Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Catastrophe bond indices continue to climb, investors will benefit


Catastrophe bond and insurance-linked securities investors look set to benefit as the price and total-return indices have risen strongly in recent weeks after cat bond prices jumped during May and in the first week of June. It’s time for our regular 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 insurance-linked securities marketplace.

The recent rises in both indices will translate into improved returns for ILS funds and their investors. April saw improved returns for ILS funds thanks to price improvements in the secondary markets and this continued through May, with one ILS investment manager having their second highest monthly return ever in May. It looks like the first week of June will have extended these gains as the indices have risen strongly again in the last fortnight.

The recent price rises are actually not typical of the seasonal declines we often see at this time of year. Normally price returns are declining at the start of June as the U.S. hurricane season begins and impacts the pricing of outstanding hurricane exposed cat bonds. This year, because of the declines seen through Q1 and Q2 due to the high primary cat bond market issuance level, hurricane exposed cat bonds have been rising in price as they recover some of their value now primary issuance has slowed. This has reversed the normal seasonal trend and gives ILS investors and ILS funds an opportunity to make some gains to recover some of the slower performance they’ve seen so far this year. With the primary cat bond market looking quiet right now, although we do hear rumours of some diversifying deals to come, prices will likely gain a little and then slow as seasonality returns closer to the norm.

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 risen strongly over the last fortnight with the most recent weekly rise becoming the largest this year. It closed at a level of 92.73 on the 8th June.

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, tracking the total return of a basket of natural catastrophe bonds (which you can quote and chart through Bloomberg here). This index continued to rise, as is expected, and actually accelerated upwards in the last fortnight. It closed at 224.44 on the 6th June and had its largest weekly rise since last year.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

These indices have been unpredictable during 2012 as the market adjusts to brisk issuance and high investor demand. We expect we’ll see them settle in the coming weeks into more predictable seasonal patterns and we’ll update you in another fortnight.

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