Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Strong investor demand helps ILS funds to record return in August


The average returns of insurance-linked securities funds, as measured by the Eurekahedge ILS Advisers Index, keeps increasing as they put in another record month in August. Insight from ILS Advisers, an investment consultancy based in Hong Kong focusing on ILS as an asset class, shows that on average ILS funds returned 0.95% in August, the record single monthly return of 2012 so far and the highest single monthly return of the index since September 2010.

ILS fund managers must be delighted with the performance of their funds in recent months, it has provided them with an opportunity to demonstrate what the asset class can do after a slower start to the year where returns were lower. According to Stefan Kräuchi of ILS Advisers, the strong performance in the secondary catastrophe bond market in the month of August was very unusual as it is the one preceding the most active month of the U.S. hurricane season. The reason for the strong performance was continuing strong investor demand, which in August managed to compensate for the seasonal factors of peak hurricane season.

ILS Advisers also said that a lack of alternatives in the private market has helped to keep secondary market interest high and ILWs have been deemed to be too aggressively priced. Managers have likely been positioning themselves for the possibility of lower pricing at the next U.S. wind season renewals in the absence of any major events, an issue that will certainly be growing in priority among fund managers now given the lack of hurricanes in September so far.

The Eurekahedge ILS Advisers Index rise of 0.95% in August takes its year-to-date performance to 3.92%. With four months left to account for in 2012, generally some of the stronger months, it looks like ILS funds could deliver on average somewhere around 7% this year which would be better than perhaps was expected around the end of the first quarter when returns were looking a little depressed. For comparison, the Swiss Re Cat Bond Price Return Index was up by 0.94% and the Total Return Index was up 1.85%, suggesting that the cat bond dedicated funds had a particularly strong month in August. Cat bond prices were up strongly for the month, according to ILS Advisers, with the exception of Pelican Re which was affected by the approach of hurricane Isaac and saw a 4% drop in price as we discussed before.

All 29 of the constituent funds in the Eurekahedge ILS Advisers Index have again reported positive performance in August. ILS Advisers says that there was no clear trend with regards to performance difference between dedicated catastrophe bond funds and funds with greater allocation to private contracts.

Stefan Kräuchi said; “For September the market is focused on the developments on the weatherfront, as this is the most active month for the North Atlantic for the development of hurricanes, accounting historically for almost 50% of all storm formations. Absent any major event in September we expect another strong month for ILS funds.”

With just a few days to go in September, and no sign of the Atlantic throwing a last-minute storm at the U.S. coastline, it looks like ILS funds are set for more strong returns. The question will be whether they can beat August?

We’ll update you next month on the index performance for 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 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.

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