Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Catastrophe bond price return index starts to look more seasonal


In the last fortnight the unseasonal rise of the catastrophe bond price return index has stopped and the trend is now more in line with how we would expect the index to be moving at this time of year, during the U.S. hurricane season. It’s time for our fortnightly look 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.

Price returns of outstanding catastrophe bonds have been on the rise since mid-May, with strong increases being seen through June and into the beginning of July. These unseasonal rises have helped insurance-linked securities fund managers to achieve record monthly returns at a time of year when generally the markets pricing is more stable. The price return rise has been welcomed by investors who have had a chance to recoup some of the mark-to-market losses that were a feature of the first few months of 2012. It’s thought that the twin influences of strong investor interest and abundant capital have helped to sustain this unseasonal rise for over one month, but now we expect a more typical trend for the time of year to emerge.

A more typical trend would be for a slow and steady decline, or flat movement, week-on-week for the price return index and a slower rise in the total return index (due to lower issuance levels). This trend has now begun we believe but it is going to be interesting to see whether the index exhibits typical behaviour through the whole of the hurricane season this year and how early it begins to rise again. The behaviour and any unusual movement of the index will largely be driven by storm formation over the coming weeks.

Interestingly, in the last two weeks we’ve continued to see cat bond issuance activity and of particular note was Munich Re’s comments on their Queen Street VI Re Ltd. cat bond which completed in the last week. Queen Street VI provides cover for U.S. hurricane as well as European windstorm and it’s a little unusual to see hurricane risk issued in a cat bond this far into the hurricane season. Of note is the fact that Munich Re covered higher probability events with this latest deal, so more risky than previous Queen Street deals, and it really shows the strong appetite for cat bonds that a risky deal containing U.S. hurricane successfully came to market in July.

So, now let’s turn to the indices starting with 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 you can see from the chart below the index has declined slightly for two weeks in a row, a much more typical display of seasonality, we expect this index to become more stable as long as there are no threatening catastrophe events. Interestingly the index doesn’t appear to have suffered an additional decline due to the downgrade of the Residential Re cat bonds in the last week, perhaps showing that investors are becoming more accepting of qualifying losses on aggregate cat bonds. The index closed at 93.19 on the 20th July.

Swiss Re Global Cat Bond Performance Price Return Index

Swiss Re Global Cat Bond Performance Price Return Index

Next 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, it will likely continue this trend albeit at a slightly slower rate than in recent weeks. The index closed at 227.91 on the 20th July.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

So, cat bond returns are exhibiting more seasonal behaviour and as a result ILS fund returns will be more in line with where they are anticipated to be at this time of year. We’ll update you in another fortnight to see whether seasonality has continued to display a more typical course.

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