Insurance-linked security rates rise slightly, returns recover from Sandy in Q4: Lane Financial

The final quarter of 2012 saw the average rate-on-line of insurance-linked security and catastrophe bond deals rise a little after having seen declines through much of the year, according to the latest quarterly ILS market update from ILS, cat bond and reinsurance consultancy Lane Financial LLC. This could have been an effect of hurricane Sandy and it will be interesting to watch the trajectory of this metric through the coming year.

We always look forward to the ILS market reports from Lane Financial as they contain a deep statistical view of the outstanding ILS and cat bond market using its own proprietary Lane Financial Insurance Return Index. This index measures the return of the outstanding ILS and cat bond market and rate-on-line pricing data taken from actual secondary market ILS and cat bond activity.

In this article we’ll look at two of the charts from the Q4 ILS market report, the Lane Financial synthetic rate-on-line metric which takes data from both the ILS and ILW market to create an index which gives a reasonable approximation of the premiums being paid (or rate-on-line) for transactions. The other metric is the return of the market, for which we’ll look at Lane Financial’s monthly total return chart which gives a good approximation of how investors returns have performed through the end of 2012.

After seeing a hefty decline through to the end of Q3 2012 the rate-on-line metric has bounced back a little in the fourth quarter. Lane Financial’s synthetic rate-on-line index rose just over 2% in the fourth quarter. This small change could be a reaction to hurricane Sandy, with investors demanding a slightly higher premium for their investments, or it could just be a small bounce with the market recognising that pricing had reached a new low for the last two years. It will be interesting to see where this metric goes in the coming months. Many observers expect rates to stay low as capital interest in ILS remains high from investors.

ILS Synthetic Rate-On-Line Index - Source: Lane Financial LLC

The second metric we’re looking at in this article is the total return performance of the Lane Financial All CAT ILS index. This index clearly shows the impact that hurricane Sandy had on cat bond returns at the beginning of Q4, but also evident is the strong recovery that occurred as soon as the cat bond market identified that losses were looking unlikely. This total return index recovered the majority of the Sandy impact by the end of the fourth quarter and looked set to begin 2013 on an upwards trajectory.

Monthly All CAT ILS Total Return Performance - Source: Lane Financial LLC

We will cover some other insights from the Lane Financial report in the coming days.

You can download a full copy of the quarterly ILS market report on the Lane Financial website where you’ll need to register to download a copy.