Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Catastrophe bond indices fluctuate but continue to rise


The catastrophe bond indices which track the price return and total return of the outstanding catastrophe bond market have continued to fluctuate over the last two weeks but a general upwards trend remains. When we looked at these indices two weeks ago, the primary cat bond issuance market was quiet, and the indices had experienced a strong bounce, likely helped by strong demand for cat bond positions from investors given the lack of primary issuance.

Now the primary cat bond market has sprung back to life. Since our last article looking 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 markets general sentiment, three new cat bonds have launched.

First to come to market was Tar Heel Re Ltd., a $200m cat bond for the North Carolina wind pools seeking to provide indemnity protection for storms which meet specific qualifying criteria in the state. Next to launch was another cat bond transaction from State Farm with the $250m Merna Re IV Ltd. which focuses on New Madrid area earthquake cover and will replace the soon to mature Merna Re II. Finally the awaited next cat bond from Florida Citizens launched last week, seeking $250m of cover for hurricane protection via Everglades Re Ltd. (Series 2013-1).

Given the sudden flurry of primary cat bond issuance, which is expected to be joined by more transactions over the next few weeks, it’s possible that conditions in the secondary cat bond market will become easier for investors. In recent weeks some investors have reported difficulty in acquiring positions in cat bonds to aid their diversification. We’ve also heard of investors struggling to put cash to work from new investor inflows and maturing bonds due to a lack of available opportunities in the secondary catastrophe bond market.

The unusual conditions in the market, continuing high investor appetite combined with a lack of primary cat bonds to soak up demand, have made the secondary markets fluctuate in recent weeks. As we wrote recently these conditions have led to unseasonal price movements in secondary cat bonds with some transactions completing at unusually high bid levels. Of course the unseasonal price movements will be welcomed by investment managers with large cat bond components to their investment funds and will help to ensure reasonable returns continue at the start of 2013.

So first let’s turn to 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 fluctuated over the last two weeks, experiencing a slight dip at the 8th March but then recovering in the last week to rise to a close of 95.50 on the 15th March. That’s virtually flat, up just 0.01%, since the last time we reported at the end of March.

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 has continued to rise since we looked a fortnight ago, although the rate of increase has fluctuated. It closed on the 15th March at a level of 247.25, which is a rise of 0.37% in the last two weeks.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

Now that some primary catastrophe bond deals have launched it should help to soak up some of the investor demand and the secondary market will likely become a little easier to access over the next two weeks. It’s difficult to predict where the indices will move, any large upsizing from the three new cat bonds could result in a dip in price returns as focus moves to the primary market as investors take the opportunity to deploy capital. Conversely, investor appetite and the need to diversify may help to maintain the indices upwards trend.

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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