Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Insurance-linked securities (ILS) funds have another impressive month in July


Insurance-linked securities (ILS) funds have achieved another month of impressive returns in July with the average ILS fund up by 0.62% for the month and 2.94% year-to-date, as measured by the Eurekahedge ILS Advisers Index. Insight from ILS Advisers, an investment consultancy based in Hong Kong focusing on ILS as an asset class, shows that July has become the best single monthly return for the index since last October, beating the 0.60% performance we reported the index achieved in June.

The returns were not down to the catastrophe bond market alone this time. In fact catastrophe bonds price recovery slowed in July, with the outstanding cat bond market only up slightly for the month by 0.05% as measured by the Swiss Re Cat Bond Price Index and by 0.86% in the Total Return Index. The strong price recovery slowed due to the peak season for hurricanes and typhoons being reached, according to ILS Advisers, and this effect will last until the end of Q3 or even into Q4. ILS Advisers note that the positive performance of the cat bond market and ILS funds shows that the mark-to-market impact of the storm season has been perhaps lower than usual, which they say further demonstrates the strength of the ILS market.

All 29 of the constituent funds in the Eurekahedge ILS Advisers Index have  reported a positive return for the month of July. ILS Advisers say that by looking at the funds results you can see both the slowdown in the recovery of the cat bond market and on the other hand evidence of seasonal factors where some U.S. hurricane exposed cat bonds saw slight price decreases. Funds which have a higher percentage of their portfolio allocated to cat bonds, particularly U.S. wind exposure, as a result saw lower performance compared to funds with lower allocations. Conversely, ILS funds with higher allocations to financial insurance contracts, which don’t exhibit the seasonal pricing changes so much, saw slightly better returns on average.

Stefan Kräuchi of ILS Advisers said; “In general funds with higher allocations to private transactions performed better than pure cat bond funds or funds with a higher allocation to cat bonds. This is mainly due to the pause in the price recovery of cat bonds and seasonality which is typically reflected in cat bonds but not in private transactions. Even though seasonality impact was lower than models would suggest.”

ILS Advisers expect that primary market activity for cat bonds as well as for private transactions will remain fairly quiet for the next two months. Once the peak season is over, they expect primary market activity to resume. They are confident that the market later this year will continue to see strong demand combined with competitive pricing, resulting in an expectation that issuance levels will be high.

ILS Advisers expect the performance of the Eurekahedge ILS Advisers Index to be similar in August to that seen in July. As we reported on Monday, the Swiss Re Cat Bond Indices have seen a stronger than normal rise in August already which should help to ensure that ILS funds with greater allocations to cat bonds have a good month too. Another article we published on Tuesday references a strong return from cat bonds so far in August as well. Of course should tropical storm Isaac  (or any other storm that forms) make its way through the Caribbean and threaten the U.S. coastline then all bets are off on cat bond performance for the month.

We’ll update you next month on performance from August. 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. It 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.

Register today for ILS Asia 2023, our next insurance-linked securities (ILS) market conference. Held in Singapore, July 13th, 2023.

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