ILS Fund Index Returns 0.85% for 2021. Cat Bond Funds Outperform


Insurance-linked securities (ILS) funds posted a return of just 0.05% for December 2021, bringing the annual return of ILS funds to just 0.85% for the year 2021, according to the Eurekahedge ILS Advisers Index.

2021 has been another challenging year for the Insurance Securities Market (ILS) and the annual results of ILS advisors, widely benchmarked in the ILS Fund Performance Index, tell a clear story.

2021 saw the average ILS fund only return positive 0.85%, the fourth lowest annual return on record and far behind 2020’s 3.48%.

But the average market performance of ILS funds doesn’t tell the whole story, as you need to look at different categories of ILS funds to really see where performance has been delivered to investors yet.

The catastrophe bond fund market has demonstrated its ability to generate attractive returns, despite another year of heavy catastrophe losses for the insurance and reinsurance market, in 2021.

Overall, the average return for catastrophe bond funds was 2.34% for the whole of 2021, much better than a negative return of -0.12% for funds that also invest in private ILS contracts, such as guaranteed reinsurance.

The more remote nature of the risk and higher reinsurance layer coverage of the catastrophe bond helped protect this segment of the ILS market from many losses that hurt collateralized reinsurance in 2021.

Additionally, the way the blanket hedge is structured in catastrophe bonds has also helped,

Another year with frequent small to medium sized catastrophic events once again really hurt some private ILS strategies, which weighed on performance for the full year.

But, as always, it’s the range of returns that shows the breadth of strategies in the overall insurance-linked securities (ILS) market.

The worst ILS fund tracked by ILS Advisers fell -12.1% for the year, but the most positive returned 13.8% for its investors.

Not all ILS funds are created equal and the variety of strategies available means investors can choose which managers and strategies to follow.

It is important to note that an ILS fund that was negative in 2021 could still be positive in another year of significant catastrophe loss, as these are the specifics of events, how they fall, where and most importantly how they aggregate to specific exposures of an ILS. funds subscribed which determines how badly a strategy might be affected.

As always, risk selection and portfolio management are key, but what is a very strong portfolio one year may be weaker another, depending on the specifics of catastrophe claims activity.

Overall, 19 of the ILS funds tracked by the Eurekahedge ILS Advisers Index ended the year in positive territory, while 10 posted negative performance for the year as a whole.

December was a weak month to end the year, with pure catastrophe bond funds returning just 0.04%, thanks to pricing pressure in the market due to large new issues, which means private ILS funds beat them with an average return of 0.05%. .

However, there are some losses to consider, as some ILS funds were affected by the overall franchise erosion through December, largely as a result of the US tornado outbreak and the typhoon in the Philippines.

Although this Typhoon Rai (Odette) caused a loss for holders of a World Bank catastrophe bond, this will be reflected in the January 2022 returns for the cat bond fund segment.

ILS fund managers are hoping for improved performance in 2022, thanks to tougher reinsurance pricing, as well as ongoing actions to improve portfolios and tighten coverage conditions.

Reduced global exposure, as well as the imposition of stricter global reinsurance and retrocession conditions, could be a difference maker, especially for private ILS funds, if we have another year with many catastrophic losses. .

The ILS Fund Index remains well below its 2017 peak, showing that as a sector, ILS still has some way to go to recoup all of its losses.

You can track the Eurekahedge ILS Advisers Index here on Artemis, including the USD-hedged version of the index. It comprises an equally weighted index of 28 constituent insurance-linked investment funds that tracks their performance and is the first benchmark that allows comparison between different insurance-linked securities fund managers in the investment space. investment of ILS bonds, linked to reinsurance and catastrophe.

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