Catastrophe bond price return index continues decline, total return index rises

by Artemis on May 14, 2012

With primary catastrophe bond issuance still flowing strongly, the latest cat bond Long Point Re III launched last week, investors are still jostling to gain access to and accommodate the latest transactions to come to market. The results of this and other price pressures is a continued decline on price returns of outstanding catastrophe bonds. It’s two weeks since our last look at the Swiss Re Cat Bond Performance Indices (our last article here) and time for an update.

Downward pressure on many outstanding cat bonds continues to be a feature of the market in 2012, making returns harder to come by for some investors. The reasons for the decline remain the same, high primary issuance, jostling for positions from investors, some dumping of positions in the secondary market, rate pressure and seasonality and the approaching hurricane season all having an impact. Some reports also show that certain diversifying cat bonds and ILS are actually seeing price rises at the moment and often trading above par. All in all, there’s a lot happening from both an issuance and investment perspective in the ILS market and as a result the price returns of the market are feeling the pressure still.

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). The decline continued since our last look a fortnight ago and this index closed on the 11th May at 92.02.

Swiss Re Global Cat Bond Performance Price Return Index

Swiss Re Global Cat Bond Performance Price Return Index

Next we turn to 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). Now this index shows a different story, reflecting the issuance of a number of large cat bond deals and the steady flow of new deals it has smoothed out somewhat and continued its climb. The total return index closed on the 11th May at a new all time high of 221.16.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

Participants in the cat bond and ILS market still expect price returns to recover some ground once we enter the U.S. hurricane season and primary issuance slows. With both Residential Re 2012 and Long Point Re III still to be sized and settled we shouldn’t be surprised to see some further decline over the next few weeks though. We’ll update you in two weeks.

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