Every so often the financial press zero’s in on the catastrophe bond and insurance-linked security, usually to discuss the impact of natural events and losses. Sometimes they focus on positive aspects of the cat bond market, such as the returns that the asset class generates. Bloomberg have done just that today, publishing an article in which they discuss the high returns the sector is currently generating and the benefits of the lack of correlation with the broader financial markets.
The article on Bloomberg, titled ‘Cat Bonds Beating Corporates Most Since November‘, discusses the fact that returns on cat bonds have reached a point where they are exceeding returns on corporate debt by the most in nine months. Investors are facing record low yields on corporate debt instruments and hence are looking elsewhere in their hunt for returns which are not correlated with economic performance. The cat bond and ILS space offers just such an investment opportunity.
Bloomberg highlights that cat bonds have returned 1% this month and compare that to a loss of 0.9% in corporate debt over the same period. Conversely 2011 saw cat bonds return half what corporate debt was offering due to the losses the sector faced. It’s encouraging that so much capital entered, or wanted to enter, the space after a year like 2011 and testament to the unique investment opportunity ILS offers that high interest from investors continues to be a feature of the market.
We wrote about the high return of the cat bond market over the last two weeks in an article published on Monday. One of the main reasons for the excellent performance over August to date is the benign nature of the hurricane season so far and the lack of threat to the U.S. coastline. The Bloomberg article reinforces this, quoting John Seo of Fermat Capital Management who says that higher coupons combined with investor demand is accelerating returns.
Cat bonds have returned 5.3% since March according to Bloomberg while this month the outperformance of cat bonds compared to corporate debt has become the most pronounced since last November. Bloomberg cites data that shows that average coupon rates have risen on cat bonds this year, averaging 915 basis points in 2012, up from 899 basis points in 2011 and 881 bp in 2010. That’s significantly higher than many other asset classes and the fact it has been rising reflects a maturing market where investors are becoming accustomed to accepting risk in return for a decent coupon payment.
Shiv Kumar who works in the ILS space at Goldman Sachs is quoted as saying; “It’s not related to how the U.S. economy is doing, to how the global economy is doing, the concerns about growth, currencies or deficits. The sector itself has proven to be a diversifying, objective, clean play compared with debt and equity markets.”
The article goes on to discuss the benefits that the asset class offers investors who are willing to allocate a portion of their capital into ILS and cat bonds. It’s always encouraging to see positive press for the sector and this year the coverage is looking particularly positive which can only help to bring the ILS and cat bond space to the attention of an even wider range of investors. As we wrote the other day, catastrophe bonds are one of the few clearly attractive asset classes right now.
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