December 3, 2023

Numerous insurance-linked securities (ILS) fund strategies have delivered decade-high returns through at least 2023 so far, as a higher reinsurance rate environment and widening spreads on instruments such as cat bonds boosted their performance.

Chart ROI performanceWhile ILS funds have underperformed in many instances over the past five years or so, 2023 is turning into a major recovery year so far.

We need to qualify this, of course, as we face almost the entirety of the Atlantic hurricane season, and it only takes one major insurance catastrophe loss event globally to reverse the fortunes of ILS funds.

But at this stage of the year, many ILS funds are on track for at least their best first half in a decade, and for some, their best ever.

One benchmark we can keep an eye on is the Eurekahedge ILS Advisers Index, which has yet to fully report for May but is now on track for its strongest performance in the first five months of the year since 2007.

The rest of the ILS funds that are required to report returns in May didn’t need to deliver more for the index to post its best return ever in the year to the end of May.

Another benchmark we offer is the Plenum CAT Bond UCITS Fund Index, which tracks the performance of a basket of cat bond funds structured in the UCITS format, providing a broad benchmark for the performance of cat bond investment funds.

The UCITS cat bond fund index returned nearly 7% through June 9, well ahead of any year in history and for many cat bond funds, their best first-half performance ever.

Another benchmark in the cat bond fund market that we can watch is Swiss Re’s Global Cat Bond Total Return Index, which returned 8.56% through the end of May.

Given its nature, the index leads the performance of true cat bond funds, but it shows just how significant cat bond market yields have been so far in 2023. The Swiss Re index is also at or near record highs for the five-month period of the year.

We have seen ILS fund returns in some risky strategies, including retrocession, etc., and these strategies have also significantly outperformed the cat bond market year-to-date.

We are told that due to the relatively low level of catastrophe losses so far in 2023, many ILS fund strategies are expected to deliver semi-annual returns well in excess of 10%.

Less volatile mortgage-reinsurance and quota-share ILS fund strategies are expected to have the strongest performance in the first half, in many cases expected to return between 6% and 8% in the first six months of the year.

Overall, so far this year, the ILS Fund has demonstrated that the reinsurance rate environment has improved and the impact of a sharp rise in cat bond spreads is benefiting the fund and its investors.

Investors are eager to see this trend of higher returns continue.

ILS fund returns may currently be high enough to easily absorb average catastrophe losses for a year and still deliver positive performance in many cases, which should be positive for encouraging new investor inflows in the coming months.

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