Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Cat bond market price and total returns continue to rise


Both the price return and total return of the outstanding catastrophe bond market have continued to rise over the last fortnight as the slightly unusual trend of price firming, some of which has been unseasonal continued. Now that the primary cat bond market has come alive with a number of new issuances during March and more in the pipeline, the latest Bosphorus 1 Re Ltd. having just begun marketing, it’s expected that unseasonal price movements will become less pronounced.

The price of outstanding cat bonds had been firming through February and into March as investors with abundant capital and interest in the asset class sought to put capital to work on secondary marks. This led to an unusual trend of unseasonal price rises on cat bonds which would normally be softening at this time of year.

The secondary cat bond market has, so far this year, looked quite different to a year earlier when price returns declined dramatically through the start of 2012 as investors put capital to work in new issuances. This year the secondary cat bond market has received a lot more attention due to robust inflows of capital from investors entering the sector, although trading conditions haven’t always been easy.

So, it’s time for another of our regular looks at the Swiss Re Cat Bond Performance Indices, to see what they can tell us about pricing and returns in the secondary market for catastrophe bonds and the cat bond market’s general sentiment. When we last looked a fortnight ago the indices were continuing a generally upward trend, although with some fluctuation. Now the upward trend has continued although a little more consistently.

So, 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). This index has continued to rise steadily over the last two weeks, closing at 95.71 on the 29th March. That’s a rise of 0.22% for the last two weeks, but demonstrating the fluctuation we mentioned last time only 0.23% for the month of March to the 29th.

Swiss Re Global Cat Bond Performance Price Return Index

Next let’s 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). This index has also continued to gain steadily, closing at 248.64 on the 29th March. That is a gain of 0.56% in the last two weeks and a healthy 0.91% for March up to the 29th of the month.


Swiss Re Global Cat Bond Performance Total Return Index

With new primary catastrophe bond issuance now beginning to soak up a little of the excess capital in the sector it is likely that gains may not be so steep in weeks to come. If gains do continue to be strong, particularly for the price return index, it will be a clear demonstration of the strong investor interest in the asset class and also the ample cash sitting with investors and ILS fund managers. Also, a continuation of the unseasonal price rise of certain off-risk cat bonds will signify continued strong demand for cat bond investments.

We’ll return to these indices regularly to update you as the year progresses.

The total-return of the catastrophe bond market as measured by these indices was over 10% in 2012.

Don’t forget to answer our anonymous poll to tell us what volume of catastrophe bonds you think will be issued in 2013?

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