Newsletter August 2019

Half year losses lower than historical average

First named hurricane Barry made landfall

The average ILS fund was up by 0.42% in July as measured by the Eurekahedge ILS Advisers Index.

In July Barry became the first named hurricane that made landfall in U.S. for the year. It landed in sparsely populated area in Louisiana and caused limited damage with expected insured losses less than USD 600m. Severe weather in the Rockies and Plains caused 50,000 claims and economic losses of USD 730m. An M7.1 earthquake struck South California. Luckily little damage was resulted and the economic losses were estimated to be around USD 100m. In the first half of the year, global economic losses were estimated to be USD 73bn, 22% below the historical average and insured losses USD 20bn, 26% below average. 78% of the insured losses were incurred by the severe weather and flooding. Over 60% of insured losses were observed in the U.S., mainly due to its high insurance penetration rate. Some research indicates the weakening of the El Nino effect, which might be slightly more favorable for formation of hurricanes than people previously estimated. Events during July had little impact on the ILS market.

In the primary market, two deals totaled around USD 1bn were issued to cover mortgage insurance risks which pushed up the total outstanding amount for the peril to exceed 7bn, ranking 3rd among all perils. The total market size of cat bonds stands well above USD 40bn. Entering Q3, the primary market usually becomes less active. As much as USD 2bn cat bonds will mature in the second half of the year and we therefore expect a considerable amount renewing transactions. Secondary market trading was quite active as investors rebalanced their portfolios. Cat bond price went up 0.19% while the total return was 0.80% (Swiss Re Cat Bond Indices). The performance of ILS funds improved compared to last month as the seasonal premium allocation increased for the month. Cat bonds became attractive as the coupon rate raised back to levels of 2016. On the other hand, the average outstanding expected loss went down to 2.33%, the lowest level of risk since 2016. For a publicly traded fund, the share price was traded at significant discount to NAV as the fund announced run-off of its portfolio.

27 of the funds represented in the Eurekahedge ILS Advisers Index were positive for the month. The difference between the best and the worst performing fund was 5.06 percentage points, which was higher than previous month’s figure. Pure cat bond funds as a group were up by 0.49% while the subgroup of funds whose strategies include private ILS increased by 0.34%. Private ILS funds underperformed pure cat bond funds by 3.30 percentage points on an annualized basis year-to-date.

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