declines in diversifying regions such as Europe.
Kräuchi explained; “From the updates from ILS fund managers, January renewal was quite in line with our estimation previously. U.S. saw more discipline with slight rate reduction. Europe region and diversifier markets were very competitive, where we saw a lot more rate cuts and more compression on margin.”
This resulted in some evidence of different strategies among ILS fund managers, with some choosing to write this business still, while others focused instead on peak peril regions.
The effect though is a general expectation of returns dropping further for this year.
“We already see funds lowering the target returns for the year, facing the fact overall rate on line decreased,” Kräuchi said.
So January 2016 started much the way 2015 signed off, with ILS fund managers largely reporting positive returns albeit lower than historical averages due to the depressed state of reinsurance market pricing.
Perhaps though, we need to get used to a new normal of lower prices and therefore reduced returns among ILS funds, as the changes to the reinsurance cycle persist. Time will tell whether we will ever see the returns witnessed in prior years by the ILS Advisers Index, or whether, across the market average of ILS funds, the historical averages may be tough to beat.
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 31 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.