With 2023 returns now in, are investors looking forward or back?
Aside from the one-year view, 2023 remixes the track record.
Full-year ILS returns data is now out, with the Eurekahedge ILS Advisers Index showing a 14.1% gain for the year across pure cat bond and mixed private and cat bond strategies.
The return was clearly strong, outperforming comparative investments like S&P's US High Yield Corporate Bond Index, which gained 12.3% in the year.
Our analysis shows how gross cat bond spreads increased gently during H2 2023, moving in the opposite direction to high-yield bond spreads, which ended the period lower than they started it.
Pulling up the track record
Even more important than a single year of stellar performance is that 2023 returns have helped pull the ILS industry out of negative territory.
Last year’s return boosted the ILS Advisers Index’s 10-year annualised return to 2.1%, and the five-year annualised return to 3.3%.
This has gone a long way towards paying back investors who suffered the pain of cat losses in the preceding years – although for the five-year figures, moving past 2017 and 2018 clearly helps.
That said, the annualised returns numbers are still not particularly exciting.
For mixed private ILS and cat bond funds the five-year number comes in at 3%, while for pure cat bond funds it’s 4%.
Before the impact of last year’s 14.1% gain, the five-year annualised return was still in the red on an annualised loss of 0.2%, although on a 10-year basis it was slightly positive at 1.5%.
Looking back or forward?
So how much weight will investors put on the annualised record vs. the projection for the year ahead?
Will the fact that the five-year data is now positive do enough to turn investors’ eyes to the juicy 2023 return?
The 2024 expected returns are broadly similar to what was expected last year, which could be tempting.
Sources note that US investment culture tends to be more positive towards forward opportunities, and less focused on past issues.
However, the relatively slow reaction from incoming capital shows that people are more concerned about the long-term view, and not trusting of the one-year perspective.
Notified redemptions are still trickling out from funds, as reserves get released, including trapping from Covid years that is still unwinding.
Inflows are generally more tentative, with some investors looking to make strategic longer-term allocations taking a “toe in the water” approach.
It’s hard to envision that 2024 will be the year where total ILS assets under management kick up again from their plateau of around $100bn that they have settled at over the past five years. (Although the fall in trapped capital means capacity feels less constrained.)
The reinsurance pricing environment will play a role in investors’ decision-making though, and if current pricing and attachment points hold, inflow momentum may yet start to build through the second half.