The average return of insurance-linked securities (ILS) and reinsurance-linked investment funds in March reached 0.65% as measured by the Eurekahedge ILS Advisers Index helping the ILS fund management sector to its best first-quarter return since 2010. For the first-quarter the average ILS investment fund returned 2.08% for the quarter. The last time the ILS Advisers index tracked higher in Q1 was in 2010 when it returned 2.31%.
ILS fund managers and their investors have enjoyed a very good start to the year in 2013, helped by some unseasonal price movements in outstanding catastrophe bonds and no major or impactful catastrophe events. The first three months of the year has seen spread tightening across the majority of the secondary catastrophe bond market helping funds and the ILS Advisers index to a another strong months performance in March.
The cat bond market as a whole managed a return of 1.00% in the month of March according to the Swiss Re Cat Bond Total Return Index, demonstrating that ILS funds with large allocations in cat bonds have done particularly well again.
The primary cat bond market came back to life in March, note ILS Advisers, with a number of new transactions marketing. Spreads on primary cat bond deals came under pressure across the board due to the demand from investors and new capital that had been waiting to be put to work.
This results in lower returns for new cat bond deals but makes the cat bond market particularly attractive to new sponsors at the moment, as they see a clear value in placing some of their risk in the capital markets while investors have this strong appetite. ILS Advisers note that while primary cat bond spreads have come under pressure, private transaction premium levels have held up quite well.
ILS Advisers note an interesting trend in the Q1 2013 cat bond market, the almost total domination of the indemnity trigger. 80% of deals issued in Q1 had indemnity triggers, compared with the market average at the end of 2012 being 51% according to Swiss Re data. In the past, indemnity cat bonds had to attract investors with higher spreads due to a perceived lower transparency in the trigger. ILS Advisers note that this doesn’t seem to be the case anymore as primary pricing demonstrates, adding that this further demonstrates the strong investor interest in the ILS and cat bond asset class.
Stefan Kräuchi, founder of ILS Advisers, commented; “As has been widely reported, new issuance activity was very strong in March, resulting in lower spreads for newly issued cat bonds. While this is negative for cat bond returns going forward, this makes the ILS market relatively more interesting for reinsurance buyers and will attract new sponsors and bring new and hopefully more geographically diversified investment opportunities. In contrast, premium levels for private transactions seem to have held up quite well in recent renewals based on manager comments.”
Commenting on the seeming move towards indemnity triggers in recent cat bond transactions, Stefan Kräuchi added; “This observation, combined with lower spreads seems to reflect some kind of power shift from investors to the sponsors. Having said that, of course relative to the alternatives in the fixed income markets in Europe, US and Japan the asset class is still very attractive, as pension fund investor in Switzerland rightly pointed out to me last week.”
In the month of March 2013 28 out of the 29 funds in the ILS Advisers index reported a positive monthly return.
Going forwards, ILS Advisers update noted that it expects April returns to be slightly lower than March on the assumption that secondary cat bond market spread tightening may have now run its course. Given the recent issuance of a number of new cat bonds which have helped to soak up investor demand and the fact that the U.S. hurricane season is approaching spreads should begin to widen a little, how quickly this happens will likely depend on how much excess investor demand and capital exists.
We’ll update you next month on the index performance for April.
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.