ILS Fund Returns Dented By Continuing Loss Creep In March

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Includes: GLRE, HVRRF, HVRRY, SSREF, SSREY, TPRE
by: Steve Evans
Summary

Continued loss creep suppressed the returns of catastrophe bond, insurance-linked securities (ILS) and reinsurance linked investment funds in March 2019, causing the ILS Advisors Index to fall to a negative -0.12% for the month.

Virtually no one has been immune to this, as the typhoon Jebi industry loss has risen steadily from initial modelled estimates of around $3 billion to $5 billion, to now become a $12 billion to even $13 billion market-wide loss event.

The Eurekahedge ILS Advisers Index recorded a -012% March return for the group of ILS and cat bond funds it tracks, below the average for the month, which has taken the year-to-date (end of March) return for the Index to just 0.39%, one of the lowest Q1 returns on record.

Continued loss creep suppressed the returns of catastrophe bond, insurance-linked securities (ILS) and reinsurance linked investment funds in March 2019, causing the ILS Advisors Index to fall to a negative -0.12% for the month.

Loss creep challenges continue for the ILS fund market, as well as for broader insurance and reinsurance players that had been impacted by some of the complex catastrophe events of the last year.

Our readers will be all too aware of the typhoon Jebi related loss creep that has continued to hurt reinsurance firms and ILS players. Virtually no one has been immune to this, as the typhoon Jebi industry loss has risen steadily from initial modelled estimates of around $3 billion to $5 billion, to now become a $12 billion to even $13 billion market-wide loss event.

Of course that kind of loss creep has had significant ramifications for the ILS fund market, as increasing estimates of ultimate net losses from Japanese ceding companies have filtered through to impact exposed reinsurance contracts the market had underwritten.

In addition, typhoon Jebi has also sent the price of one Japanese wind exposed catastrophe bond tumbling as well, so the effects of the loss creep have been felt across both the cat bond fund and private ILS fund markets.

The Eurekahedge ILS Advisers Index recorded a -012% March return for the group of ILS and cat bond funds it tracks, below the average for the month, which has taken the year-to-date (end of March) return for the Index to just 0.39%, one of the lowest Q1 returns on record.

Explaining the mixed performance of the group of ILS funds tracked by the Index, ILS Advisors Founder Stefan Kräuchi told us, "8 funds represented in the Eurekahedge ILS Advisers Index were positive, less than last month. Pure cat bond funds as a group were down by 0.21% while the subgroup of funds whose strategies include private ILS decreased by 0.06%."

As a result, "Private ILS funds on average continued to underperform pure cat bond funds by 1.23 percentage points on an annualized basis year-to-date," Kräuchi further explained.

The range of investment strategies in the ILS fund market is increasingly broad, resulting in a wide gap between performance typically.

"The biggest gainer was a private ILS fund that increased by 0.72%. The biggest loser in the Index was also a private ILS fund that lost 1.03% for the month. The difference between the best and the worst performing fund was 1.75 percentage points," according to Kräuchi.

Loss creep from hurricane Michael has also served to mark down further a few Florida exposed catastrophe bonds in the month, Kräuchi further explained, which alongside the Jebi loss creep caused certain cat bonds to be marked down between 10% and 30% in the month of March.

The catastrophe bond market price return fell by -0.46%, while its total return managed a positive 0.06% for March, according to Swiss Re's cat bond index.

On the private ILS and collateralised reinsurance side of the ILS fund market loss creep continued, with reserves strengthened for typhoon Jebi which caused widespread impacts to fund performance.

Kräuchi said that there is a chance that the Ethiopian Airlines aviation loss could have a small impact on specialty lines contracts allocated to be certain ILS funds.

Ongoing typhoon Jebi loss creep is likely to be a factor in April as well, as recognised sources of loss estimates continued to raise their expectations for the storm's impact during the month.

As we explained, Swiss Re's CEO said that the typhoon's industry loss has likely risen to as much as $13 billion now, whereas in March the estimates were sitting lower than that.

So there could be further ILS fund negativity to come, related to typhoon Jebi, as the market continues to move towards a figure that can encompass all of the expected claims.

The loss creep from Jebi has resulted in an unwelcome dent to first quarter ILS fund returns in 2019, just at a time when ILS fund managers were keen to demonstrate their performance potential.

But the entire insurance and reinsurance industry missed the magnitude of the Jebi loss, so ILS funds were bound to be hit in the same way and with the world's largest reinsurance companies all having added significantly to their reserves for the catastrophe event, it is no surprise ILS funds have had to follow suit.

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 32 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.

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