RMS: Cat Bond Analysis Reveals Market Predictions of Price Bottom Are Optimistic

November 10, 2015

Return relative to risk values for catastrophe bonds at current prices are actually higher in 2015 than they were last year, even though recent market commentary suggests that market prices have stabilized, according to research by RMS, the Newark, Calif.-based catastrophe risk management firm.

“Commentary in the specialist insurance press has generally deemed pricing of catastrophe bonds in 2015 to have bottomed out,” said RMS in a recent blog. “While true in average terms, baseline pricing figures mask risk-return values. True risk pricing can be calculated only by considering all dimensions of loss, including seasonal variations and the time value of money.”

“Primary pricing of individual cat bonds is based largely on the expected losses available from ILS portfolio management platforms,” said Jin Shah, director, capital markets, at RMS, who co-authored the blog with Oliver Withers. “Only by having all bonds evaluated in one risk platform can changes in risk premium over time be better evaluated to identify new trends in the market.”

RMS said it developed this insight into market pricing by applying the same model across more than 130 issuances in the secondary markets.

“The analysis showed, for example, that on Sept. 30, 2014, the difference between bond spreads and the adjusted expected loss was 2.22 percent, compared with 2.52 percent on the same day this year,” RMS explained.

“The pricing of cat bonds at the end of the third quarter of 2015 was 30 basis points higher than it was on the same date in in 2014, relative to the risk and adjusted for the time-value of money,” Shah said, “but only accurate risk and return modeling reveals the true rewards.”

Additional details of the research can be found via RMS’ website.

Source: RMS


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