Catastrophe bond price return index jumps on benign hurricane season

by Artemis on August 20, 2012

The last two weeks has seen a strong jump in the value of the outstanding catastrophe bond price return index as seasonal effects of the hurricane season have yet to seriously impact price returns. It’s time for our regular look at the Swiss Re Cat Bond Performance Indices (our last article here) to see what they can tell us about movements in pricing and returns of outstanding catastrophe bonds and the general sentiment of the cat bond and insurance-linked securities marketplace.

There have been many forces influencing the cat bond indices in 2012, high issuance put downward pressure on secondary prices, high inflows of capital exerted upwards pressure as investors tried to put capital to work in cat bonds and this played a part in the gains seen in May and June. As we move through August, the Atlantic hurricane season enters its typically most active and threatening stage and as a result we’d expect price returns to be more muted. However, as the hurricane season has not yet threatened the U.S. coastline, demand for hurricane exposed cat bonds can remain greater than we would seasonally expect and help to drive price returns higher. The reason for this is that as the hurricane season passes without loss the perceived risk of hurricane exposed cat bonds decreases a little as there is less of the season to run, hence prices can rise. Demand continues to play a part as well and the secondary markets continue to see a decent level of trading activity.

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 last fortnight has seen particularly strong gains as price returns increased. The index closed at 93.70 on the 17th August.

Swiss Re Global Cat Bond Performance Price Return Index

Swiss Re Global Cat Bond Performance Price Return Index

Next we turn to 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). As you’d expect when price returns have risen so strongly, the total return of the outstanding cat bond market has also risen, closing up at another high of 230.72 on the 17th August.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

As the catastrophe bond and insurance-linked securities market develops, these indices are constantly changing and trends from previous years are becoming less likely to be repeated. There are underlying seasonality factors which do not change, but often they are now masked by material changes caused by demand. A big reason for this is the increase in capital interest in the asset class along with a changing investor profile. Another big reason is the way the market is maturing, with investors becoming more confident and familiar with how cat bonds behave as an asset class. We’ll update you on the state of the indices again in another two weeks.

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