Catastrophe bonds outperform corporate debt again in 2013

by Artemis on August 20, 2013

Once again an investment made in catastrophe bonds would be outperforming one made in corporate debt. Almost a year ago to the day, Bloomberg covered the cat bond market and focused on the impressive returns that the asset class was making when compared to corporate debt. A year later the cat bond market continues to outperform.

Bloomberg has again covered the catastrophe bond market today, in a piece looking at not just cat bonds but the broader bond investment market, Bloomberg again says that catastrophe bond investments are outperforming other asset classes.

The catastrophe bond market, as measured by the Swiss Re indices, shows that U.S. wind or hurricane bonds are on track to return as much as 10% this year, which Bloomberg notes is double the 4.6% annualized return of the Bank of America Merrill Lynch U.S. High Yield Index.

Cat bond prices have risen at their fastest rate since last September this month, as the influence of the U.S. hurricane season begins to kick in and an element of seasonality returns, manifesting itself as price rises. These strong rises in outstanding cat bond prices are expected to continue for as long as the U.S. avoids major impact from hurricanes during the season, meaning that investors are set to reap the rewards of the asset class while the tropics remain calm.

Bloomberg believes that U.S. wind catastrophe bonds could provide their best returns relative to junk debt bonds since the height of the financial crisis, with an average yield in the cat bond market of around 7.87% compared to 6.77% for the junk bond market, according to the story.

The article from Bloomberg, which you can read via Insurance Journal here, compares cat bonds as an investment to junk bonds and concludes that cat bonds have shown their relatively uncorrelated nature by not being affected by cut backs on Federal stimulus measures, which have impacted wider bond markets.

It’s another positive story for the cat bond market, which helps to demonstrated the attractiveness of the asset class and explains the growing interest being shown by new investors from the capital markets. It also shows that despite the declines in pricing and returns, which has been a feature of cat bonds issued since the last quarter of 2012, the market continues to provide a better return than comparable asset classes. Sentiment like this can only help to continue to build interest in catastrophe bonds, insurance-linked securities, catastrophe risk and reinsurance as an asset class.

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