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Quarterly Market Performance Report |
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.
To read the full version of this article with graphs:
 Download the PDF Here
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