ILS funds average 0.16% in May, as pressure on cat bond prices continues

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The pressure on the prices of outstanding catastrophe bonds continued to weigh on the average yield of the insurance-linked securities (ILS) market in May, the average yield of ILS funds on a group of 34 ILS funds, linked to the reinsurance and catastrophe bonds managing only 0.16% in May.

As might be expected, due to the pressure on cat bond prices, the group of funds focused on investing in cat bonds struggled again in May. In contrast, the group of funds that also invest in private ILS or collateralized reinsurance performed better.

The average return of 0.16% for the month of May, for the ILS funds tracked by the Eurekahedge ILS Advisers index, is the third lowest return for May on record. The year-to-date return has now reached 1.09%, remaining well below average for the time of year.

Despite various catastrophic events around the world in May, ILS Advisers reports that the ILS fund group it follows suffered no material loss.

Stefan Kräuchi, Founder of ILS Advisers, commented; “Given various events around the world this month, the ILS funds have suffered minimal impact. 26 of the 34 funds represented in the Eurekahedge ILS Advisers index were positive. 8 index funds were negative. All negative funds are pure cat bond funds.

The ILS Advisers Index continues to demonstrate the best performance of ILS funds focused on private ILS and collateral reinsurance, while market price pressure for cat bonds is clearly evident in the inability of eight funds to perform. positive.

“Private ILS funds outperformed pure bond funds by 0.27 percentage points per month and 3.04 percentage points on an annualized basis. The outperformance has persisted over the past 14 months, ”explained Kräuchi.

Catastrophic bond pricing pressure was widely seen on low yield bonds in May, according to ILS Advisers, as these bonds suffer from weaker demand as catastrophic bond fund managers need to target the yielding layers. higher in order to maintain yields.

ILS Advisers noted some interesting trends in recent reinsurance renewals, including some tightening in rates on private ILS transactions.

“In terms of private ILS, while ROLs have declined in recent renewals, they have slowed down or even hardened in some areas,” commented Kräuchi.

This stabilization in reinsurance rates, which has been noted by major reinsurance brokers, has been aided by a decline in capital under management of some large ILS managers, Kräuchi said.

“The deduction of AUMs from some large ILS players signaled the mitigation of overcapacity. Likewise, the weakening of capital market support and the increase in demand lead to the development of the retro market, ”he continued.

The spread between the best and worst performing ILS funds in May narrowed to 0.9%, lower than the figure for the previous month. Pure catastrophe bond funds averaged a stable return in May, although many fell, while the subgroup of funds whose strategies include private ILS rose 0.27%.

The expected recovery in secondary catastrophe bond prices had not yet materialized at the end of May, with many positions still listed below par. This should start to become evident during the US wind season, although it remains to be seen how far they recover given demand factors that are also putting pressure on catastrophic bonds.

We normally expect this index to post a much stronger performance for June. Investment managers hope to see cat bond funds make a larger contribution during this month.

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

You can follow the Eurekahedge ILS Advisers index on Artemis here, including the new USD hedged version of the index. It includes an equally weighted index of 34 constituent ILS funds that tracks their performance and is the first benchmark index that allows a comparison between different managers of securities funds linked to insurance in the ILS investment space, linked to reinsurance. and catastrophe bonds.

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