The speed of insurance-linked securities and catastrophe bond rate declines slowed in the fourth-quarter of 2013, but still rates dropped to their lowest level since before hurricane Katrina struck, according to data from ILS consultancy Lane Financial LLC.
This measurement of ILS and cat bond market rates and their trajectory is taken from the Lane Financial synthetic rate-on-line index, which uses data from both the ILS and ILW markets to give a reasonable approximation of premiums being paid (or rate-on-line) for ILS and cat bond transactions.
The Lane Financial synthetic rate-on-line index is now at its lowest point since hurricane Katrina struck in mid-2005. The index has a way to go before it would be at its lowest level ever, seen prior to Katrina when the index sat at a level of 75. At the end of 2013 the index had declined to 92.9, a drop of 7% since the end of Q3.
The synthetic rate-on-line index declined by 27% over the course of 2013, but the rate of decline slowed in Q4 dropping just 7% compared to a drop of 16% during the third-quarter. The index is now 49% lower than its highest point ever in mid-2009.
When Artemis last covered the rate-on-line index in October we commented that the index would likely flatten out a little in Q4 as pricing seemed to not have much further to go south. This turns out to have been the correct forecast looking at the chart above. Still the index is a distance from the lowest point seen pre-Katrina in the soft market and it will be interesting to see what direction it travels in over the next few quarters to see if rates on line approach those historic lows.
The slow-down in the speed of price declines in the ILS and catastrophe bond market is also evident from secondary market data reported on by Lane Financial.
This next chart shows Lane Financial’s data on secondary market yield spreads of ILS and cat bonds versus the average expected losses at the time of issue. The gap between the two is the expected excess return achievable.
The average secondary market yield has declined from 5.5% at the end of Q3 to 5.26% at the end of Q4, a drop of just over 4%. That’s a considerably smaller decline than was seen between Q2 and Q3, when secondary market yields plummeted.
However, over the course of 2013 the measure of average secondary yield has dropped from 7.59% at the end of Q4 2012 to 5.26% at the end of 2013, which is a decline of just over 30%. Over the same period the average expected loss at time of issue has declined by just 4%, showing that the secondary ILS and cat bond market is returning a lot less for only slightly less risk.
It is the excess return however, the spread between yield and expected loss, which has been compressed the most in 2013. At the start of the year this stood at 5.14%, according to Lane Financial’s data, but by the end of 2013 this had shrunk by around 44% to just 2.9%, the lowest excess return figure since Lane Financial’s data began.
So, with ILS and catastrophe bond primary issuance rates down, secondary ILS yields down and expected losses remaining relatively static, it does of course mean that ILS multiples have also taken a further tumble.
In fact the average multiple at market of Lane Financial’s All Cat ILS index, calculated as secondary yields versus issue expected loss, is now at an all time low of 2.22%.
Recent declines in catastrophe bond and ILS pricing have continued to erode the average multiple of the market, however the slide in multiples has slowed since the end of the third-quarter of 2013, as has the rate decline.
Market participants have been discussing the ‘floor’ in cat bond and ILS pricing for sometime. Does the recent slow down in the rate of decline of rates, pricing and multiples signify that we are nearing that floor? We’ll update you at the end of the next quarter.
Read more on Lane Financial’s latest ILS and cat bond market quarterly report: