2013 has continued on a positive note for investors and fund managers as the average return of insurance-linked securities (ILS) and reinsurance-linked investment funds in February reached 0.73% as measured by the Eurekahedge ILS Advisers Index. This is the best February performance recorded by the Index since 2010 and beats the return of 0.68% reported for January. The return has again been helped by the lack of supply of primary catastrophe bonds.
Tightening of prices in the secondary catastrophe bond market has been a contributing factor to the performance of the Index in February, as it was for January as well. The lack of supply of primary cat bonds meant that investors, who have plenty of capital, have focused on secondary cat bond marks to deploy that capital resulting in an uptick in some outstanding bond prices.
Some of the price movements in the secondary market for cat bonds have been unseasonal in nature and have led to some investors finding deploying capital difficult. Hong Kong based investment consultancy ILS Advisers said that because of the disappointing level of new issuances in February the tightening of prices in the secondary cat bond market was the main driver for February’s strong performance.
Demonstrating the strength of the return in the secondary cat bond market, the Swiss Re cat bond indices were up 0.60% for the Price Return Index and 1.30% for the Total Return Index. Compare that to the performance that these indices were seeing in February 2012, when both the Price Return and Total Return indices actually declined due to investor interest being focused on a busy primary cat bond issuance market, and it’s easy to see how primary deal-flow can have an impact on ILS fund returns.
Commenting on the strong performance of ILS funds in February Stefan Kräuchi, founder of ILS Advisers, said; “This was the strongest month of February since 2010. Mainly driven by demand/supply imbalance. Given the strong pick up in new issuances the situation should improve slightly. Issue remains the lack of new supply of non-US risk, which restricts the growth of many funds that try to diversify their portfolios.”
Now that the primary issuance market has sprung back to life and we have a number of cat bonds which have recently come to market, ILS Advisers expect the demand-supply imbalance to level out somewhat. However, Stefan Kräuchi makes a valid point about the lack of diversification opportunities within recent transactions, which have a very U.S. peril focus. This will suit some of the newer investors and ILS funds in the space but for established and larger funds there could be some difficulty obtaining the diversification necessary to participate in the new transactions on a larger scale. Kräuchi also notes that the lack of diversification opportunities could be a particular issue for ILS funds operating under regulated fund regimes.
All 29 of the constituent funds within the ILS Advisers Index reported positive returns in February, demonstrating the developments in the ILS market and the effect of investor demand-supply imbalance. Given the tight demand-supply situation, and absent any major insured losses, ILS Advisers expect another strong month for the Index in March.
We’ll update you next month on the index performance for March.
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.