Decline in ILS and cat bond rates accelerated in Q3: Lane Financial

by Artemis on October 8, 2013

The speed of decline in insurance-linked security and catastrophe bond rates accelerated during the third quarter of 2013, according to the latest market report from ILS consultancy Lane Financial LLC. ILS rates, as measure by Lane Financial, dropped approximately 16% during Q3 2013.

The measurement of the rate trajectory of the ILS and cat bond market is taken from the Lane Financial synthetic rate-on-line index, which takes data from both the ILS and ILW markets to give a reasonable approximation of the premiums being paid (or rate-on-line) for ILS and cat bond transactions. The synthetic rate-on-line index is now at its lowest point since the fourth-quarter of 2005.

The ILS synthetic rate-on-line index had declined to 118.9 by the end of the second-quarter of 2013. The index has now plummeted down to 99.6 at the end of Q3, a drop of 16.2% in just a single quarter. The index stood at 127.1 at the start of 2013 which means that by this measure the average rate-on-line of the ILS and catastrophe bond market has dropped by nearly 22% in just nine months.

It’s also interesting to note that the average rate-on-line of ILS and cat bonds, as measured by Lane Financial’s synthetic index, now sits a massive 45% lower than at its all time high point in mid-2009. The chart below shows the steady decline in rate-on-line since Q2 of 2012.

ILS synthetic rate-on-line index

ILS synthetic rate-on-line index to end of Q3 2013 - From Lane Financial LLC

It should be noted that while rates have declined rapidly over the last few months we are still some way from the bottom seen in 2005. The trajectory over the next few months will be interesting, we suspect it will be much flatter when the next edition of this report is released in early January.

The decline in pricing of catastrophe bonds and ILS is not just reflected in Lane Financial’s synthetic rate-on-line index, it’s also extremely clear to see in a chart showing secondary market yield spreads of ILS and cat bonds. As you can see from the chart below, the average secondary market yield of ILS and cat bonds also plummeted in Q3, finishing the quarter at 5.50.

Arithmetic Average Secondary Market Yield Spreads and Average Expected Losses

Arithmetic Average Secondary
Market Yield Spreads and
Average Expected Losses (as issued) - From Lane Financial LLC

While the average secondary market yield dropped rapidly over the last quarter it is interesting to note that the average expected loss actually saw a slight uptick, which shows that investors are willing to take on similar levels of risk for much lower return right now. Again, it will be interesting to see where this chart of secondary market ILS yields goes over the rest of the year.

Finally from Lane Financial’s quarterly ILS market report we’ll take a look at the total return performance of the Lane Financial All CAT ILS index. This index shows that the rate of return to investors has actually been better, according to this measure, over the last quarter, with a total return of 3.29% for the third-quarter, considerably higher than Q2 which only saw a return of 2.13% for the same index.

The rolling twelve month return for this index has dropped slightly to 11.19%, but this is about right in terms of a historical average return over the life of this index.

Monthly All CAT ILS Total Return Performance to end of Q3 2013

Monthly All CAT ILS Total Return Performance to end of Q3 2013 - From Lane Financial LLC

Overall, the Lane Financial indices, combining All CAT, Life and other transactions return, had a total return of 3.29% for the third-quarter of 2013.

Finally, the size of the outstanding ILS and cat bond market keeps growing, according to Lane Financial. According to the report the par value of the market has grown from $16.40 billion at the end of Q2 to $17.56 billion in just one-quarter. The market value of the same transactions has jumped from $16.67 billion to $18.06 billion.

It’s clear from the report that the cat bond market has been experiencing strong growth and even stronger demand, which has helped to push down rates while at the same time lowering average secondary yields, but the market just keeps on growing. As we wrote earlier today, we now see the outstanding cat bond and ILS market as over $19 billion in size, according to our Deal Directory.

You can access the full report via the Lane Financial website.

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