Lane Financial LLC, a consulting firm and broker-dealer focused on the insurance-linked security, catastrophe bond and associated sectors or reinsurance, published their latest quarterly ILS market report yesterday. As always, the report contains a deep statistical view of the outstanding ILS and cat bond market using their own proprietary Lane Financial Insurance Return Index which measures the return of the market and pricing data taken from actual secondary market activity.
In this article about the report from Lane Financial we’re going to look at two of the key metrics of the ILS and cat bond market. The Lane Financial synthetic rate-on-line measurement which takes data from both the ILS and ILW market to create an index which gives a good approximation of the premiums being paid (or rate-on-line) for transactions. The other metric is the return of the market, for which we’ll look at Lane Financial’s monthly total return chart which gives a good approximation of how investors returns are performing.
The synthetic rate-on-line index peaked at the end of Q1 2012 at 152.7, the highest point since mid-2010. The rate-on-line index then began to decline in Q2, hitting 150.4 at the end of that quarter but then fell sharply during Q3, ending the most recent quarter at 124.6. That’s down just over 17% in a single quarter and denotes the biggest quarterly change in pricing for a few years.
This decline is no surprise if you have been keeping an eye on the pricing of recent cat bond deals, all of which have been closing at or below the guidance pricing range enabling sponsors to achieve their desired cover at a much cheaper rate. The fall was likely helped by declines in pricing of ILWs during the third quarter, which we discussed in this article.
The chart below shows the drop in the synthetic rate-on-line index and the percentage change. As you can see, the index changes with seasonality every year so it is interesting to see that the percentage change has been higher in 2012, a year with much less seasonal hurricane influence so perhaps suggesting that the influx of capital into the sector has really been having an effect on pricing, as we’ve discussed before.
The second chart, below, shows the monthly total return performance of the Lane Financial All CAT ILS index. This clearly shows the strong recovery that returns have made during 2012, denoting much better performance for ILS funds and investors ILS portfolios. You can also clearly see evidence of seasonality in this chart as a pattern emerges of rising and falling returns during each year.
These two charts clearly show the healthy state of the ILS and catastrophe bond market in 2012. Cheaper rates for issuers combined with higher returns for investors, at a time of increased investor interest, definitely helped the market move forwards in 2012. It will be interesting to see how these charts react to increased issuance as we move into the fourth quarter and into 2013. Looking back at the latest Lane Financial reports in six months time will be telling.
Other gems from the Lane Financial report include the fact that a $100 investment in cat bonds which tracked their index from 2002 to present would have seen you more than double your money based on the total return to $235.34. That’s a compound annual growth rate of 8.29%, a very attractive investment proposition over these last ten years.
Another interesting fact in the report is that according to Lane Financial’s numbers on the ILS and cat bond market, the market value of all outstanding Cat ILS included in the LFC index is at an all time high of $14.365 billion. So from Lane Financial’s viewpoint the ILS and cat bond market is bigger than it has ever been right now.
Also of interest is the fact that the average expected loss of the market has remained almost static over the last twelve months, suggesting that perhaps the ILS and cat bond market have found a ‘sweet spot’ which is attractive to sponsors and investors.
We published another article containing data from this report here: Correlation between insurance-linked securities returns and S&P500 returns declines
You can download a full copy of the quarterly ILS market report on the Lane Financial website where you’ll need to register to download a copy.