Swiss Re Insurance-Linked Fund Management

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Record -9.04% decline for ILS funds in September 2017: ILS Advisors


The insurance-linked securities (ILS) fund market has experienced its largest ever losses in September 2017, final data from ILS Advisors index of ILS funds performances shows, with the average being a decline of -9.04%.

Eurekahedge ILS Advisers Index, showing average return of ILS and cat bond fund marketIn total, 33 out of the 34 ILS and catastrophe bond funds tracked by the Eurekahedge ILS Advisers Index saw a negative return during the month of September 2017, as the impacts of hurricanes and earthquakes drove the entire ILS market to a decline.

Following on from a negative August, in which the average return of 34 constituent insurance and reinsurance-linked investment funds sank to -0.34% on the impact of hurricane Harvey, September has been significantly worse for ILS funds, as the impacts of hurricane Irma drove major losses and Maria further still.

As we wrote a fortnight ago, it was clear that September 2017 was going to be the most negative month ever and perhaps lead 2017 to be the most negative year on record for the ILS fund market.

With the average return of ILS funds in September falling to -9.04% and 33 out of the 34 tracked ILS funds reporting negative returns, the impact has been widespread across the market.

However, all is not equal in ILS fund losses with strategy and the types of contracts underwritten dictating the scale of losses an ILS fund suffers.

While the catastrophe bond market suffered a decline of over -6.5%, on a total return basis, private contracts exposed to insurance and reinsurance risks in Texas, Florida and Puerto Rico suffered the most.

Hence the ILS funds that invest in private ILS contracts and collateralized reinsurance and retrocession fared the worst.

ILS Advisors reported a huge gap between best and worst performing ILS fund of 26.73%, reflecting the gulf between different ILS and reinsurance linked investment strategies.

Further reflecting the different impacts of recent events, the pure cat bond funds as a group dropped by -4.66% , but the ILS funds that invest in private ILS and collateralized reinsurance dropped by -12.11%.

On an annualised basis, that means that the private ILS funds now trail cat bond funds by 10.81%.

To the end of September the ILS market was down by more than -7%, so is heading for its most negative year on record.

Stefan Kräuchi of ILS Advisors explained that loss estimates remain preliminary for these recent events which could affect future months performance, “It’s noteworthy that the loss figures are still very preliminary and the estimates provided show a wide range, mainly because the three hurricanes happened in a short interval and available loss estimates are top down estimates. In the coming 2-3 month we expect more certainty in the loss data and possible adjustments to the fund performance as well.”

This means some funds may find they can boost future months performance, as market-to-market prices of catastrophe bonds rebound, while some private ILS contracts find that losses associated with them are lower than initially anticipated.

Of course, there is also the chance that some positions worsen, and that loss reserves have to be increased, especially for aggregate reinsurance arrangements.

A number of ILS funds investing in collateralized reinsurance have experienced declines of -15% to -20% for September, having marked down losses for many positions exposed to hurricane Irma. But with Irma losses in Florida perhaps not stacking up as rapidly as had at first been expected, there is a chance that some of these reserves may have been made at levels higher than are eventually needed.

But with losses also now threatened due to the California wildfires, it looks unlikely that the ILS market could recover enough to post a positive return for the year.

Eurekahedge ILS Advisers Index, showing average return of ILS and cat bond fund market

Eurekahedge ILS Advisers Index, showing average return of ILS and cat bond fund market - Click the image for more data on ILS fund performance

You can track the Eurekahedge ILS Advisers Index on Artemis here, including the new USD hedged version of the index. It comprises an equally weighted index of 34 constituent insurance-linked investment 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.

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

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