With all the insurance-linked securities (ILS) funds tracked by the ILS Advisers Fund Index now having reported their returns for January 2025, it’s become clear that there was a significant performance gap for the month due to the California wildfire losses.
In fact, the performance gap works out to be almost 20%, between the best and worst performing ILS funds included in the Index.Which drives home the different levels of impact experienced by ILS investors, depending on the strategies they allocate their capital to across the market.
When we reported on the ILS Advisers Fund Index earlier this month, only 75% of ILS fund managers had reported their returns for January 2025 at the time, which we explained would likely mean the Index return for the month would decline as more data was submitted.
Private ILS strategies, that typically allocate to collateralized reinsurance and retrocession opportunities, were the ones lagging as it can take longer to establish valuations for these funds in the wake of a damaging and costly catastrophe event like the wildfires in Los Angeles.
Now, the data has all been submitted and the ILS Advisers Fund Index value for January 2025 has been recalculated to be -1.99% for the month.
Remember that the ILS Advisers Index tracks the performance of 37 ILS funds that all have at least 70% of their exposure to natural catastrophe risks, which consists of 19 catastrophe bond funds and 18 private ILS fund strategies.
When 75% of the funds tracked by the Index had reported, the average return for the month, according to the Index, was -0.38%. It’s clear that some of the private ILS funds that have reported later have taken the average down considerably.
At the first reporting, when 75% of the 37 ILS funds had reported their returns for January, ILS Advisers said the data showed, “Pure cat bond funds as a group posted a 0.08% gain for the month, while funds incorporating private ILS strategies lost -1.40% on average.”
Now that the full data is in, pure catastrophe bond funds as a group had averaged still +0.08%, given there were no more reports awaited for that market segment, but the average for ILS funds investing in private collateralized reinsurance and retrocession ILS opportunities has declined to -4.17% for January 2025.
More telling though and laying bare the significant impacts some private ILS fund strategies suffered, the gap between best and worst performing fund has widened considerably,
When 75% of funds had reported, the gap spanned from +0.87% for the best performing ILS fund, to -3.71% for the month.
But now, with 100% of ILS funds having reported, the gap for January 2025 returns spans from +0.90% to -18.9%, so a performance gap of -19.8% for the month.
We suspect the strategy with the lowest performance for the month will be a higher-octane private ILS strategy, likely one that allocates capital across higher-risk and returning retrocessional reinsurance type opportunities. It has become apparent that a number of reinsurers made recoveries from their retrocession arrangements, while many US carriers have made significant reinsurance recoveries after the wildfires.
The performance gap lays bare the significant impacts the wildfires have had for some ILS fund strategies. But it also lays bare the fact these ILS funds will be contributing to funding the wildfire claims and recovery, helping California through the injections of capital that will flow through the re/insurance industry.
It is important to note that valuations of ILS funds are unlikely to include any allowance for any potential subrogation recoveries for the Eaton fire at this time. So, there may be room for some incremental reduction in the negative performance over-time, if subrogation claims are successfully made against utilities whose equipment is said to have caused that blaze.
Overall, January 2025 has become the most negative month for the ILS market since September 2022, when hurricane Ian dented the ILS Advisers Fund Index by -6.88%.
As we explained before, there are likely to be effects on February’s ILS fund performance too and so far the ILS Advisers Index has reports in from 59% of managers fund’s, but the return for last month is running at just 0.18%.
Catastrophe bond mark-downs due to the wildfires continued in February, which will dent sector returns, while there could be portfolio effects for some private reinsurance and retro focused ILS strategies as well.
You can track the ILS Advisers Fund Index here on Artemis. It comprises an equally weighted index of 37 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.
