Catastrophe bond price return index slows rise in October

by Artemis on October 24, 2013

The inexorable rise of the Swiss Re Global Cat Bond Performance Price Return index, which tracks the price return for all outstanding USD denominated cat bonds and has been rising consistently since late July, has slowed as we move through October.

The index, showing price returns of outstanding cat bonds, has been rising strongly through the main part of the U.S. hurricane season, helped by the season being a particularly benign one so far. This upward trend is typical behaviour, as seasonal effects tend to push up prices a little during hurricane season, but the fact that this has tailed off at this stage, with more than a month of the season still to go, may signify that investors feel the threat has all but passed.

We are now as good as through the main part of the U.S. wind season, when the threat is strongest from landfalling hurricanes. The season officially ends on the 30th November, but the last month is not known for serious hurricane impacts to the U.S. coastline. The fact that the price returns have stopped accelerating upwards perhaps shows that the market is aware and price rises have become less apparent.

We mentioned this earlier in our update on the ILS Advisers Index, when we quoted ILS Advisers Stefan Kräuchi as saying; “It seems that the market has already begun to price in the end of the hurricane season even though it officially only ends at the end of November.”

This slowdown in the rise of the price return index could be attributed to the market pricing in the end of the hurricane season more than a month early.

So, let’s have a look at the Swiss Re Global Cat Bond Performance Price Return index, tracking the price return for all outstanding USD denominated cat bonds. The chart below shows that the index slowed its rise in the last fortnight and actually stayed level over the last two reporting intervals. While this could be an anomaly due to seasonal effects it may also signify that investors feel more confident that the hurricane season has all but passed.

When we last covered the Swiss Re cat bond indices a month ago, the price return index has risen strongly to 96.43. At its latest reported level of 97.14 on the 18th October, the index had risen by around 0.73% in approximately one month. With this slowdown we expect the price return index performance for October to be lower than the previous few months.

Swiss Re Global Cat Bond Performance Price Return Index

Swiss Re Global Cat Bond Performance Price Return Index

Now we turn to the Swiss Re Global Cat Bond Performance Total Return index, which tracks the total return of a basket of natural catastrophe bonds. As you’d expect with no hurricanes threatening or other catastrophe loss events having occurred which could have impacted outstanding catastrophe bonds, this index has risen further.

When we last looked this index stood at 260.06 on the 13th September. At its last measurement on the 18th October it had risen strongly to 263.92, a rise of just under 1.5% in just over one month. Performance like this is boosting returns for investors and investment funds with allocations to catastrophe bonds, while the Atlantic hurricane season remains quiet and no other catastrophes threaten this performance could continue.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

For the third-quarter of 2013 both of the indices have seen impressive performance. The price return index has risen by approximately 1.8% over the course of Q3 2013, while the total return index rose by an extremely impressive 3.7%. Performance of close to 4% for the total return index will have been welcomed by investors and shows that despite cat bond rate declines the asset class still provides a very attractive return.

Read more on the returns of various indices tracking the return of catastrophe bonds and catastrophe reinsurance risk in our recent article which looks at returns so far this year.

We’ll be back to review the Swiss Re cat bond indices again in another few weeks.

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