The downward trend in the catastrophe bond price return index has been a feature of the market since late October 2011. Price returns of outstanding catastrophe bonds have been declining steadily ever since and in 2012 the downward decline has accelerated somewhat with some steeper drops. It’s been forecast that the price return index would begin to bounce back before the end of Q1, as primary issuance has been expected to slow down a little allowing the secondary market to pick up more trading again.
The reason for the decline in outstanding cat bond prices has been the high volume of primary market issuance. This has meant that dedicated ILS and cat bond investors have been busy accommodating new deals into their portfolios while outstanding cat bonds hold less attraction at that time apart from as a diversification necessity. Prices can only drop so far though and it has been suspected that they would stabilise and perhaps bounce back a little at the end of Q1.
Right on time in the last week we’ve seen the first rise of the cat bond price return index since the end of 2011. This is interesting as it could correlate with prices in the secondary market reaching the point where they are more attractive and investors beginning to return to secondary cat bonds as they see them as an opportunity to make a decent return again. We wrote the other day that the prices of outstanding cat bonds were at a point where they offered a unique opportunity to enter the market more affordably for investors who are new to the sector. At these prices secondary cat bonds also begin to offer experienced, dedicated ILS investors an opportunity to achieve better returns. This would be a positive thing for the cat bond market as it demonstrates the standard market dynamics of how demand and supply are affected by pricing.
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). As we said, this index has seen its first positive rise since December 2011. The index closed at 92.55 on the 23rd March. We’re unlikely to see any rapid recovery back to the levels seen in Q3 2011 but this index should stabilise and rise more than it falls (depending on primary issuance levels). Clearly the threat to the MultiCat cat bond from the recent earthquake was not considered serious enough to impact price returns on this occasion (often any threatening event will result in a sell off and mark down of that bond which can hit the index).
Now we look at 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, which is to be expected at a time when new issuance is adding to the total return of the outstanding cat bond market. The index closed at 219.83 on the 23rd March, another all time high.
We’ll bring you another update on these indices in two weeks.