Price returns in the secondary catastrophe bond market have taken another dip in the last fortnight as the pricing pressure we discussed two weeks ago here continues to exert itself on the pricing of outstanding cat bond marks. As we approach the U.S. hurricane season we’re beginning to see cat bond prices looking more seasonal and the turn in price returns has also been assisted by the strong primary cat bond issuance in recent weeks.
Secondary cat bond prices began to see some pressure removed in mid-April, as investors managed to deploy capital into primary cat bond issues meaning that the trend for bidding up secondary marks was relieved somewhat. A small amount of seasonality has also returned to the market, meaning that some cat bond prices have seen small declines from the highs experienced earlier this year.
Catastrophe bond investors have been experiencing strong returns so far in 2013, helped by the inflation of secondary prices thanks to demand and a lack of catastrophe events. April looks set to be the best month of the year so far for the average ILS fund, according to the Eurekahedge ILS Advisers Index, but given the secondary pricing trend in recent weeks it looks like May could see lower performance especially on funds allocating a lot of their capital into cat bonds.
Another $500m of new cat bonds (full details in the Deal Directory) have come to market since we last wrote about the Swiss Re Cat Bond Performance Indices, to see what they can tell us about pricing and returns in the secondary market for catastrophe bonds and the cat bond market’s general sentiment. The effects of high primary issuance and some seasonality returning combined are now having a noticeable impact on the indices and both have declined in the last fortnight.
So, let’s turn to the Swiss Re Global Cat Bond Performance Price Return index first, which tracks the price return for all outstanding USD denominated cat bonds. When we last looked the index had dropped down to 96.03 on the 3rd of May. Since then it has declined further and at its most recent close on Friday 17th May the cat bond price return index sat at 95.85, a reduction of nearly 0.2% in two weeks. Some further steady declines are possible as the U.S. hurricane season begins, although the volume of primary issuance over the course of the hurricane season, which is often uncertain, could dictate just how much this index declines.
Now let’s turn to the Swiss Re Global Cat Bond Performance Total Return index, tracking the total return of a basket of natural catastrophe bonds. This index, which sat at 251.5 on the 3rd May, rose in the following week to 251.92 but then declined slightly to 251.82 at its most recent close on the 17th May. It’s not clear whether this is a knock-on effect of the price decline or whether it could have been caused due to index calculation and the fact that the $425m Lodestone Re 2010-1 cat bond deal matured on the 17th of May. The removal of that $425m of notes could have caused a decline in total-returns. It will be interesting to see which way this index goes in the coming weeks.
We will be back to look at these indices again in another two weeks by which time the 2013 U.S. hurricane season will have begun and there is therefore the potential for further secondary price declines. Of course primary issuance also dictates what direction these indices go in and it will be interesting to see whether any last-minute U.S. hurricane exposed cat bonds launch and equally whether we see a number of diversifying deals come to market during the summer months.