Catastrophe bond market total return rises in 2016

by Artemis on January 16, 2017

The total return of the catastrophe bond market in 2016 came in more than 2.5% higher than 2015, with brokers and market indices typically reporting a 6% to 7% cat bond total return in 2016, compared to as low as 4% in 2015 depending on which bonds they included in their data.

The reason for the increase in returns is partly due to investor demand side influence on the market and the amount of capital looking to access cat bonds, but also due to the fact that the average coupon of 2016 catastrophe bond issuance was almost half a percentage point higher than 2015, while 2015 issuance had seen a full 2% increase in average coupon from 2014.

The last two years increases in coupons of cat bonds issued have helped the market’s total return to rise, resulting in a much more positive year’s performance for many catastrophe bond strategies in 2016, as compared to 2015 and 2014.

The Swiss Re Global Cat Bond Total Return Index was up an impressive 6.94% from the last mark of 2015 to the 31st December 2016, a full 2.74% higher than the 4.2% this Index achieved in 2015 and also up on the 6% reported in 2014.

However cat bond index returns remain some way down on the 10%+ recorded in 2012 and 2013, or before, reflecting the lower priced reinsurance market environment.

Of course the benign level of major catastrophe losses that affected insurance and reinsurance markets in 2016 has once again been a major driver of positive performance in catastrophe bonds in 2016.

With just one, relatively small loss to contend with, from the Gator Re catastrophe bond, ILS funds and investors have continued to benefit from a relatively loss free cat bond market.

The fact that supply of new cat bonds consistently fails to meet the potential demand available among ILS funds and institutional investors, has also helped to ensure that prices rise and so total returns have been boosted in 2016.

The majority of cat bond funds saw a more positive 2016 as a result of all of these dynamics, with some even reporting their best returns in two years.

With forecasts suggesting that 2017 may see sufficient catastrophe bond issuance to prevent the market from shrinking, despite the very high levels of maturities scheduled, the market looks set to continue on its growth trajectory.

However, slight growth in 2017 will not be sufficient to meet catastrophe bond investor demand. The market clearly has sufficient appetite to absorb a number of billions of dollars of additional cat bond issuance, should insurance and reinsurance cedents want to lock in protection from the capital markets.

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