U.S. severe storms knock April ILS fund returns

The returns of insurance-linked securities (ILS), pure catastrophe bond and reinsurance-linked investment funds were knocked by severe thunderstorm activity across the United States in April, resulting in a below-average for the month 0.15% return.

At least one ILS fund fell to a negative return for April 2017, as the losses from the impactful severe convective weather season continue to rise, causing some catastrophe bonds to suffer a fall in pricing and some private ILS or collateralized reinsurance contracts to be hit as well.

April 2017 saw an average ILS fund return of 0.15%, which is well behind the historical average for the month of 0.42%. It takes 2017 year-to-date returns for the first-quarter to 1.05%, across the group of 34 ILS investment funds tracked by the Eurekahedge ILS Advisers Index, which is the third lowest in the twelve years this data has been tracked.

It was severe thunderstorm, hail, convective weather and tornado activity across the U.S. that particularly hurt ILS funds in April 2017, resulting in reduced performance for many funds and negative performance for at least one, we understand.

Stefan Kräuchi, founder of ILS Advisers explained the impacts seen as his firm collates the data from ILS funds, which included a reduction in secondary pricing for some catastrophe bonds that have exposure to U.S. severe thunderstorm risks.

Additionally, “Some private contracts were hit by the severe weather in the U.S. Some funds faced direct losses to their reserve and some incurred erosions on their deductibles,” Kräuchi said. “This combined with the fact that out of season premium allocation was generally less than premium allocation in the season, depressed the April performance of private ILS funds.”

On the catastrophe bond side, the Gator Re cat bond outstanding principal was further reduced in April, resulting in that bond becoming fully paid out (as we covered previously), as far as the retained principal goes.

Other cat bonds with exposure to severe U.S. thunderstorm perils, tornadoes and hail, saw their secondary prices affected during April, as aggregate losses start to mount for sponsoring insurers. In particular this refers to the Skyline Re cat bond that we reported on previously.

Private ILS, or collateralized reinsurance, contracts have clearly also been hit, judging from ILS Advisers insights into ILS funds that have reported hits to reserves and deductible erosion. This has further pulled down the performance of the ILS fund market in April.

However, ILS fund strategies differ wildly and some funds still manage very attractive performance, despite the higher level of attritional losses in April.

“29 funds represented in the Eurekahedge ILS Advisers Index made positive returns,” Kräuchi explained. “The difference between the best and the worst performing fund was 1.19 percentage point.”

Pure cat bond funds saw lower performance as a group at 0.09% for April, while the funds that also invest in private ILS or collateralized reinsurance increased by more than double that amount, at 0.20%. As a result, private ILS funds stretched their lead, outperforming pure cat bond funds by 1.42% on annualized basis to the end of April.

Cyclone Debbie also occurred in Australia during April and there may have been some small hit to certain ILS funds from that event as well.

Also affecting the catastrophe bond funds performance was the very high issuance of new deals, which can depress secondary mark pricing as ILS funds look to allocate to new deals and the liquidity in the market in a very busy month can push down overall pricing, impacting cat bond fund returns.

Given the record level of cat bond primary issuance in May this is likely to also be a factor in that month as well.

The severe thunderstorm weather has continued through May, with insurance industry losses this month also heading into the billions of dollars. As aggregate losses continue to mount the risk may be rising for certain reinsurance and ILS contracts.

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.

Join Artemis in Singapore on July 13th 2017 for ILS Asia, tickets on sale here