Data from the first few months of 2017 shows that there has been a steep fall in the returns of new catastrophe bonds compared with those issued in the first quarter of 2016. The returns of bonds exposed to US hurricane risk has reached record lows, falling by more than 25% at the 2% risk level. Risk-remote issues have seen even greater reductions.
Risk-adjusted returns of catastrophe bonds had held steady at long term lows for several years. However, bonds issued towards the end of 2016 started to find a new pricing floor and this trend has continued in 2017. The $100m security issued by Louisiana Citizens paid 2.25% over the floating rate which is a new record low for bonds exposed to US hurricanes. Sompo's $400m japanese typhoon hedge paid investors less than 1% above the floating rate net of expected losses.
This chart shows the catastrophe bonds that have priced so far in 2017 versus those issued in the first quarter of 2016.
Data from RMS shows that rate reductions have also been reflected in secondary market trading. The Cat Adjusted Spread is a risk-adjusted measure of cat bond returns and is currently more than 0.5% lower than at the same time last year.
Japan has the world's second largest insurance market (after the United States). The Japanese financial year starts on April 1 as do most Japanese reinsurance contracts. Reinsurance brokers observed mid single-digit reductions for Japanese earthquake and typhoon programmes - a similar fall as was observed in 2016.
According to Guy Carpenter, there has been little change in the pricing of US ILWs. This chart shows the steady cost of hedging insurance losses due to US earthquakes. The risk continues to increase due to changes in demographics and inflation. Registered users can see the interactive chart here.
A concise introduction to reinsurance, catastrophe bonds, and insurance-Linked funds is available on Amazon here.
Posted: Monday, April 3rd, 2017