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Quarterly Market Performance Report |
October 15, 2007
By: Morton N. Lane, President; Roger G. Beckwith, Vice President
A benign storm season (so far) has led to high returns for investors in cat bonds for the second year running. That is reflected in the quarterly report shown in the adjacent table. The (All Cat) quarterly return is 3.76%, which if repeated every quarter would result in an annual return of 15.04%. Given an average coupon of approximately L + 8%, this is only possible because of rising cat bond prices (falling yields or premiums). Historical Cat yields are plotted on page 6.
The adjacent Table also shows that we have subdivided the market returns into several categories. The first division is between pure Cat bonds, Life securities, and “Others” (i.e. non-Cat, non-Life). These latter categories are presently small, but worth tracking as they will undoubtedly grow. Note that the Life category only includes those bonds that provide a “risk analysis” to investors. That is typically not the case, for example, for XXX securitizations which are not included here. The second division of the insurance linked securities (ILS) market is between those bonds originally issued at an investment grade rating versus those originally issued at sub-investment grade, i.e., below BBB-. Many hedge funds seek high returns and do not invest in highly rated bonds, so a sub-investment grade index may be more reflective of their activity. Of course, funds also apply leverage.
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