Recent months have seen investors in catastrophe bonds and insurance-linked securities make their best returns of the year as secondary market prices have soared thanks to strong demand and a benign hurricane season. It’s time for our fortnightly 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 ILS marketplace.
When we last looked (our article from two weeks ago can be found here) the catastrophe bond price return index had just hit its highest point of the last twelve months and has now recovered all of the decline it experienced from Q4 2011 to May 2012, when the high primary cat bond issuance levels had tempered investor interest in secondary market cat bond notes causing the decline (alongside some seasonality). Since its lowest point on the 11th May the price return index has now recovered over 4%. More telling perhaps of the returns that cat bond and ILS investors have been enjoying this year, is the fact that the total return index, which is a better indicator of investor returns over time, has risen 8% over the same period.
ILS funds have been reporting their best monthly returns of the year in August and September, with some achieving their best returns in twelve months or more. This is expected to continue in October, with another profitable month for investors looking likely, as long as the Atlantic remains quiet and unthreatening. We are however approaching the end of the hurricane season and primary cat bond issuance is expected to bounce back strongly as we move towards Q4. What impact that will have on these indices remains to be seen. If we have another extremely strong period of new cat bond issuance we could see the price return index decline again, as interest in secondary marks dries up. It will be interesting to follow the performance of these indices as we move towards the end of the year.
In September, secondary market cat bond and ILS trading was a little slower than in the months prior, but substantial interest in the asset class remained. The slower secondary market activity levels are an indicator of investors holding back on deploying capital in the hope that new deals will come to market soon. It’s rumoured that another European windstorm cat bond will begin marketing towards the end of this month, which will please those investors with capital to put to work and could offer the sponsor a great opportunity to secure a larger amount of cover at a cheaper price.
First let’s 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). When we last reported, the index sat at 95.29 on the 28th September. Now, at its latest close on the 12th October the index had risen further to 95.83, a rise of 0.56% in two weeks. Again, this strong performance continues to indicate that ILS and cat bond investors are enjoying very good returns right now. Further increases are likely while no hurricanes or other catastrophe events threaten the market and primary issuance is slow, so investors will hope for these good returns to continue.
Next let’s 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). This index sat at 237.01 on the 28th September when we last reported on it. At close on the 12th October the cat bond total return index had risen to 239.15, an increase of 0.90% in the fortnight. As this index denotes the total return of the outstanding cat bond market an investment strategy tracking the market would have made a similarly attractive return. Again, this upwards movement seems likely to continue and could accelerate as new transactions come to market towards year-end.
So currently there seems to be no let-up in the rise of secondary market catastrophe bond prices, and the combination of high demand and seasonality has another few weeks to run. After that, the season effect of the hurricane season should wear off a little and the market expects investor demand to be satisfied more by new issuance. This should see a stabilisation effect on the price return index as we move towards the end of the year. Of course if we see another busy Q4 and Q1 as we did in winter 2011/2012 then we may see some effect of a lack of demand for secondary positions.
We’ll update you on these indices in another fortnight.