Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Catastrophe bond price return index resumes downward trend


It’s two weeks since we last looked at the Swiss Re Cat Bond Performance Indices to see what they can tell us about the movements in pricing and returns of outstanding catastrophe bonds and the general sentiment of the cat bond and insurance-linked securities marketplace. Last time we looked the price return index had achieved its first positive movement of the year after a steady downward trend began in the second half of 2011. Well the downward trend in the price return index has since resumed reflecting the continuance of the trend seen since last year.

Price returns of outstanding secondary market catastrophe bonds have been steadily declining ever since primary market cat bond issuance accelerated last year. As our regular readers know, primary cat bond issuance has been extremely brisk so far in 2012, we now have thirteen new insurance-linked security and catastrophe bond deals listed in our Deal Directory. This brisk issuance has led to lower than normal interest in secondary market trading as investors have focused on accommodating the new transactions in their portfolios.

This is no bad thing and actually points to what could be the emergence of a more normal trend in the cat bond market; secondary cat bond prices rising when interest is high and falling when interest is lower (as it is now). That seems much more akin to how a growing market which would like to increase its liquidity should be reacting. As we noted the other week, this also offers an opportunity for those looking to balance their portfolios or access the market for the first time at a reasonable price.

So, 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). After a brief upturn a fortnight ago the index dipped quickly and then in the last week more slowly. It seems this trend may continue until issuance slows. This will likely happen as the U.S. hurricane season approaches and generally that slows down primary cat bond issuance. This index closed at 92.29 on the 6th April.

Swiss Re Global Cat Bond Performance Price Return Index

Swiss Re Global Cat Bond Performance Price Return Index

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). This index also saw a dip week ending 30th March, likely a knock on effect of the steeper dip in the price return index that week, it then rose again in the last seven days to finish the week at another new high of 219.93.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

We’ll continue to update you on a fortnightly basis to see whether this trend continues or not. Insurance-linked security fund managers must be hoping it won’t as it is beginning to impact their ability to make the returns they may have been promising this year.

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