The unusual pattern of returns in the secondary catastrophe bond and insurance-linked securities market has helped ILS funds achieve their best monthly return of 2012 so far. Returns that the average ILS fund has been making have risen steadily as we moved into Q2, with first April and then May becoming the strongest month of the year so far. Now June has seen another increase, and according to insight from ILS Advisers, an investment consultancy based in Hong Kong focused on ILS as an asset class, it could have been higher.
The data we’re discussing in this article comes from the Eurekahedge ILS Advisers Index, 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.
June saw the Eurekahedge ILS Advisers Index rise by 0.60%, narrowly beating May which was up 0.59%. This makes June the best monthly performance so far in 2012 and the best monthly return since October 2011. Stefan Kräuchi of ILS Advisers told us that he puts June’s strong monthly return down to; “Performance in June was strong on the back of the seasonal slowdown in the primary market combined with strong money inflow into the space.”
The performance in June could have been even better though and was reduced due to loss development at two of the constituent ILS funds. Stefan Kräuchi told us; “27 out of 29 funds reported mostly very good results for the month. Upward adjustment of loss reserves for New Zealand and Japan earthquake respectively from last year by two funds in June prevented even stronger performance and deducted over 30bp of index performance.”
Had those events not impacted the return of this index it would have been the best single monthly return since October 2010 which would have been quite remarkable. Those loss reserve adjustments will have affected two funds who play in the collateralised space rather than the cat bond space, so any dedicated cat bond funds which are included in the Eurekahedge ILS Index will on average have returned better than the 0.60%.
We’ll update you next month on July’s performance. You can track the Eurekahedge ILS Advisers Index on Artemis here.