The rise in cat bond spreads is reflected in the return of the Swiss Re Cat Bond Index after a few months this year, perhaps the most widely used benchmark in the insurance-linked securities (ILS) space, which has reached its highest level since 2013.
As we’ve previously reported, cat bond spreads spiked in the first quarter of 2023, with data from Artemis showing cat bond spreads hitting record highs around mid-March.
While the average spread over expected losses for all cat bonds issued at that time of the year was an impressive 10.47%, what we saw in cat bond pricing as new capital flowed into cat bond funds Moderating trends have now brought that number down somewhat.
In fact, the average cat bond spread to expected losses from 2023 to date is now 8.12%, according to Artemis data, which includes all cat bonds issued, priced and settled in 2023 as of this morning.
The Q1 2023 spread for the full quarter ended up being 9.41%, while the Q2 spread so far is lower at 6.77%, as you can see in our chart which tracks quarter by quarter Cat Bond Pricing and Spread Data.
That’s still a very healthy level of spread, especially if you look back at how cat bond pricing and spreads were reduced through most of 2010.
The lingering question is where will the spread settle and will the downtrend that really started in the second half of March in recent weeks continue? Or will the market find a new balance of risk and reward?
Investors we spoke with would like to see an equilibrium where the rate of decline in price multiples slows and spreads eventually stabilize at levels well above the market’s all-time lows.
Market multiples see this a little differently, as it is important to note that the average expected loss for cat bond issuance in 2023 is also falling. So while the spread above it has narrowed, cat bond investors have taken on less risk.
Artemis’ chart showing cat bond multiples is a good way to show the difference, showing that while market multiples fell in the second quarter, they are still well above multiples for cat bond issuance two years ago.
Back to the Swiss Re Cat Bond Index, a widely used benchmark for measuring the total return of the outstanding cat bond market.
Year-to-date total returns of 7.55% have been impressive as of May 2023, when the Swiss Re Global Cat Bond Index was last priced.
This is the highest return for the Swiss Re Global Cat Bond Index since 2013, even though we are only in the fifth month of the year.
Clearly, the cat bond market has a long way to go in 2023, with the entire North Atlantic hurricane season likely to be dealt with.
But the strong start to the year for bond returns means investors have a bigger buffer to absorb some losses or volatility in cat bond pricing than they have had in many other years of the past decade.
As we recently reported, the UCITS Catastrophe Bond Fund as a whole returned an average of 5.50% through the end of April, trailing the Swiss Re Index’s return of 6.82% for the same period of the year.
The Swiss Re Index includes all cat bonds issued and therefore does not represent a portfolio managed cat bond fund strategy. It also doesn’t contain any cash, so there is no drag at high maturities, as seen earlier this year.
However, it does show the potential for cat bonds, which may be the highest returns ever seen in the cat bond market.
Finally, as measured by the Eurekahedge ILS Advisers Insurance Linked Securities Fund Index, ILS funds as a sector are posting their best April returns since 2007-present.
If this performance holds up, the ILS Advisors Index could report its highest returns on record once May data is included, and that’s when many mortgage reinsurance and retrocession strategies really started to benefit from boosting returns during the wind season before seasonal factors.
Find all our graphs and data here or via the Artemis Dashboard.
All of our charts are updated as new cat bond issuances are completed and older bonds mature.