Swiss Re Insurance-Linked Fund Management

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ILS funds start year with 0.36% average return in January 2017


The average return across a group of 34 insurance-linked securities (ILS), pure catastrophe bond and reinsurance-linked investment funds was 0.36% in January 2017, which is a significant uplift on the previous years 0.21%.

January’s average ILS fund return of 0.36%, as recorded by the Eurekahedge ILS Advisers Index, is still below the long-term average of 0.62%, being the third lowest January return in the 12 years that the Index has been calculated.

No major loss events impacted the ILS fund market in January, which has helped to ensure more stable returns for most funds, but some reserve adjustments were seen as the loss events of 2016 continue to affect certain ILS fund performance.

But with reinsurance, ILS and catastrophe bond rates having tumbled over recent years, the fact that the average return is up on last year and actually only just slightly below the January 2015 return reflects a more stable environment and higher returns now achievable through the private ILS market.

Even pure catastrophe bond funds did not fare too badly in January, despite issuance failing to keep up with investor demand which often puts pressure on cat bond fund performance. Cat bond funds averaged 0.3% in January 2017, while the funds that invest in private ILS or collateralised reinsurance managed 0.4%.

Stefan Kräuchi, founder of ILS Advisers, explained some of the dynamics of January 2017’s ILS fund returns; “All funds represented in the Eurekahedge ILS Advisers Index made positive returns. The difference between the best and the worst performing fund was 0.80 percentage point.”

The difference between best and worst performing was lower than in the previous month, perhaps reflecting the fact that losses to ILS funds were minimal in January.

Some ILS fund managers are still analysing the impacts from U.S. tornado activity that occurred in January, to identify whether any reserving may be necessary, but at this time no funds have reported any losses of significance during the month.

However, some ILS funds needed to make reserve adjustments for their hurricane Matthew loss provisions in January, ILS Advisers reported, showing that the impacts of the frequent loss events that hit ILS funds investing in private reinsurance contracts in 2016 continues to show up in some ILS fund returns.

“No events in January had an impact to ILS funds so far. Some funds reported that they are still monitoring the potential impact from the U.S. record-breaking tornadoes during the month. This impact might come through their retro contracts which typically take longer time to recognize any losses. Some funds also record small loss reserve adjustment from Hurricane Matthew last year,” explained Kräuchi.

So 2017 gets off to a reasonable start for ILS fund returns, considering the fact that reinsurance and catastrophe bond rates have fallen further at and around the renewals. Of course the better performance is also reflective of the fact that the level of risk has risen a little in the market over recent years, as a way to counteract falling prices.

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 - 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.

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