Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Cat bond indices: Price returns slip further, total returns continue to rise


It’s been two weeks since we last looked at the Swiss Re Cat Bond Performance Indices, to see how their performance reflected the mood and state of the catastrophe bond and insurance-linked securities market. Both of the indices have continued to trend roughly as they have done since late March, after the earthquake in Japan caused both indices to drop significantly.

The catastrophe bond market has been quiet in the primary market and displayed a reasonable amount of trading activity in the secondary market since we last wrote about the indices. Generally, investors have been holding their primary positions of late, especially given the lack of new issuance that had been seen, until Friday when two new catastrophe bond deals (Vita Capital IV and Queen Street III Capital) received preliminary ratings from S&P and began marketing.

The lack of primary market issuance has continued to trigger issuance of private market insurance-linked security transactions, with the latest being arranged by Towers Watson for an unnamed Florida middle-market insurer. The Oak Leaf Re 2011-1 cat bond only issued $11.95m of notes through a private placement so didn’t provide any opportunity for the investors seeking to access the ILS asset class.

The two new cat bond deals we mentioned above will bring a welcome opportunity for investors who have been seeking to diversify their U.S. wind heavy ILS portfolios. However the cat bonds which are marketing aren’t large enough to satisfy everyone and competition to subscribe to these deals is likely to be fierce. Investors will be pleased to note that many market participants are predicting an active Q4 for issuance. At least one more cat bond is going to come to market during Q3 as well. Most likely is a pure California quake bond on behalf of the CEA, and there is also a possibility of a Japan typhoon cat bond which we have heard rumours about.

Standard & Poor’s has begun to resolve the ratings on catastrophe bonds which used the Risk Management Solutions (RMS) U.S. hurricane risk model. Six cat bond tranches were downgraded last week as their probability of attachment had changed sufficiently under the new model. S&P expect to resolve the ratings on a few outstanding bonds within the next two weeks. The market has we believe, after initial worry, come to terms with the impact on these outstanding cat bonds. The next test of the new model will be the pricing on a U.S. hurricane cat bond that gets issued using the RMS model.

So it’s been another busy two weeks in the market, if not so much for issuance then at least for discussion points. The main sentiment we hear from contacts in the market continues to be that investors are still keen on cat bonds as an asset class but demand still outstrips supply. So, with all of the above how have the cat bond indices reacted?

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). This index has continued to trend slowly downwards. It’s believed that the main causes of this decline has been the uncertainty over RMS exposed transactions and also the seasonal effect of the U.S. hurricane season. The index closed at 93.73 at close on the 15th July.

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 the basket of natural catastrophe bonds (which you can quote and chart through Bloomberg here). This index continues to rise, which is the seasonal trend for total returns at this time of year (total returns are of course also helped by new issuance which generally pushes them higher). It closed at 210.12 on the 15th July.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

So, it’s been a busy two weeks for market commentary but the indices haven’t reacted dramatically or in an unexpected manner. This trend is likely to continue for the summer months as hurricane season plays out. We’ll update you again in two weeks.

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