Cat bond index price returns join total returns in upwards growth

by Artemis on August 1, 2011

Since our last look a fortnight ago at the Swiss Re Cat Bond Performance Indices, to see how their performance reflected the mood and state of the catastrophe bond and insurance-linked securities market, both indices are now showing positive upwards growth. The price return index has reversed a four week decline and has recovered some ground to its highest point since late March.

There’s still a long way for both indices to go to reach the highs that were seen before the Tohoko, Japan earthquake in March. The events in Japan saw both of the cat bond indices drop dramatically and recovery is taking time especially with the other unknown factor of the RMS risk model update which has helped to create uncertainty in the market.

Two more new catastrophe bonds have begun marketing since we last wrote, both offering great diversification opportunities for investors and as a result will be well received. Embarcadero Re Ltd. is a $150m California earthquake cat bond being issued on behalf of the California Earthquake Authority, it closes very soon. Pylon II Capital Ltd. is a European windstorm cat bond being issued directly by electricity firm EDF, a rare corporate cat bond and another great diversification opportunity.

Otherwise, the market has been behaving as would be expected. We suspect that the upward trend in the indices will continue unless a major hurricane threatens the U.S. coastline, the upward trend will also be encouraged by the removal of uncertainty regarding cat bonds which use the RMS hurricane model. That uncertainty has been removed thanks to S&P resolving all the outstanding CreditWatch statuses on the affected tranches of notes. The secondary market will be pleased that this uncertainty has been removed as pricing should stabilise on these tranches.

So, onto the indices. First we look at the Swiss Re Global Cat Bond Performance Price Return index, which tracks the price return for all outstanding USD denominated cat bonds (which you can quote and chart through Bloomberg here). This index as we said, has reversed a period of decline to bounce strongly in the last two weeks, closing at 94.15 on the 29th July.

Swiss Re Global Cat Bond Performance Price Return Index

Swiss Re Global Cat Bond Performance Price Return Index

Next we look at the Swiss Re Global Cat Bond Performance Total Return index, tracking the total return of the basket of natural catastrophe bonds (which you can quote and chart through Bloomberg here). This index continues its upwards trend and if we don’t see anymore major losses over the next few months this could achieve an all time high later this summer, perhaps even as soon as in a fortnight’s time when we analyse the indices again.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

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