Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

2013 cat bond & catastrophe reinsurance investment returns on track


The outstanding catastrophe bond market returned over 1.5% in September, following on from an even healthier 1.7% return in August, demonstrating that despite declines in pricing, catastrophe bond returns remain a very attractive proposition for institutional investors.

These figures are from the Swiss Re Global Cat Bond Performance Total Return Index, which tracks the total return of a basket of natural catastrophe bonds and gives a reasonable approximation for the return of the outstanding cat bond market.

The two months of very healthy returns, as seasonal price influences from the hurricane season helped to boost secondary cat bond prices and returns, contributed to making the third-quarter of 2013 a very good one for cat bond investors. The total return for Q3 2013 was 3.73%, according to the Swiss Re index, which will help to boost investors and funds with large allocations to cat bonds.

Since its inception in 2002, the Swiss Re Global Cat Bond Performance Total Return Index has returned an average annually of 8.45%. With the strong performance in the last quarter, 2013 looks set to end the year with above average returns.

In fact, so far, the total return index has risen just over 8.8% over the first three-quarters of 2013. With one-quarter to go, two months of which are technically still in the hurricane season where some seasonality should still occur, it’s hard to believe that the annual return for 2013 will dip below that average.

We can compare the performance of the cat bond market, as measured by the Swiss Re index, to the return of the average insurance-linked security (ILS) fund, using the Eurekahedge ILS Advisers Index, and to the industry loss based catastrophe reinsurance market, using the Mercury investible Catastrophe Risk Index (MiCRIX).

Catastrophe reinsurance market returns, as measured by catastrophe bonds, ILS funds and industry-loss warranties

Catastrophe reinsurance market returns, as measured by catastrophe bonds, ILS funds and industry-loss warranties

Here the differences in the return of available investable instruments within this ILS or alternative sector of the catastrophe reinsurance market become more apparent. Also the seasonality of the different instruments show, with the MiCRIX looking most seasonal in the hurricane season, the cat bond market next and the ILS fund market looks like managers try to smooth returns over the whole year.

The Mercury iCRIX, for example, has returned 11.99% in 2013 to date and a huge 8%+ in the third-quarter alone. This index tracks the performance of a diversified portfolio of peak peril industry loss warranties (ILW’s), so providing another useful measure of the returns possible from catastrophe reinsurance as an asset class. The MiCRIX is beating its annualised average return of 9.9% already.

The Eurekahedge ILS Advisers Index has returned 5.55% year to date and 2.1% in the third-quarter (note: September’s returns are currently only based on 23% of constituent ILS funds so this could rise). This measure is an equally weighted index of 30 constituent ILS funds, so providing a really good proxy for the average returns achieved by ILS investment funds and giving a good approximation for the returns of the ILS fund market as a whole. The annualised return average for the ILS Advisers index is 6.85% which seems well within reach by the end of the year.

Readers who follow our coverage of indices will know that they can show the differences in strategy between pure cat bond funds and those ILS funds more focused on collateralized reinsurance and ILW’s. There are times when cat bonds return more than the ILS fund market and equally there are months when the opposite happens.

What this shows is that there is a range of returns available from catastrophe reinsurance as an asset class, depending on the strategy an investor chooses to follow. This is why selection of fund managers is key, ensuring that the strategy they follow is aligned with your own return targets and it is key to look through past performance.

Looking at each of these different proxies for catastrophe reinsurance market returns and comparing them to their annualised averages, it seems clear that 2013 is on course to provide above average returns to each index, which would denote above average returns for most catastrophe reinsurance-linked investment strategies in 2013.

If the remainder of the year is loss free and no market changing events occur ILS investors will be looking at a very good year, despite any decline in catastrophe bond and catastrophe reinsurance pricing. Of course the pricing effect may take longer to filter through, particularly in the cat bond market where contracts are longer, so we’ll have to see how returns compare over the next few years.

Visit our dedicated pages to track the Eurekahedge ILS Advisers Index and the Mercury investible Catastrophe Risk Index (MiCRIX).

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