It’s time for another fortnightly look at the Swiss Re Cat Bond Performance Indices to see how they have performed and what their movement can tell us about the mood and sentiment within the insurance-linked securities market or reinforce from our other recent articles. Last time we looked at the indices they had both dropped due to the continuing impact of mark-to-market Mariah Re losses and price adjustments of U.S. hurricane exposed bonds.
In the last two weeks we’ve seen a drop in the cat bond price-return index and a gain in the cat bond total-return index. There are a number of likely causes for the further drop in price-returns.
The final adjustments to mark-to-market prices on the Mariah Re bonds may have only hit the index in this last fortnight. The Mariah Re bonds are now priced right down due to their losses and there doesn’t seem room for any more downside to come, unless of course the loss estimates rise further and the Mariah Re 2010-1 loss grows.
The end of the U.S. hurricane season is almost upon us and this always causes some seasonal price changes in U.S. hurricane exposed bonds but also some repositioning of funds as investors offload certain risks to pick up others and maintain a balanced and diversified portfolio.
New issuances have come to market in the last two weeks, and more cat bonds have begun marketing, which means investors will offload some positions to make room in their portfolio for new deals. Again this can cause some flux in the indices.
The secondary market has again been moderately active recently but it’s widely expected that secondary market cat bond prices will stabilise over the next fortnight (events, losses or growing Mariah Re estimates aside) and investment managers have said that they expect prices and returns to stabilise in coming weeks. This should translate into some consistent gains for both indices (again, unless there are any loss events or updates).
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 shows the further decline, but we do believe a lot of this is seasonal and it should start to recover and make some gains soon. It closed on the 18th November at 94.38. as you can see it’s still way down on the start of 2011.
Now 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 has made a small gain this last fortnight and now sits just below it’s all time high having closed at 217.63 on the 18th November.
The next time we report on these cat bond indices the U.S. hurricane season will officially be over so we hope to see less bias from the price adjustments the end of the season causes. With more new cat bonds marketing and some in the wings waiting to come to market we expect the indices to begin to return to growth during December.