Catastrophe bond prices and returns continue their climb

by Artemis on September 14, 2009

Has anyone else noticed the increasing interest in catastrophe bonds and insurance linked securities in the media lately? The large amount of articles in such titles as the Financial Times and American Chronicle, the amount of noise being generated about life insurance securitization, it’s all becoming reminiscent of the coverage the market received a few years ago (pre-Lehmans). It seems that confidence in the market is really back on track and despite the slow down in issuance in the last month or so a lot of people are talking about cat bonds again.

One big reason for the discussion is the fact that prices and returns are still rising. Bloomberg reports today that cat bonds have advanced for a record 10th week in a row due to the benign Atlantic hurricane season and improved situation in the capital markets. The lack of hurricane activity certainly has a bearing on how cat bonds perform; with so much of the market invested in North Atlantic hurricane risk it’s bound to bounce when we have such a slow storm season. The capital markets however are only just starting their resurgence, which has a positive effect, but leads me to think that a lot of the confidence seen in cat bonds is down to the new structural approach being taken to the collateral arrangements and counterparty. Investors we speak to certainly feel much happier now they can see steps being taken here.

The Swiss Re Cat Bond Price Return Index has risen 1.4% on the 11th September, that’s the biggest single increase since 2004. The 10 weeks of gains are the longest straight period of price rises since Swiss Re began tracking prices back in 2002.

Here you can see the Swiss Re Cat Bond Price Return Index over the last three years. As you can see the markets prices are really bouncing back and there seems no reason currently to think that will stop or reverse.

Swiss Re Cat Bond Price Return Index

The other index Swiss Re produce is the Swiss Re Cat Bond Total Return Index (tracking the total rate of return for all dollar-denominated bonds). Rather than showing prices this shows returns. This index reached an all time high back in July and has continued to climb since then.

Swiss Re Cat Bond Total Return Index

Looking at these indices over a three year period gives a really good picture of the market and how the collapse of Lehmans and the financial markets affected it. The current bounce seems very healthy and destined to continue, at least until we return to more normal hurricane conditions. To counter that we need more varied issuance of other risks which would enable the market to have less of a North Atlantic bias.

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Aamir September 30, 2009 at 3:59 pm

Hi, I was wondering whether or not Indexes like the Swiss Re CAT Bond Total Return Index or the Morton Lane Total Return Index can be useful in valuing these FRNs? If so how?

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