Insurance-linked securities funds see below average October returns

The month of October saw positive returns from the majority of insurance-linked securities funds (ILS) but the average return of the ILS fund market, as measured by the Eurekahedge ILS Advisers Index, was below the historical average.

The average insurance-linked security fund saw a return of 0.53% for the month of October, according to ILS Advisers. This is below the historical average for October, which is 0.58%, which when you consider that this year saw no major losses threaten the ILS market is perhaps a little surprising.

October’s performance lifted the ILS Advisers Index to a return of 6.56% for 2013 up to the end of October, which is a healthy year for the sector as measured by this barometer of the average performance of ILS funds.

The Eurekahedge ILS Advisers Index is an equally weighted index which tracks the performance of 33 constituent ILS funds (three more funds have been added to the index in October), providing a broad measure of the performance of underlying hedge fund managers who exclusively allocate to insurance linked investments.

Stefan Kräuchi, founder of ILS Advisers, told Artemis; “Performance with 0.53% was comparatively low for a loss free October. The reason is that there was not much price appreciation in the secondary market, as the mild hurricane season has already been priced in probably one month earlier than usual. As a result performance was mainly driven by current yield.”

For comparison, the catastrophe bond market was up by 0.17% in October for the Swiss Re Cat Bond Price Return Index and by 0.86% for the Cat Bond Total Return Index. This shows that a pure cat bond investment strategy could have performed better than the average ILS fund in October.

The strong rally in ILS prices witnessed since July ran out of steam in October, according to ILS Advisers, with the expectation of a mild hurricane season having been priced into the market earlier than usual. The market avoided large losses during October, despite the threat of a number of Japanese typhoons, hurricane Raymond in the Pacific threatening Mexico and European windstorm Christian, none of which appear to have impacted the funds in the index.

32 out of the 33 funds tracked by the ILS Advisers Index saw positive performance for the month of October, but the gap between the best and worst performing shows the diverse range of strategies available in ILS funds. There was a gap of 4.52% between the best and worst performing ILS fund in October, which is 0.76% higher than the gap in September. The size of this gap, and that seen in recent months, shows that there are funds in the market achieving 3%+ each month over the last few months.

Pure catastrophe bond funds performed slightly better as a group in October, with an average performance of 0.57%, compared to those which also include private ILS deals in their strategy and saw 0.5% performance for the month.

Performance from the Eurekahedge ILS Advisers Index in 2013 has now surpassed the level returned over the course of the full year of 2012. Last year saw Index performance of 5.93% for the year, while 2013 ILS fund returns have now reached 6.56% with two months still to report.

The Eurekahedge ILS Advisers Index continues to provide a good proxy for the performance of the ILS fund market, demonstrating the attractive returns that are possible from catastrophe risk and reinsurance as an asset class. The addition of three new funds to the index, taking its constituents to 33, in the last month helps to make it even more representative of the ILS markets performance as a whole.

Eurekahedge ILS Advisers Index - Tracking the average performance of 30 ILS funds (click the image for more details)

You can track the Eurekahedge ILS Advisers Index on Artemis here. It comprises an equally weighted index of 33 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.