It’s time for another of our regular fortnightly looks 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. When we last looked it was clear that the approach of hurricane Isaac had not had any impact on the indices, and it’s clear that there was no delayed impact either as the indices have both risen further.
Major hurricanes can cause a decline in catastrophe bond price returns as the storm approaches land and investors adjust their portfolios to either sell exposed positions or acquire distressed cat bonds which are thought to be at risk. A great example of this was reported here last year as hurricane Irene approached the U.S. northeast. There was an element of this livecat trading as hurricane Isaac approached the U.S. coastline, but it seems to have been fairly minimal and mostly occurred on the Pelican Re cat bond which had the greatest risk of exposure to the storm, although is now considered safe.
So it should be no surprise to see that the cat bond indices have both risen further in the last fortnight, with no impact from hurricane Isaac and no additional threat from any other hurricanes. Price returns have risen strongly once again, showing the seasonal nature of the asset class, as the lack of impact from hurricanes causes prices to tighten further. We wrote about this in this article ‘Pelican Re catastrophe bond pricing dropped over 4% due to hurricane Isaac‘ last week where we discussed the impact that Isaac had on the pricing of Pelican Re. In that article we also discussed the price increase that cat bonds which weren’t exposed to Isaac experienced, those price rises appear to be continuing.
So lets 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 in the last fortnight, closing up once again at 94.75 on the 14th September. That’s another 0.55% increase in the last fortnight and takes the price return index very close to the highest point this year, you have to go back to the end of October 2011 to find a higher point on the index. We expect that the price return index will keep rising while the tropics are quiet and the index should see a new high point of the year within the next month if the upward trend continues.
Next 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). Unsurprisingly the total return of the outstanding cat bond market continues to rise strongly. As you can see from the chart below this index has been experiencing very strong increases in the last few months and this looks set to continue through the coming weeks, as long as there are no impactful catastrophe events. The cat bond total return index closed at 234.88 on the 14th of September, which is up 0.88% in just two weeks.
Insurance-linked securities and cat bond investors and ILS fund managers will be extremely happy with the way the third quarter of the year is developing. The performance of these cat bond indices, with particularly strong returns a key feature, shows that investors and ILS fund managers will be reporting strong returns again this month if there are no hurricane or other catastrophe events to impact the market. This is good for the asset class as investors are able to recoup any returns they lost earlier this year when prices dropped.
It will be interesting to see how the indices are affected once issuance picks up again towards the end of the year, particularly if we get through the hurricane season unscathed. There could be a turn in secondary market pricing again, similar to that experienced early this year, as high levels of primary issuance dampen demand in the secondary cat bond market. However it is possible that any impact may not be quite so apparent this time around as there is more capital in the ILS sector and more investors to help prop up secondary prices.
With hurricane season proving to be benign so far it is a profitable time for ILS fund managers and investors. Similarly reinsurers are looking set to emerge out of the hurricane season with good reserves of cash. What this will all mean for pricing of reinsurance and cat bonds later this year and at the January renewals will be fascinating to see.
We’ll update you again in another two weeks on the health of these indices.