Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

ILS and cat bond rates fell more slowly in Q2 2013: Lane Financial


The speed of decline in insurance-linked security and catastrophe bond rates slowed somewhat during the second quarter of 2013, according to the latest quarterly market report from ILS, cat bond and reinsurance consultancy Lane Financial LLC. ILS rates, as measure by Lane Financial, dropped approximately 3.6% during Q2 2013.

The measurement 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 early 2008.

At the end of the first-quarter the rate-on-line index stood at 123.4, but that has dropped down to 118.9 by the end of the second-quarter, a fall of 3.6%. Over the first half of 2013 the index has fallen from by 6.45% in total.

More impressive is the decline in ILS rates seen over the last year. At the end of the second-quarter of 2012 the ILS rate-on-line index stood at 150.4, so according to this RoL index, ILS rates have fallen by 20% on average in just one year. Readers will be aware that some catastrophe bond issues have actually seen rates as much as 40% lower than their equivalent issues a year earlier.

Most of the decline in ILS rates actually happened over the second-half of 2012, according to Lane Financial’s synthetic index (as you can see in the graphic below), and the decline in ILS rates has been slower in 2013, with Q2 rate declines slower than in Q1 this year. This suggests that the market adjusted as capital flowed in and investors found their risk appetite, with rates through 2013 becoming flatter which has been evidenced by recent cat bonds where price decreases have become less pronounced. It will be interesting to see whether the ILS rate-on-line index remains more stable over the remainder of the year.

ILS synthetic rate-on-line index

ILS synthetic rate-on-line index to end of Q2 2013 - From Lane Financial LLC

The second metric we’ll look at from the Lane Financial report is the total return performance of the Lane Financial All CAT ILS index. This shows that while investors have continued to enjoy attractive returns, the rate of return has slowed somewhat during the second-quarter of the year. This echoes the performance of other indices, such as the Swiss Re cat bond indices and the ILS Advisers Index which tracks ILS fund performance.

The quarterly return of the All CAT index was 2.13% for Q2 2013, compared to 3.28% for the first-quarter of the year. This is still a very decent return and if you look at the rolling 12 month return for the All CAT ILS index it was 12.38% to the end of Q2, which any cat bond investor or ILS fund manager would be very happy with.

Monthly All CAT ILS Total Return Performance

Monthly All CAT ILS Total Return Performance to end of Q2 2013 - From Lane Financial

Overall, the Lane Financial indices, combining All CAT, Life and other transactions return, had a total return of 2.04% for the second-quarter of 2013.

Also of note in the report is the fact that the average yield spreads and expected loss of transactions issued in recent months have not changed all that much in the last quarter. In fact the average secondary market yield spread of the market has risen slightly in the last quarter, while the average secondary market expected loss has declined very slightly.

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 $15.08 billion at the end of Q1 to $16.40 billion in just one quarter. The market value of the same transactions has jumped from $15.22 billion to $16.67 billion.

The strong issuance seen in the catastrophe bond market during the second quarter of 2013 has helped the size of the market grow by almost $1.4 billion in a single quarter, or 8.8% growth of the market on par values and 9.5% growth on market values, which is extremely impressive market growth. $17 billion looks easily possible by the end of the year, but could we even see $18 billion?

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

Artemis Live - ILS and reinsurance video interviews and podcastView all of our Artemis Live video interviews and subscribe to our podcast.

All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance video content and video interviews can be accessed online.

Our Artemis Live podcast can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.