Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Cat bond price return index at highest point since Tohoku quake


After more than two and a half years the Swiss Re Global Cat Bond Performance Price Return index, which tracks the price return for all outstanding USD denominated cat bonds, has made it back to its highest level since the index plummeted after the Tohoku, Japan earthquake and tsunami.

The index showing price returns of cat bonds is much more prone to fluctuation from catastrophe events than other measures of the outstanding cat bond market. It is also prone to fluctuation due to high primary issuance, capital inflows and other market dynamics. The higher the index sits, however, the higher the returns on the price of cat bonds tend to be for investors.

The cat bond price return index plummeted after the Tohoku earthquake and tsunami event, as the market came to terms with a loss from the Muteki cat bond which was triggered by the event. The secondary cat bond market also dealt with the Mariah Re tornado cat bond defaults, hurricane Irene and superstorm Sandy during the last two and a half years, events which all affected the price return index.

As well as these catastrophe events, we have seen unseasonal declines in the price return index, with these largely created by strong primary issuance. Through the fourth quarter of 2011 and first half of 2012 we saw a slow and steady decline in the price return index as strong primary issuance meant investors did not utilise secondary trading as much and interest was lower in the secondary cat bond market.

Conversely the fourth quarter of 2012 and first quarter of 2013 saw similarly high primary issuance but the new inflows of alternative capital from investors were so high, driving demand for secondary marks, that price returns were forced upwards. There was also an element of a recovery after Sandy in those two quarters, but the strong investor interest was the main upwards impetus. After that we saw some unseasonal movements, as demand remained high, and then more recently a return to seasonality.

So the cat bond price return index is an interesting chart to watch as it provides insight into what is happening both in terms of catastrophe loss activity as well as issuance and investor appetite. Now back at its highest point for the last two and a half years, the price return index could rise even higher if we remain free of major insured catastrophe loss events.

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 first chart below shows the price return index performance since March 2011, showing all the movement discussed above. You can see it still has a way to climb to reach that high from before the Japanese catastrophe, but the trajectory points in that direction and if the market remains loss free and no major hurricanes threaten the U.S. coastline it could reach it this year.

Swiss Re Global Cat Bond Performance Price Return Index since March 2011

Swiss Re Global Cat Bond Performance Price Return Index since March 2011. Now at a high since the post-Tohoku decline

The next chart shows our usual one year performance range for the cat bond price return index. When we last wrote about the Swiss Re cat bond indices, the price return index had risen strongly to reach 95.78 on the 23rd August. At its latest calculation point, on the 13th September, the price return index had risen again to 96.43. That’s a jump of almost 0.68% in just three weeks. The price return index rose by almost 1% in August and September is already looking to be similar in performance.

Swiss Re Global Cat Bond Performance Price Return Index

Next 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 would expect when price returns rise so strongly, the total return of the outstanding catastrophe bond market sees similarly positive movement.

When we last looked at these indices the cat bond total return index had risen to 257.13 on the 23rd August, having gained over a percent in the last month. The strong performance has continued and the total return index now stands at 260.06 on 13th September, another impressive gain of 1.14% in just three weeks.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

The continued strong performance of both indices shows that catastrophe bond focused investors and insurance-linked security (ILS) funds with large allocations to cat bonds both stand to make very good returns again in September.

When you look at the total return performance of catastrophe bonds as an asset class versus other major global financial assets, as we did here earlier this week, it is clear to see the reason for investors attraction to the sector. Despite the decline in catastrophe bond pricing of new issues in recent months, as an asset class cat bonds continue to provide a very attractive return which can diversify a holistic investment strategy and offers very low correlation to the wider financial markets.

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

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