Cat bond price returns continue to slide as primary issuance remains strong

by Artemis on February 14, 2012

Primary issuance in the catastrophe bond market has been strong at the end of 2011 and into 2012. Seven new catastrophe bond and insurance-linked security transactions have been brought to market since the start of the year and if issuance keeps going at this pace we could see a very healthy volume of deals in Q1 of 2012.

One of the knock on effects of a period of strong primary market issuance is a slow down in the secondary cat bond markets. This happens as investor demand for outstanding cat bond and ILS notes decreases as their appetite to buy into new deals grows. Capital is set aside to put into new transactions meaning that secondary prices can be depressed somewhat. This is the trend we’ve been seeing since mid-October last year when primary issuance started to pick up into Q4.

It’s three weeks since we last looked at the Swiss Re Cat Bond Performance Indices to see how they had been performing. At that time the downward trend in price returns was plain to see while total returns continued to rise reflecting the high volume of new issuance. Both trends have continued over recent weeks and we currently see no reason for that to change in the near future.

So, 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). As expected the slide in price returns of outstanding cat bonds has continued. The index closed on the 10th February down at 93.18. This trend is likely to continue while primary issuance is strong.

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 a basket of natural catastrophe bonds (which you can quote and chart through Bloomberg here). Again this index is following the expected pattern of a continued slow rise, reflecting the addition of new issuance volume to the index as the total-return of outstanding cat bonds continues to grow. This index closed on the 10th February at an all time high of 219.12.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

We’ll update you again on the state of these indices in a few weeks. We don’t expect anything dramatic to change unless any major events or catastrophes impacted the markets.

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